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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, 1997
-----------------------
OR
- -------
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
[No Fee Required] For the transition period to .
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Commission File Number 0-14488
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SEITEL, INC.
(Exact name of registrant as specified in charter)
Delaware 76-0025431
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
50 Briar Hollow Lane
West Building, 7th Floor
Houston, Texas 77027
-------------- -----
(Address of principal (Zip Code)
executive offices)
(713) 881-8900
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
---- ----
Yes X No
---- ----
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 27, 1998 was approximately $331,183,075. 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 $15.50 and there were a total of 22,551,854 shares of Common Stock
outstanding.
Documents Incorporated by Reference:
Document Part
------------------------------------ --------
Definitive Proxy Statement for III
1998 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 O 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 1997, approximately 400 different petroleum companies entered into
seismic data license agreements with the Company. At December 31, 1997, the
Company owned approximately 885,000 linear miles of 2D and approximately 9,000
square miles of 3D seismic data which it maintained in its library, which, based
solely on management's knowledge and beliefs regarding the industry, constitutes
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 15 seismic sales specialists markets data
from its library and from newly created 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 22 member staff of geotechnical professionals who have in
excess of 400 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.
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 data creation activities in two ways; multi-client or
"group shoot" programs and proprietary acquisition programs for its wholly-owned
petroleum exploration and production subsidiary, DDD Energy, Inc. ("DDD
Energy"), and DDD Energy's partners. The Company contracts with selected seismic
acquisition crew companies, including its former wholly-owned subsidiary, Eagle
Geophysical, Inc., to conduct both onshore and offshore seismic surveys. In a
group shoot program, 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 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. To date, over 1,500 square miles of advanced 3D seismic surveys have
been conducted for DDD Energy and its exploration partners. In excess of 500
square miles of 3D surveys are already scheduled to be conducted in 1998 and
1999 by DDD Energy and its partners.
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, its large and growing 3D data library, a processing
center and proprietary computer technology coupled with extensive geophysical
application expertise to effectively interpret 3D data. DDD Energy exclusively
utilizes the Company's processing and interpretation technology and operations
to provide optimum quality control and confidentiality for the exploration and
production programs in which DDD Energy participates.
The Company wholly-owned a seismic data acquisition crew company, Eagle
Geophysical, Inc. ("Eagle"), until August 11, 1997, at which time it was
spun-off as an independent company. The Company now has a 17.9% ownership
interest in Eagle.
Oil and Gas Exploration and Production Operations
In addition to licensing its seismic data to customers, the Company also
utilizes its seismic expertise 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.
Since its formation in 1993, DDD Energy has entered into and maintained
cost and revenue-sharing relationships with more than 100 petroleum companies
and, in doing so, has received the benefit of these petroleum companies' land,
geological, engineering and drilling staffs. The Company has conducted over
1,500 square miles of advanced 3D surveys, with more than 500 square miles of
new surveys currently scheduled to be conducted for DDD Energy and its partners,
located primarily onshore Texas and Louisiana, and also onshore Alabama,
Mississippi and Arkansas. DDD Energy's working interest in these projects ranges
from approximately 10% to 90%, with an average working interest of approximately
31%. 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.
Since inception, DDD Energy has participated in the drilling of 240 wells,
165 of which are commercially productive for a 69% success rate.
Customers
During 1997, the Company's seismic data customers consisted of
approximately 400 oil and gas companies. No one customer accounted for as much
as 10% of the Company's revenues during the years 1997, 1996 or 1995. 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 is 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. In 1985, there were approximately 150 independent
seismic companies operating in the United States, of which approximately 15 were
significant competitors. In 1997, there were approximately 100 companies, with
approximately 10 significant competitors. With the U.S. "oil patch" collapse in
1985, many of the independent seismic companies went out of business; during the
1990's, this industry has witnessed a major consolidation. 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 and the technical proficiency and exploration
experience of its geotechnical staff. These resources enable the Company to
provide high-quality service and to create and market high-grade data.
In the oil and gas exploration and production business there are numerous
oil and gas companies competing for the acquisition of mineral properties. The
Company believes it can participate effectively in the exploration for and
development of natural gas and crude oil reserves 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 results of operations can fluctuate from quarter to quarter.
The fluctuations are caused by a number of factors.
With respect to the Company's seismic licensing revenue, the Company's
results are influenced by petroleum industry capital expenditure budgets and
spending patterns. These 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 revenue does not necessarily flow evenly
or progressively on a sequential quarterly basis during the year. In addition,
certain weather-related events may delay the creation of seismic data for the
Company's library during any given quarter. Although the majority of the
Company's seismic resales are under $500,000 per sale, occasionally a single
data resale from the Company's library can be as large as $5 million or more.
Such large resales can materially impact the Company's results during the
quarter in which they occur, creating an impression of a trend of increasing
revenue that may not be achieved in subsequent periods.
With respect to revenue from the Company's oil and gas operation, bringing
a small number of high-production wells on line in a given quarter can
materially impact the results of such quarter since many of the wells in which
the Company participates flow at high rates for the first 60 to 90 days of
production and then taper off to a lower, steady rate for the remainder of their
lives. If several of such wells are brought on line in a quarter, the results
for such quarter will appear unusually strong, and then later, when production
decreases to its long-term, steady rate, the Company's results may not be able
to sustain the trend of increased performance indicated by the strong results of
the previous quarter. 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 or shortages and other factors, which may
delay the hookup of successfully completed wells and delay the resultant
production revenue. Also, due to the high percentage of gas reserves in the
Company's portfolio and the seasonal variations in gas prices, the Company's
results from its oil and gas operations also are subject to significant
fluctuations due to variations in commodity prices. In addition, some producing
wells may be required periodically to go off line temporarily for pipeline and
other maintenance. The Company does not believe that these fluctuations in
quarterly results are indicative of the Company's long-term prospects and
financial performance.
See Note P 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, 1997, the Company and its subsidiaries had 94 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, 63 are related
to the seismic operations and 16 are related to the oil and gas operations. The
balance provide accounting and administrative support for all 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.
The following organization chart gives an overview of the structure of the
Company:
---------------------------
+----| Seitel Delaware, Inc. | 1%
| | 100% |----+ ----------------------------
| --------------------------- | |Seitel Data, Ltd. |
| |----| |
| --------------------------- 99%| ----------------------------
|----| Seitel Data Corp. |----+
| | 100% |----+ ----------------------------
| --------------------------- | |Seitel Offshore Corp. |
| |----|100% |
| --------------------------- | ----------------------------
|----| DDD Energy, Inc. | |
| | 100% | | ----------------------------
- ------------------ | --------------------------- | |Seitel International, Inc.|
++++++++++++++++++ | |----|100% |
+ + | --------------------------- | ----------------------------
+ SEITEL, INC. +----+----| Matrix Geophysical, Inc.| |
+ + | | 100% | | ----------------------------
++++++++++++++++++ | --------------------------- | |Datatel, Inc. |
- ------------------ | +----|100% |
| --------------------------- ----------------------------
|----| Seitel Canada Holdings, |
| | Inc. | ----------------------------
| | 100% |---------|Olympic Seismic Ltd. |
| --------------------------- |100% |
| ----------------------------
| ---------------------------
|----| Seitel Management, Inc. |
| | 100% |
| ---------------------------
|
| --------------------------- ----------------------------
|----| Seitel Geophysical, Inc.|----+----|African Geophysical, Inc. |
| | 100% | | |100% |
| --------------------------- | ----------------------------
| |
| --------------------------- | ---------------------------- --------------------------
|----| Alternative Communica- | +----|EHI Holdings, Inc. |----| Eagle Geophysical, Inc.|
| | tions Enterprises, Inc. | |100% | | 17.9% |
| | 100% | ---------------------------- --------------------------
| | Dormant|
| ---------------------------
|
| ---------------------------
|----| Exsol, Inc. |
| | 100% |
| | Dormant|
| ---------------------------
|
| ---------------------------
|----| Geo-Bank, Inc. |
| | 100% |
| | Dormant|
| ---------------------------
|
| --------------------------- ----------------------------
|----| Seitel Gas & Energy |---------|Seitel Natural Gas, Inc. |
| | Corp. | |100% |
| | 100% Dormant| ----------------------------
| ---------------------------
|
| ---------------------------
+----| Seitel Power Corp. |
| 100% |
| Dormant|
---------------------------
ITEM 2. PROPERTIES
The Company, through its wholly-owned subsidiary DDD Energy, participates
in oil and gas exploration and development efforts. For estimates of the
Company's net proved and proved developed oil and gas reserves as of December
31, 1997, see Note Q to the Company's Consolidated Financial Statements. There
are numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the producer. The
reserve data set forth in Note Q to the Company's Consolidated Financial
statements represent only estimates. Reserve engineering is a subjective process
of estimating underground accumulations of natural gas and liquids, including
crude oil, condensate and natural gas liquids, that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the amount
and quality of available data and of engineering and geological interpretation
and judgment. As a result, estimates of different engineers normally vary. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revision of such estimate. Accordingly, reserve
estimates are often different from the quantities ultimately recovered. The
meaningfulness of such estimates is highly dependent upon the accuracy of the
assumptions upon which they were based.
In general, the volume of production from oil and gas properties owned by
the Company declines as reserves are depleted. Except to the extent that the
Company acquires additional properties containing proved reserves or conducts
successful exploration and development activities, or both, the proved reserves
of the Company will decline as reserves are produced. Volumes generated from
future activities of the Company are therefore highly dependent upon the level
of success in finding or acquiring additional reserves and the costs incurred in
so doing.
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, 1997. Gross oil and gas wells include 10
with multiple completions. All of the wells are operated by the Company's
petroleum company partners.
Gross Wells Net Wells
----------- ---------
Oil 41 10.22
Gas 106 29.34
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
---------- --- ----- ---------- --- -----
1997
- ----
Texas 5.29 4.05 9.34 1.88 .52 2.40
Mississippi 2.64 2.00 4.64 1.24 - 1.24
Louisiana 2.35 1.05 3.40 1.05 - 1.05
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 - - -
As of December 31, 1997, the Company was participating in the drilling of
10 gross and 2.43 net wells.
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of December 31, 1997. 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 26,293 11,775 64,739 18,004
Louisiana 4,144 891 71,391 21,789
Alabama 160 5 1,516 270
Mississippi 4,100 1,321 26,806 16,239
Arkansas - - 3,600 450
------------ ------------- ------------- ------------
Total 34,697 13,992 168,052 56,752
============ ============= ============= ============
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, 1997 reserves with any federal
agencies.
Net Production Average Sales Price
--------------------- Average -------------------------
Year Ended Oil Gas Production Oil Gas
December 31, (Mbbls) (Mmcf) Cost per Mcfe (Bbls) (Mcf)
------------ ------- ------ ------------- ------ ------
1997 420 6,926 $ .55 $ 16.83 $ 2.63
1996 363 4,902 .44 18.52 2.28
1995 193 1,170 .66 13.85 1.55
The amounts in 1997 and 1996 include 56,000 and 84,000 barrels,
respectively, and 1,795 and 2,094 million cubic feet, respectively, delivered
under the terms of a volumetric production payment agreement effective July 1,
1996 at an average price of $14.04 and $14.91, respectively, per barrel and
$1.84 and $2.15 per mcf, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in ordinary, routine claims and
lawsuits incidental to its business. In the opinion of management, uninsured
losses, if any, resulting from the ultimate resolution of these matters should
not be material to the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on November 20, 1997.
Matters voted upon at the Annual Meeting, and the results of those votes are as
follows:
1. The election of nine directors to serve until the 1998 Annual Meeting.
NAME NO. OF VOTES FOR NO. OF VOTES WITHHELD
-------------------- ---------------- ---------------------
Herbert M. Pearlman 9,112,694 185,658
Paul A. Frame 9,113,794 184,558
Horace A. Calvert 9,113,094 185,258
David S. Lawi 9,114,099 184,253
Debra D. Valice 9,114,099 184,253
Walter M. Craig, Jr. 9,112,845 185,507
William Lerner 9,114,599 183,753
John E. Stieglitz 9,113,145 185,207
Fred S. Zeidman 9,114,699 183,653
2. Approval of an amendment to the Company's Certificate of Incorporation to
increase the authorized Common Stock to facilitate a two-for-one stock
split.
NO. OF VOTES FOR NO. OF VOTES AGAINST NO. OF VOTES ABSTAINED
---------------- -------------------- ----------------------
9,064,342 179,240 54,770
3. Approval of an amendment to the Seitel, Inc. 1993 Incentive Stock Option
Plan to limit the total number of options that can be granted to a single
participant under the Plan during any calendar year to 250,000 options.
NO. OF VOTES FOR NO. OF VOTES AGAINST NO. OF VOTES ABSTAINED
---------------- -------------------- ----------------------
8,823,505 372,192 102,655
4. Approval of an amendment to the Seitel, Inc. 1993 Incentive Stock Option
Plan to increase the number of shares available for granting options
thereunder by 850,000 shares.
NO. OF VOTES FOR NO. OF VOTES AGAINST NO. OF VOTES ABSTAINED
---------------- -------------------- ----------------------
3,368,325 2,548,455 146,200
5. Approval of the Seitel, Inc. 1998 Executive Compensation Plan.
NO. OF VOTES FOR NO. OF VOTES AGAINST NO. OF VOTES ABSTAINED
---------------- -------------------- ----------------------
4,956,383 929,912 176,685
6. Approval of the appointment of the public accounting firm of Arthur
Andersen LLP to act as the Company's independent Public Accountants for
1997.
NO. OF VOTES FOR NO. OF VOTES AGAINST NO. OF VOTES ABSTAINED
---------------- -------------------- ----------------------
9,233,899 14,575 49,878
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 1997 and 1996 as reported by the New York Stock Exchange.
1997(1) 1996(1)
------------------------------- -------------------------------
High Low High Low
------------- -------------- ------------- -------------
First Quarter $ 22.31 $ 15.69 $ 17.75 $ 11.63
Second Quarter 19.50 16.31 14.31 12.50
Third Quarter 22.81 18.44 18.88 13.13
Fourth Quarter 25.88 16.00 21.88 18.13
(1) All stock market prices have been restated to reflect the two-for-one
stock split in December 1997.
On March 27, 1998, the closing price for the Common Stock was $15.50. To
the best of the Company's knowledge, there are approximately 1,245 record
holders of the Company's Common Stock as of March 27, 1998.
Dividend Policy
The Company did not pay cash dividends during 1996 or 1997, 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.
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.
Statement of Operations Data: Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- -------- ----------
Revenue $ 127,556 $ 106,002 $ 74,439 $ 70,902 $ 43,456
Expenses and costs:
Depreciation, depletion and
amortization 49,679 39,249 26,872 27,181 19,852
Impairment of oil and gas
properties 9,560 - - - -
Cost of sales 17,953 19,402 13,071 10,499 3,202
Selling, general and administrative 23,043 19,165 15,393 14,672 9,132
--------- --------- -------- -------- ---------
100,235 77,816 55,336 52,352 32,186
--------- --------- -------- -------- ---------
Income from operations 27,321 28,186 19,103 18,550 11,270
Interest expense, net (3,554) (2,900) (3,078) (3,198) (2,126)
Equity in earnings (loss) of affiliates 146 (186) - - -
Gain on sale of subsidiary stock 18,449 - - - -
Increase in underlying equity in affiliate 10,750 - - - -
Extinguishment of volumetric
production payment (4,133) - - - -
--------- --------- -------- -------- ---------
Income from continuing operations
before provision for income
taxes and extraordinary item 48,979 25,100 16,025 15,352 9,144
Provision for income taxes 17,422 8,863 5,898 5,681 3,328
--------- --------- -------- -------- ---------
Income from continuing operations
before extraordinary item 31,557 16,237 10,127 9,671 5,816
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 31,557 15,249 8,679 9,619 5,717
Extraordinary charge on early
extinguishment of debt, net of tax - - - (304) -
--------- --------- -------- -------- ---------
Net income $ 31,557 $ 15,249 $ 8,679 $ 9,315 $ 5,717
========= ========= ======== ======== =========
Statement of Operations Data: Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- -------- --------- ---------
Earnings per share: (1) (2)
Basic:
Income from continuing operations
before extraordinary item $ 1.48 $ .83 $ .55 $ .68 $ .49
Discontinued operations - (.05) (.08) - (.01)
Extraordinary item - - - (.02) -
--------- -------- -------- --------- ---------
Net income $ 1.48 $ .78 $ .47 $ .66 $ .48
========= ======== ======== ========= =========
Diluted:
Income from continuing operations
before extraordinary item $ 1.43 $ .79 $ .49 $ .55 $ .35
Discontinued operations - (.05) (.07) - (.01)
Extraordinary item - - - (.02) -
--------- -------- -------- --------- ---------
Net income $ 1.43 $ .74 $ .42 $ .53 $ .34
========= ======== ======== ========= =========
Weighted average shares: (1) (2)
- Basic 21,380 19,646 18,408 14,212 11,964
- Diluted 22,050 20,660 20,976 18,237 18,485
-----------------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------------
Balance Sheet Data: 1997 1996 1995 1994 1993
---------- ---------- ---------- ----------- ----------
Data bank, net $ 180,936 $ 126,998 $ 105,369 $ 95,801 $ 58,583
Oil and gas properties, net 112,915 86,572 42,424 21,389 4,811
Property and equipment, net 2,349 14,022 10,126 11,035 6,985
Total assets 365,682 294,679 209,567 166,769 92,554
Total debt 90,566 86,488 61,283 16,927 31,866
Stockholders' equity 207,273 155,641 120,378 101,329 41,583
Stockholders' equity per common share
outstanding at December 31 $ 9.19 $ 7.51 $ 6.38 $ 5.74 $ 3.47
Common shares outstanding at
December 31 (1) 22,548 20,724 18,874 17,652 11,974
(1) All number of shares and per share amounts have been restated to give
effect to the two-for-one stock split effected in the form of a 100% stock
dividend in December 1997.
(2) During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which prescribes new computations
of all earnings per share amounts. All prior earnings per share data have
been restated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following table sets forth selected financial information (in
thousands) for the periods indicated, and should be read in conjunction with the
discussion of Results of Operations below.
1997 1996 1995
------------- ------------- -----------------
Seismic:
Revenue $ 85,560 $ 67,138 $ 55,749
Amortization 35,163 30,477 23,852
Cost of sales 394 448 627
Oil and Gas:
Revenue 25,680 18,255 4,806
Depletion 12,666 7,212 1,625
Impairment of oil and gas properties 9,560 - -
Cost of sales 5,168 3,134 1,571
Geophysical Services:
Revenue 16,316 20,609 13,884
Depreciation 983 951 532
Cost of sales 12,391 15,820 10,873
Other depreciation 867 609 863
Selling, general and administrative 23,043 19,165 15,393
Net interest expense 3,554 2,900 3,078
Equity in earnings (loss) of affiliates 146 (186) -
------------ ------------ ------------
Income from continuing operations before provision
for income taxes and special items (1) 23,913 25,100 16,025
Provision for income taxes 8,498 8,863 5,898
------------ ------------ ------------
Income from continuing operations before special items (1) $ 15,415 $ 16,237 $ 10,127
============ ============ ============
Net income $ 31,557 $ 15,249 $ 8,679
============ ============ ============
- ----------------------------------
(1) Special items include a pre-tax gain of $29,199,000 related to the
spin-off of the Company's seismic acquisition crew subsidiary and a
pre-tax loss of $4,133,000 related to the extinguishment of the
Company's volumetric production payment for the year ended December
31, 1997.
Results of Operations
Total revenue was $127,556,000, $106,002,000 and 74,439,000 in 1997, 1996
and 1995, respectively, representing increases of 20% from 1996 to 1997 and 42%
from 1995 to 1996. Revenue primarily consists of revenue generated from the
marketing of seismic data, oil and gas production and proprietary seismic data
acquisition (until August 11, 1997).
Revenue from the marketing of seismic data was $85,560,000, $67,138,000 and
$55,749,000 during 1997, 1996 and 1995, respectively. The increases between
years are primarily attributable to an increase in demand for high-resolution
seismic data, which is being used increasingly in oil and gas exploration and
development efforts. The Company believes the demand for its seismic data
remains strong due to several factors: large integrated oil and gas companies
are increasingly utilizing 3D seismic to evaluate the probability of the
existence and location of hydrocarbons; they have reduced their 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 $25,680,000, $18,255,000 and $4,806,000 during
1997, 1996 and 1995, respectively. The increases in oil and gas revenue are
primarily due to higher production resulting from more wells being on line in
1996 and 1997. The first year of oil and gas operations for the Company was
1993. Since then, the Company has steadily increased its exploration and
development efforts resulting in 68 wells producing as of December 31, 1995
increasing to 92 at December 31, 1996 and to 122 at December 31, 1997. Net
volume and price information for the Company's oil and gas production for the
years ended December 31, 1997, 1996 and 1995 is summarized in the following
table (amounts include deliveries made under the terms of a volumetric
production payment agreement effective from July 1, 1996 to June 30, 1997):
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
Natural gas volumes (mmcf) 6,926 4,902 1,170
Average natural gas price ($/mcf) $ 2.63 $ 2.28 $ 1.55
Crude oil/condensate volumes (mbbl) 420 363 193
Average crude oil/condensate price ($/bbl) $ 16.83 $ 18.52 $ 13.85
Revenue from the acquisition of proprietary seismic data and leasing of
seismic equipment ("geophysical services") performed by the Company's former
seismic acquisition crew subsidiary, Eagle Geophysical, Inc. ("Eagle"), was
$16,316,000, $20,609,000 and $13,884,000 for 1997, 1996 and 1995, respectively.
The decrease from 1996 to 1997 is a result of the spin-off of Eagle on August
11, 1997. Consequently, the geophysical services revenue for 1997 represents
approximately seven and one-half months, whereas 1996 represented a full year.
The increase between 1995 and 1996 is primarily attributable to an increase in
the channel capacities of both crews. Additionally, revenue from geophysical
services recognized by the Company varies based on whether projects were
performed for other subsidiaries of the Company, in which case no revenue is
recognized, or were performed for third parties.
Depreciation, depletion and amortization consist primarily of data bank
amortization and depletion for oil and gas properties. Data bank amortization
amounted to $35,163,000, $30,477,000 and $23,852,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. As a percentage of revenue from
licensing seismic data, data bank amortization was 42%, 47% and 45% for 1997,
1996 and 1995, 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 and, in 1997, an
increase in revenue from purchased seismic data which is amortized on a
straight-line basis. 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.
The Company's (and its industry's) seismic revenue trends 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 expected declines in
activity, 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's
seismic business is stable and the possibility for significant improvement
exists.
Depletion of oil and gas properties, excluding the impairment discussed
below, was $12,666,000, $7,212,000 and $1,625,000 for the years ended December
31, 1997, 1996 and 1995, respectively, which amounted to $1.34, $1.02 and $.70,
respectively, per mcfe of gas produced during such periods. The increase in
rates reflects the amount of exploration and development costs incurred
increasing at a higher rate than the proven reserve base.
At December 31, 1997, the Company recorded a non-cash impairment of oil and
gas properties totaling $9,560,000 ($6,160,000, net of taxes) based on its
December 31, 1997, estimated proved reserves valued at March 18, 1998 market
prices. The impairment is primarily due to lower commodity prices as compared to
the December 31, 1996 and 1997 prices.
Cost of sales consists of expenses associated with the oil and gas
production and geophysical services (until August 11, 1997), as well as seismic
resale support services. The increases in cost of sales related to oil and gas
production is directly attributable to the increase in revenue from this area.
Oil and gas production costs amounted to $.55, $.44, $.66 per mcfe of gas
produced during 1997, 1996 and 1995, respectively. The variation in rates is
primarily attributable to the number of oil wells the Company has in relation to
its total wells as oil wells typically have higher associated production costs
than gas wells. Additionally, in 1997, ad valorem taxes increased as a result of
the increase in the value of reserves. The increase in cost of sales from 1995
to 1996 related to the acquisition of seismic data for non-affiliated parties is
due to an increase in revenue from this area. The decrease from 1996 to 1997 is
due to the 1997 cost of sales reflecting only seven and one-half months of
activity as a result of the spin-off of Eagle, whereas 1996 represented a full
year. Gross profit margin related to the acquisition of seismic data for
non-affiliated parties (revenue less cost of sales) was 19%, 21% and 22% for
1997, 1996 and 1995, respectively.
The Company's selling, general and administrative expenses increased from
$15,393,000 in 1995 and $19,165,000 in 1996 to $23,043,000 in 1997. The increase
for each year was primarily a result of variable expenses, including commissions
on revenue and compensation tied to pre-tax profits, related to the increased
volume of business. As a percentage of total revenue, these expenses were 21% in
1995 and decreased to 18% in 1996 and 1997. The decrease is primarily due to
ongoing cost reduction programs.
The Company's interest expense was $3,407,000 in 1995, $4,063,000 in 1996
and $4,610,000 in 1997. 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. The increase from 1996 to
1997 was primarily due to interest incurred on borrowings made under the
Company's revolving line of credit during 1997 along with the full amount of
Senior Notes being outstanding for all of 1997.
Interest income was $329,000 in 1995, $1,163,000 in 1996 and $1,055,000 in
1997. The increase from 1995 to 1996 was primarily attributable to interest
earned on the investment of increased cash balances as a result of the proceeds
from the Senior Notes. The decrease from 1996 to 1997 was primarily due to the
fluctuation in cash balances available for investment.
On August 11, 1997, Eagle completed an initial public offering in which the
Company sold 1,880,000 of its 3,400,000 shares of Eagle common stock as a
selling stockholder. As a result of the offering, the Company now owns 1,520,000
shares of Eagle common stock or 17.9% of the outstanding shares of Eagle. The
Company received net proceeds of $29,723,000 from its participation in the
offering, resulting in a pre-tax gain, net of costs, of $18,449,000 from its
sale of Eagle stock. Additionally, the Company recorded a pre-tax gain, net of
costs, of $10,750,000, representing an increase in the Company's underlying
equity of Eagle as a result of Eagle's issuance of stock in connection with the
offering. The Company's equity in earnings of Eagle was $146,000 for the period
from August 11, 1997 to December 31, 1997.
The Company entered into an agreement, which was effective July 1, 1997, to
extinguish its volumetric production payment. The cost to acquire the production
payment liability exceeded its book value. As a result of this transaction, the
Company recorded a pre-tax loss of $4,133,000 in 1997.
During a portion of 1996, the Company had 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.
The ownership interest in ERI was reduced to 19% in late 1996. During 1996, the
Company recognized a net loss from its interest in ERI of $186,000. In May 1997,
the Company contributed its 19% ownership interest in ERI to Eagle.
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.
Liquidity and Capital Resources
As a result of its sale of 1,880,000 shares of Eagle common stock on August
11, 1997, the Company received net proceeds of $29,723,000 which were used
primarily to fund additions to the Company's seismic data library and oil and
gas properties. As of December 31, 1997, the market value of the Company's
remaining equity interest in Eagle was $19,760,000, based on 1,520,000 shares at
the December 31, 1997 closing price of $13.00 per share as quoted by NASDAQ.
These shares are subject to certain trading restrictions.
Because Eagle is no longer consolidated in the Company's consolidated
financial statements, the amount of the Company's term loans and capital lease
obligations was reduced to $385,000 and $71,000, respectively, as of March 27,
1998. The Company also received repayment of debts owed directly to it by Eagle,
plus advances, amounting to $2,094,000. At December 31, 1997 the Company owed
$12,500,000 to this affiliate for seismic survey services.
From July 1995 to April 1997, the Company and two of its wholly-owned
subsidiaries obtained four separate three-year term loans totaling $1,077,000.
Two of the loans bear interest at the rate of 8.413%, and two at the rate of
7.9%. The proceeds were used for the purchase of certain property and equipment
which secures the debt. Monthly principal and interest payments total
approximately $34,000. The balance outstanding on the loans at March 27, 1998,
was $385,000.
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 may offer from time to time in one or more series (i) unsecured
debt securities, which may be senior or subordinated, (ii) preferred stock, par
value $0.01 per share, and (iii) common stock, par value $.01 per share, or any
combination of the foregoing, up to an aggregate of $41,041,600 pursuant to an
effective "shelf" registration statement filed with the Securities and Exchange
Commission.
On March 16, 1998, the Company increased its $50,000,000 unsecured
revolving line of credit facility to $75,000,000. 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
March 16, 2001. As of March 27, 1998, the balance outstanding on the revolving
line of credit amounted to $18,000,000 bearing an interest rate of 6.44%.
In June 1996, a wholly-owned subsidiary of the Company sold a volumetric
production payment for $19 million to certain limited partnerships. During the
third quarter of 1997, the subsidiary extinguished the remaining portion of its
volumetric production payment at a cost of $13,352,000.
During 1997 and 1996, the Company received $17,361,000 and $11,182,000,
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 1997 and 1996, the Company also received $5,657,000 and
$3,204,000, respectively, in tax savings. From January 1, 1998, through March
27, 1998, the Company received $59,000 from 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 December 1997, the Company repurchased 175,000 shares of its common
stock in the open market at a cost of $2,973,000, pursuant to a stock repurchase
program authorized by the Board of Directors on December 12, 1997. The Board has
authorized expenditures of up to $25 million towards the repurchase of its
common stock.
During 1997, gross seismic data bank additions and capitalized oil and gas
exploration and development costs amounted to $89,073,000 and $50,597,000,
respectively. These capital expenditures, as well as taxes, interest expenses,
cost of sales and general and administrative expenses, were funded by
operations, proceeds from the sale of Eagle stock discussed above, 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
and borrowings under the Company's revolving line of credit.
Currently, the Company anticipates capital expenditures for 1998 to total
approximately $167 million. Such expenditures include approximately $130 million
for the creation of proprietary seismic data, and approximately $37 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 and project financing where applicable,
should be sufficient to fund the 1998 capital expenditures, along with
expenditures for operating and general and administrative expenses.
Additionally, the Company could arrange for additional debt or equity financing
during 1998; however, there can be no assurance that the Company would be able
to accomplish any such debt or equity financing on satisfactory terms.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." The statement establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The statement requires (a)
classification of items of other comprehensive income by their nature in a
financial statement (b) display of the accumulated balance of other
comprehensive income separate from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997 and
reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Under the new standard, companies will
be required to report certain information about operating segments in
consolidated statements. Operating segments will be determined based on the
method by which management organizes its business for making operating decisions
and assessing performance. The standard also requires that companies report
certain information about their products and services, the geographic areas in
which they operate, and their major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997.
Year 2000
The Company utilizes software and technologies throughout its operations
that will be affected by the date change in the year 2000 ("Year 2000 Issue").
An assessment of the systems that will be affected by the Year 2000 Issue has
been made. The Company does not believe the costs related to the Year 2000 Issue
will materially impact its results of operations. However, there can be no
guarantee that the systems of other companies, on which the Company's systems
rely, will be timely converted or that a failure to convert by another company
or a conversion that is incompatible with the Company's systems would not have a
material adverse effect on the Company.
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, 1997.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has a price risk management program that utilizes derivative
financial instruments, principally natural gas swaps, to reduce the price risks
associated with fluctuations in natural gas prices. These financial instruments
are designated as hedges and accounted for on the accrual basis with gains and
losses being recognized based on the type of contract and exposure being hedged.
Realized gains or losses on natural gas swaps designated as hedges of
anticipated production are treated as deferred credits or charges and are
included in other liabilities or other assets on the balance sheet. Net gains
and losses on natural gas swaps designated as hedges of anticipated
transactions, including accrued gains or losses upon maturity or termination of
the contract, are deferred and recognized in income when the associated hedged
commodities are produced. The Company did not materially hedge natural gas
prices in 1997. The Company continually reviews and may alter its hedged
positions.
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 1998 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, 1997
and 1996 F-2
Consolidated Statements of Operations for the
years ended December 31, 1997, 1996, and 1995 F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 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
(11)
3.6 Amendment to Certificate of Incorporation filed November 21,
1997*
3.7 By-Laws of the Company (1)
3.8 Corporate Resolution reflecting an Amendment to the By-Laws of
the Company adopted January 6, 1989 (3)
3.9 Corporate Resolution reflecting an Amendment to the By-Laws of
the Company adopted May 19, 1986 (5)
4.1 Specimen of Common Stock Certificate (1)
4.2 Form of Warrant Certificate granted to certain employees and one
Director of the Company in December 1990 and expiring in December
2000 (8)
4.3 Form of Promissory Note for Employee Stock Purchase dated July
21, 1992 (10)
4.4 Form of Subscription Agreement for Employee Stock Purchase dated
July 21, 1992 (10)
4.5 Form of Pledge for Employee Stock Purchase dated July 21, 1992
(10)
(3) Exhibits, continued...
4.6 Form of Warrant Certificate granted under the 1994 Warrant Plans
(14)
4.7 Form of Warrant Certificate granted under the 1995 Warrant Reload
Plan (17)
4.8 Form of Executive Warrant Certificate granted to certain
employees of the Company in November 1997 and expiring in
November 2002*
4.9 Form of Bonus Warrant Certificate granted to an employee of the
Company in November 1997 and expiring in November 2002*
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 (11)
10.4 Amendment No. 1 to the Seitel, Inc. 1993 Incentive Stock Option
Plan (16)
10.5 Statement of Amendments effective November 29, 1995, to the
Seitel, Inc. 1993 Incentive Stock Option Plan (19)
10.6 Statement of Amendments effective April 22, 1996, to the Seitel,
Inc. 1993 Incentive Stock Option Plan (19)
10.7 Amendment to the Seitel, Inc. 1993 Incentive Stock Option Plan
effective December 31, 1996 (21)
10.8 Amendment to Limit Options Granted to a Single Participant under
the Seitel, Inc. 1993 Incentive Stock Option Plan*
10.9 Amendment to Increase Number of Shares Available for Granting
Options under the Seitel, Inc. 1993 Incentive Stock Option Plan*
10.10 Non-Employee Directors' Stock Option Plan of the Company (13)
10.11 Amendment to the Seitel, Inc. Non-Employee Directors' Stock
Option Plan effective December 31, 1996 (21)
10.12 Seitel, Inc. Non-Employee Directors' Deferred Compensation Plan
(19)
10.13 Seitel, Inc. Amended and Restated 1995 Warrant Reload Plan (20)
10.14 Amendment to the Seitel, Inc. Amended and Restated 1995 Warrant
Reload Plan effective December 31, 1996 (21)
10.15 Memorandum of Understanding between the Company and Triangle
Geophysical Company dated as of June 7, 1984 (1)
10.16 Lease Agreement by and between the Company and Commonwealth
Computer Advisors, Inc. (2)
10.17 The Company's 401(k) Plan adopted February 27, 1995 (14)
(3) Exhibits, continued...
10.18 The Company's 401(k) Plan adopted January 1, 1998*
10.19 Executive Services Agreement dated April 3, 1990 between the
Company and Helm Resources, Inc. (7)
10.20 Employment Agreement effective as of January 1, 1991 between the
Company and Paul A. Frame, Jr. (9)
10.21 Amendment to Employment Agreement dated effective as of January
1, 1998 between the Company and Paul A. Frame, Jr.*
10.22 Employment Agreement effective as of January 1, 1991 between the
Company and Horace A. Calvert (9)
10.23 Amendment to Employment Agreement dated effective as of January
1, 1998 between the Company and Horace A. Calvert*
10.24 Employment Agreement effective as of January 1, 1991 between the
Company and Herbert M. Pearlman (9)
10.25 Amendment to Employment Agreement dated effective as of January
1, 1998 between the Company and Herbert M. Pearlman*
10.26 Employment Agreement effective as of January 1, 1991 between the
Company and David S. Lawi (9)
10.27 Amendment to Employment Agreement dated effective as of January
1, 1998 between the Company and David S. Lawi*
10.28 Employment Agreement effective as of January 1, 1993 between the
Company and Debra D. Valice (12)
10.29 Amendment to Employment Agreement dated effective as of January
1, 1998 between the Company and Debra D. Valice*
10.30 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)
10.31 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 (19)
10.32 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. (21)
10.33 Revolving Credit Agreement dated as of July 22, 1996, among
Seitel, Inc. and The First National Bank of Chicago (19)
10.34 First Amendment to Seitel, Inc. Revolving Credit Agreement dated
as of August 30, 1996 among the Company and The First National
Bank of Chicago (20) (3) Exhibits, continued...
10.35 Second Amendment to Revolving Credit Agreement dated as of July
22, 1996, among Seitel, Inc. and The First National Bank of
Chicago (22)
10.36 Ratable Note in the amount of $20,000,000 among Seitel, Inc. and
Bank One, Texas, N.A. dated as of May 1, 1997 (22)
10.37 Ratable Note in the amount of $30,000,000 among Seitel, Inc. and
The First National Bank of Chicago dated as of May 1, 1997 (22)
10.38 Third Amendment to Revolving Credit Agreement dated as of March
16, 1998 among Seitel, Inc. and The First National Bank of
Chicago*
10.39 Ratable Note in the amount of $40,000,000 among Seitel, Inc. and
The First National Bank of Chicago dated March 16, 1998*
10.40 Ratable Note in the amount of $35,000,000 among Seitel, Inc. and
Bank One, Texas, N.A. dated as of March 16, 1998*
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 (21)
10.42 Incentive Compensation Agreement (10)
10.43 Shareholder Value Bonus Agreement effective as of March 18, 1994
(13)
10.44 Amendment to Shareholder Value Bonus Agreement effective as of
March 18, 1994 (15)
10.45 Seitel, Inc. 1995 Shareholder Value Incentive Bonus Plan (16)
10.46 Terms Agreement dated July 28, 1994, between the Company and
Bear, Stearns & Co., Inc. (13)
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 (18)
21.1 Subsidiaries of the Registrant *
23.1 Consent of Arthur Andersen LLP *
23.2 Consent of Miller and Lents, Ltd.*
23.3 Consent of Forrest A. Garb & Associates, Inc.*
----------------------
* Filed herewith
(3) Exhibits, continued...
(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 Form 10-Q for the
quarter ended June 30, 1991.
(10) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
(11) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1993.
(12) Incorporated by reference to the Company's Form 10-Q for the
quarter ended September 30, 1993.
(13) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1994.
(14) 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.
(15) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
(16) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1995.
(17) 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.
(3) Exhibits, continued...
(18) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(19) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1996.
(20) Incorporated by reference to the Company's Form 10-Q for the
quarter ended September 30, 1996.
(21) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
(22) Incorporated by reference to the Company's Form 10-Q for the
quarter ended March 31, 1997.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997:
--------------------------------------------------------------------
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 30th of March, 1998.
SEITEL, INC.
By: /s/Paul A. Frame
------------------------------------------
Paul A. Frame
President
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 March 30, 1998
- -------------------------- Board of Directors
Herbert M. Pearlman
/s/ Paul A. Frame President and Chief March 30, 1998
- -------------------------- Executive Officer,
Paul A. Frame Director
/s/ Horace A. Calvert Executive Vice President March 30, 1998
- -------------------------- and Chief Operating
Horace A. Calvert Officer, Director
/s/ Debra D. Valice Senior Vice President- March 30, 1998
- -------------------------- Finance, Chief Financial
Debra D. Valice Officer, Secretary and
Treasurer, Director
/s/ David S. Lawi Director March 30, 1998
- --------------------------
David S. Lawi
/s/ Walter M. Craig, Jr. Director March 30, 1998
- --------------------------
Walter M. Craig, Jr.
/s/ William Lerner Director March 30, 1998
- --------------------------
William Lerner
/s/ John Stieglitz Director March 30, 1998
- --------------------------
John Stieglitz
/s/ Fred S. Zeidman Director March 30, 1998
- --------------------------
Fred S. Zeidman
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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
March 26, 1998
F-1
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
------------------------------------
1997 1996
----------- ------------
ASSETS
Cash and equivalents $ 4,881 $ 3,340
Receivables
Trade, less allowance for doubtful accounts of $561 and $336
at December 31, 1997 and 1996, respectively 45,482 52,509
Notes and other, net of discount of $198 at
December 31, 1996 1,202 6,618
Data bank 373,920 284,847
Less: Accumulated amortization (192,984) (157,849)
---------- -----------
Net data bank 180,936 126,998
Property and equipment, at cost:
Oil and gas properties, full-cost method of accounting,
including $39,436 and $30,709 not being amortized at
December 31, 1997 and 1996, respectively 146,642 96,045
Geophysical equipment - 20,200
Furniture, fixtures and other 5,442 4,665
---------- -----------
152,084 120,910
Less: Accumulated depreciation, depletion and amortization (36,820) (20,316)
---------- -----------
Net property and equipment 115,264 100,594
Investment in affiliates 15,054 914
Prepaid expenses, deferred charges and other assets 2,863 3,706
---------- -----------
TOTAL ASSETS $ 365,682 $ 294,679
========== ===========
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,
------------------------------------
1997 1996
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 22,423 $ 15,189
Accrued liabilities 5,330 6,538
Employee compensation payable 261 3,403
Payable to affiliate 12,500 -
Income taxes payable 1,242 302
Debt
Senior Notes 75,000 75,000
Line of credit 15,000 -
Term loans 477 9,025
Obligations under capital leases 89 2,463
Contingent payables 274 274
Deferred income taxes 18,050 9,793
Deferred revenue 7,763 17,051
----------- ------------
TOTAL LIABILITIES 158,409 139,038
----------- ------------
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized 5,000,000
shares; none issued - -
Common stock, par value $.01 per share; authorized
50,000,000 shares; issued and outstanding 22,548,408
and 10,362,102 (pre-split) at December 31, 1997 and 1996, respectively 225 104
Additional paid-in capital 128,406 105,544
Retained earnings 82,742 51,185
Treasury stock, 175,818 and 409 (pre-split) shares at cost at
December 31, 1997 and 1996, respectively (2,977) (4)
Notes receivable from officers and employees (1,109) (1,205)
Cumulative translation adjustment (14) 17
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 207,273 155,641
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 365,682 $ 294,679
=========== ============
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,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
REVENUE $ 127,556 $ 106,002 $ 74,439
EXPENSES
Depreciation, depletion and amortization 49,679 39,249 26,872
Impairment of oil and gas properties 9,560 - -
Cost of sales 17,953 19,402 13,071
Selling, general and administrative expenses 23,043 19,165 15,393
----------- ----------- -----------
100,235 77,816 55,336
----------- ----------- -----------
INCOME FROM OPERATIONS 27,321 28,186 19,103
Interest expense (4,609) (4,063) (3,407)
Interest income 1,055 1,163 329
Equity in earnings (loss) of affiliates 146 (186) -
Gain on sale of subsidiary stock 18,449 - -
Gain on increase in underlying equity of affiliate 10,750 - -
Extinguishment of volumetric production payment (4,133) - -
----------- ----------- -----------
Income from continuing operations before provision for
income taxes 48,979 25,100 16,025
Provision for income taxes 17,422 8,863 5,898
----------- ----------- -----------
Income from continuing operations 31,557 16,237 10,127
Loss from discontinued operations, net of income tax
benefit of $580 for 1996 and $703 for 1995 - (988) (1,196)
Loss on disposal of discontinued operations, net of
income tax benefit of $148 - - (252)
----------- ----------- -----------
NET INCOME $ 31,557 $ 15,249 $ 8,679
=========== =========== ===========
Earnings per share:
Basic:
Income from continuing operations $ 1.48 $ .83 $ .55
Loss from discontinued operations - (.05) (.07)
Loss on disposal of discontinued operations - - (.01)
----------- ----------- -----------
Net income $ 1.48 $ .78 $ .47
=========== =========== ===========
Diluted:
Income from continuing operations $ 1.43 $ .79 $ .49
Loss from discontinued operations - (.05) (.06)
Loss on disposal of discontinued operations - - (.01)
----------- ----------- -----------
Net income $ 1.43 $ .74 $ .42
=========== =========== ===========
Weighted average number of common and common equivalent shares:
Basic 21,380 19,646 18,408
=========== =========== ===========
Diluted 22,050 20,660 20,976
=========== =========== ===========
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, 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
Net proceeds from issuance of
common stock 912,472 8 17,318 - - - -
Two-for-one stock split 11,273,834 113 (113) - (409) - - -
Tax reduction from exercise
of stock options - - 5,657 - - - - -
Treasury stock purchased - - - - (175,000) (2,973) - -
Payments received on notes
receivable from
officers and employees - - - - - - 96 -
Foreign currency translation
adjustment - - - - - - - (31)
Net income - - - 31,557 - - - -
=========== ======= ========= ======= ========= ======== ========== ==========
Balance, December 31, 1997 22,548,408 $ 225 $ 128,406 $ 82,742 (175,818) $ (2,977) $ (1,109) $ (14)
=========== ======= ========= ======= ========= ======== ========== ==========
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,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Cash received from customers $ 123,795 $ 93,119 $ 80,981
Proceeds from volumetric production payment - 19,000 -
Cash paid to suppliers and employees (41,652) (40,066) (38,563)
Interest paid (4,584) (4,148) (4,551)
Interest received 955 1,181 320
Income taxes paid (2,353) (1,754) (2,218)
---------- ---------- ----------
Net cash provided by operating activities 76,161 67,332 35,969
---------- ---------- ----------
Cash flows from investing activities:
Cash invested in seismic data (76,616) (49,716) (59,286)
Cash invested in oil and gas properties (55,480) (48,429) (21,737)
Cash paid to acquire property and equipment (8,772) (8,224) (1,416)
Cash from disposal of property and equipment 28 59 -
Proceeds from sale of stock of subsidiary 29,723 - -
Costs related to sale of stock of subsidiary (5,435) - -
Cash received from affiliate for advances 2,094 - -
Advances made to oil and gas joint venture partner - - (1,142)
Collections on loans made 5,415 327 108
Loan made to unconsolidated affiliate - (2,000) -
Cost of investment made in unconsolidated affiliate - (109) -
---------- ---------- ----------
Net cash used in investing activities (109,043) (108,092) (83,473)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings under line of credit agreement 63,500 - 75,101
Principal payments under line of credit
agreement (48,500) - (80,186)
Borrowings under term loans 7,925 7,697 387
Principal payments on term loans (2,301) (1,743) (876)
Principal payments under capital lease
obligations (828) (1,301) (1,375)
Proceeds from issuance of senior notes - 22,500 52,500
Proceeds from issuance of common stock 17,361 11,184 6,942
Costs of debt and equity transactions (35) (860) (202)
Repurchase of common stock (2,735) - -
Payments on notes receivable from officers
and employees 96 190 156
---------- ---------- ----------
Net cash provided by financing activities 34,483 37,667 52,447
---------- ---------- ----------
Effect of exchange rate changes (60) (43) (8)
---------- ---------- ----------
Net increase (decrease) in cash and equivalents 1,541 (3,136) 4,935
Cash and equivalents at beginning of period 3,340 6,476 1,541
---------- ---------- ----------
Cash and equivalents at end of period $ 4,881 $ 3,340 $ 6,476
========== ========== ==========
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,
-------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 31,557 $ 15,249 $ 8,679
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of subsidiary stock (18,449) - -
Gain on increase in underlying equity of affiliate (10,750) - -
Extinguishment of volumetric production payment 4,133 - -
Loss from discontinued operations, net of tax - 988 1,448
Equity in loss (earnings) of affiliate (146) 186 -
Depreciation, depletion and amortization 62,293 40,229 27,663
Deferred income tax provision 8,257 3,321 2,970
Non-cash sales - - (1,534)
Gain on sale of property and equipment (16) (40) -
Amortization of deferred revenue (4,079) (5,740) -
Increase in receivables (3,544) (12,155) (5,998)
Increase in other assets (849) (1,143) (705)
Discount on note receivable (198) 198 -
Proceeds from volumetric production payment - 19,000 -
Increase in accounts payable and other liabilities 7,952 10,996 3,722
----------- ----------- -----------
Total adjustments 44,604 55,840 27,566
----------- ----------- -----------
Net cash provided by (used in) operating activities of:
Continuing operations $ 76,161 $ 71,089 $ 36,245
Discontinued operations - (3,757) (276)
----------- ----------- -----------
Net cash provided by operating activities $ 76,161 $ 67,332 $ 35,969
=========== =========== ===========
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, 1997
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 covers
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 Q, "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. Investments in less than majority owned companies over which the
Company has the ability to exercise significant influence are accounted for
using the equity method. 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, 1997 to be amortized to be 23%,
20%, 14%, 13%, 10%, and 20% for the years ending December 31, 1998, 1999, 2000,
2001, 2002 and all periods 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.
F-8
Net data bank at December 31, 1997 and 1996 was comprised of the
following (in thousands):
December 31,
1997 1996
------------- -------------
2D data created by the Company $ 17,625 $ 20,277
3D data created by the Company 151,247 96,100
Data purchased by the Company 12,064 10,621
============= =============
Net data bank $ 180,936 $ 126,998
============= =============
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, 1997, exploration and development related
overhead costs of $1,431,000, $1,146,000 and $861,000, respectively, have been
capitalized to oil and gas properties. For the three years ended December 31,
1997, interest costs of $2,105,000, $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 values, 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 from estimated proved reserves, based on current
economic and operating conditions, plus the lower of cost or fair value of
unevaluated properties, adjusted for the effects of related income taxes. If
capitalized costs exceed this limit, the excess is charged to depreciation,
depletion and amortization. Based on the Company's December 31, 1997 estimated
proved reserves valued at March 18, 1998 market prices, the Company recorded a
non-cash impairment of oil and gas properties of $9,560,000 ($6,160,000 net of
taxes) in the fourth quarter of 1997.
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 $207,000, $445,000 and $(3,000) for the years ended December 31, 1997, 1996
and 1995, respectively, as such earnings are intended to be permanently
reinvested in foreign 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. These contracts generally
provide that the customer accepts work completed throughout the performance
period and owes the Company, based on pricing provisions, amounts for job
completion, measured in terms of performance progress. Revenue received in
advance of being earned is deferred until earned.
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.
F-9
FOREIGN CURRENCY TRANSLATION: For subsidiaries whose functional currency is
deemed to be other than the U. S. dollar, asset and liability accounts are
translated at year-end exchange rates and revenue and expenses are translated at
the current exchange rates as of the dates on which they are recognized.
Translation adjustments are included as a separate component of shareholders'
equity. Any gains or losses on transactions or monetary assets or liabilities in
currencies other than the functional currency are included in net income in the
current period.
USE OF DERIVATIVES: The Company has a price risk management program that
utilizes derivative financial instruments, principally natural gas swaps, to
reduce the price risks associated with fluctuations in natural gas prices. These
financial instruments are designated as hedges and accounted for on the accrual
basis with gains and losses being recognized based on the type of contract and
exposure being hedged. Realized gains or losses on natural gas swaps designated
as hedges of anticipated production are treated as deferred credits or charges
and are included in other liabilities or other assets on the balance sheet. Net
gains and losses on natural gas swaps designated as hedges of anticipated
transactions, including accrued gains or losses upon maturity or termination of
the contract, are deferred and recognized in income when the associated hedged
commodities are produced. In order for natural gas swaps to qualify as a hedge
of an anticipated transaction, the derivative contract must identify the
expected date of the transaction, the commodity involved, and the expected
quantity to be purchased or sold. In the event that a hedged transaction does
not occur, future gains and losses, including termination gains or losses, are
included in the income statement when incurred. The estimated fair value of open
commodity price hedges as of December 31, 1997 was a gain of $183,000 and as of
December 31, 1996 was a loss of $408,000.
In the statement of cash flows, cash receipts or payments related to
financial instruments are classified consistent with the cash flows from the
transaction being hedged.
EARNINGS PER SHARE: The Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which requires
restatement of all comparative per share amounts. Under the provisions of SFAS
No. 128, the presentation of primary earnings per share has been replaced with
basic earnings per share, and fully diluted earnings per share presentations
have been replaced with diluted earnings per share for potentially dilutive
securities such as outstanding options, convertible debt and preferred stock.
All prior period earnings per share data have been restated.
Basic earnings per share are computed based on the weighted average shares
of common stock outstanding. Earnings per share computations to reconcile basic
and diluted income from continuing operations for the years 1997, 1996 and 1995
consist of the following (in thousands except per share amounts):
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
Income from continuing operations $ 31,557 $ 16,237 $ 10,127
=========== =========== ===========
Basic weighted average shares 21,380 19,646 18,408
Effect of dilutive securities: (1)
Options and warrants 670 932 2,083
Convertible subordinated debentures - 82 485
----------- ----------- -----------
Diluted weighted average shares 22,050 20,660 20,976
=========== =========== ===========
Per share income from continuing operations:
Basic $ 1.48 $ .83 $ .55
Diluted $ 1.43 $ .79 $ .49
- -------------------
(1) A weighted average year-to-date number of options and warrants to
purchase 1,007,000, 20,000 and 345,000 shares of common stock were
outstanding during 1997, 1996 and 1995, respectively, but were not
included in the computation of diluted per share income from
continuing operations because their exercise prices were greater than
the average market price of the common shares.
F-10
STOCK-BASED COMPENSATION: The Company accounts for employee stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 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 SFAS No. 123, "Accounting for Stock-Based
Compensation" on the Company's results of operations in 1997, 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, 1997 and 1996, 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, 1997 and 1996.
As of December 31, 1997, the market value of the Company's remaining equity
interest in Eagle Geophysical, Inc. ("Eagle") was $19.8 million, based on
1,520,000 shares at the December closing price of $13.00 per share as quoted by
NASDAQ.
IMPAIRMENT OF LONG-LIVED ASSETS: Effective January 1, 1996, the Company
adopted the requirements of 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. There were no impairments recorded under SFAS No. 121 in 1997, 1996
or 1995.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income."
The statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The statement requires (a) classification of items of other comprehensive income
by their nature in a financial statement and (b) display of the accumulated
balance of other comprehensive income separate from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997 and reclassification of financial statements for earlier periods
provided for comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Under the new standard, companies will
be required to report certain information about operating segments in
consolidated statements. Operating segments will be determined based on the
method by which management organizes its business for making operating decisions
and assessing performance. The standard also requires that companies report
certain information about their products and services, the geographic areas in
which they operate, and their major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997.
NOTE B--INCOME TAXES
The discussion of income taxes herein does not include the income tax
effects of the discontinued operations explained in Note M of these consolidated
financial statements.
F-11
The provision (benefit) for income taxes for each of the three years ended
December 31, 1997, are comprised of the following (in thousands):
1997 1996 1995
--------- ---------- ---------
Current - Federal $ 8,709 $ 5,214 $ 2,753
- State 314 246 153
- Foreign 142 82 22
--------- ---------- ---------
9,165 5,542 2,928
--------- ---------- ---------
Deferred - Federal 8,256 3,321 3,001
- State 1 - (31)
---------- ---------- ---------
8,257 3,321 2,970
--------- ---------- ---------
Tax provision - Federal 16,965 8,535 5,754
- State 315 246 122
- Foreign 142 82 22
--------- ---------- =========
$ 17,422 $ 8,863 $ 5,898
========= ========== =========
The differences between the U.S. Federal income taxes computed at the
statutory rate (35% for 1997, 34.7% for 1996 and 34.6% for 1995) and the
Company's income taxes for financial reporting purposes are as follows (in
thousands):
1997 1996 1995
-------- ------- --------
Statutory Federal income tax $ 17,143 $ 8,716 $ 5,540
State income tax, less Federal benefit 206 162 79
Other, net 73 (15) 279
-------- ------- --------
Income tax expense $ 17,422 $ 8,863 $ 5,898
======== ======= ========
The components of the net deferred income tax liability reflected in
the Company's consolidated balance sheets at December 31, 1997 and 1996 were as
follows (in thousands):
Deferred Tax Assets
(Liabilities) at December 31,
-------------------------------------
1997 1996
---------- ----------
Alternative minimum tax credit carryforward $ 3,541 $ 1,506
Net operating loss carryforward - 997
Partnership earnings 499 215
Investment tax credits 44 44
Other 1,021 553
---------- ----------
Total deferred tax assets 5,105 3,315
Less: Valuation allowance (44) (44)
---------- ----------
Deferred tax assets, net of
valuation allowance 5,061 3,271
---------- ----------
Depreciation, depletion and amortization (23,111) (12,969)
Other - (95)
----------
----------
Total deferred tax liabilities (23,111) (13,064)
---------- ----------
Net deferred tax liability $ (18,050) $ (9,793)
========== ==========
F-12
As of December 31, 1997, the Company has an alternative minimum tax (AMT)
credit carryforward of approximately $3,541,000 which can be used to offset
regular Federal income taxes payable in future years. The AMT credit has an
indefinite carryforward period.
In connection with the exercise of non-qualified stock options and common
stock purchase warrants by employees during 1997, 1996 and 1995, the Company
received $5,657,000, $3,204,000 and $1,900,000, 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, 1997 and
1996 (in thousands):
December 31,
----------------------------
1997 1996
---------- ----------
Senior notes $ 75,000 $ 75,000
Borrowings under line of credit 15,000 -
Term loans 477 9,025
---------- ----------
$ 90,477 $ 84,025
========== ==========
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.
LINE OF CREDIT: The Company's $50 million unsecured revolving line of
credit facility was increased to $75 million on March 16, 1998, and the maturity
date was extended from July 22, 1999 to March 16, 2001. The facility bears
interest at a rate determined by the ratio of the Company's debt to cash flow
from operations. Pursuant to the interest rate pricing structure, funds can
currently be borrowed at LIBOR plus 3/4%, the bank's prevailing prime rate, or
the sum of the Federal Funds effective rate for such day plus 1/2%. The average
interest rate applicable to amounts outstanding under this facility was 7.1%
during 1997.
TERM LOANS: From 1995 to 1997, the Company and two of its wholly-owned
subsidiaries obtained four separate three-year term loans totaling $1,077,000.
Two of the loans bear interest at the rate of 8.413%, and two at the rate of
7.9%. The proceeds were used for the purchase of certain property and equipment
which secures the debt. Monthly principal and interest payments total
approximately $34,000.
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: $10,306,000 in 1998; $18,460,000 in 1999; $18,378,000 in 2000;
$25,000,000 in 2001; and $18,333,000 in 2002.
NOTE D--LEASE OBLIGATIONS
Assets recorded under capital leases obligations of $81,000 and $2,836,000
at December 31, 1997 and 1996, respectively, are included in property and
equipment.
F-13
The Company leases office space under operating leases. Rental expense for
1997, 1996 and 1995 was approximately $606,000, $619,000 and $571,000,
respectively.
Future minimum lease payments for the five years subsequent to December 31,
1997 and in the aggregate are as follows (in thousands):
Capital Operating
Leases Leases
------------- ------------
1998 $ 74 $ 621
1999 18 622
2000 - 585
2001 - 408
2002 - 265
------------- ------------
Total minimum lease payments 92 $ 2,501
============
Less amount representing interest (3)
-------------
Present value of net minimum
lease payments $ 89
=============
The Company subleases a portion of its principal corporate offices to Eagle
Geophysical, Inc. ("Eagle"). Future minimum lease payment receivables under the
sublease as of December 31, 1997 are as follows: $83,000 in 1998; $83,000 in
1999 and $56,000 in 2000.
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 retained
responsibility for its working interest share of the cost of operations. The
Company accounted for the proceeds received in the transaction as deferred
revenue which was amortized into revenue and income as natural gas and other
hydrocarbons were produced and delivered.
The Company entered into an agreement to extinguish the remaining portion
of its volumetric production payment which was effective July 1, 1997. The cost
to acquire the production payment liability exceeded its book value. As a result
of this transaction, the Company recorded a pre-tax loss of $4,133,000 in the
accompanying consolidated statement of operations for the year ended December
31, 1997.
NOTE F--CONTINGENCIES AND COMMITMENTS
At both December 31, 1997 and 1996, $274,000 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 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 $30 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, 1998, the market price of the Company's common
stock was $15.625 per share.
The Company has employment agreements with certain of its key employees and
other incentive compensation arrangements that commit it to commissions based on
revenue, bonuses based on pre-tax profits, and other amounts based on seismic
data program profitability. Part III of the Company's Form 10-K contains a more
complete discussion of these contractual obligations.
F-14
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,
1997, 231,200 shares have been reserved for issuance under the Incentive Stock
Option Plan and 541,800 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, July 25, 1996 and November 20, 1997, approved
amendments to that plan to increase the total number of shares issuable under
the option plan to 4,000,000. As of December 31, 1997, 2,969,058 options have
been issued under the plan. As of December 31, 1997, 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 no more than 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 150,000 shares for issuance. As of December 31,
1997, 74,000 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, 1997, 1996 and 1995 (shares in thousands):
1997 1996 1995
------------------------ ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ----------- ------- ---------- -------- ----------
Outstanding at beginning of year 1,554 $ 12.06 1,280 $ 9.90 712 $ 6.13
Granted 1,325 20.03 612 14.67 674 12.96
Exercised (256) 11.14 (244) 7.08 (104) 4.08
Forfeited - - (94) 12.56 (2) 5.66
------- ------- --------
Outstanding at end of year 2,623 16.18 1,554 12.06 1,280 9.90
======= ======= ========
Options exercisable at end of year 1,732 544 372
======= ======= ========
The following table summarizes information for the options outstanding
at December 31, 1997 (shares in thousands):
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Number of Weighted Weighted Number of Weighted
Options Average Average Options Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/97 Life in Price at 12/31/97 Price
Years
- ------------------------------- ------------ ------------ ----------- ------------ -----------
$ 2.78- $ 7.00 189 4.26 $ 3.61 189 $ 3.61
$ 7.01- $ 11.00 45 6.30 10.09 45 10.09
$ 11.01- $ 15.00 786 8.00 12.77 421 12.75
$ 15.01- $ 19.00 410 7.51 17.11 207 16.81
$ 19.01- $ 21.50 1,193 5.76 20.32 870 20.30
------------ ------------
$ 2.78- $ 21.50 2,623 16.18 1,732 15.96
============ ============
During 1997, 1996 and 1995, the Company granted 2,119,408, 524,282 and
614,288 warrants, respectively, with a weighted average fair value on the date
of grant of $9.58, $8.69 and $7.52, respectively.
F-15
During 1997, the Company cancelled 460,160 warrants granted during 1997 and
274,262 warrants granted during 1996 and reissued the same number of options
under the same terms as the original grant. At December 31, 1997, 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 employees 701 $12.00 - 24.94 1999
Issued to employees 574 6.53 - 20.59 2000
Issued to employees 104 13.56 - 24.97 2001
Issued to employees 1,498 2.69 - 21.44 2002
Issued to employees 43 21.28 - 22.53 2004
Issued to employees 50 24.28 - 24.91 2005
Issued to employees 64 21.28 - 25.31 2006
Issued to an employee 2 21.84 2007
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. APB No. Opinion 25 generally
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):
1997 1996 1995
----------- ----------- ----------
Net income As reported $ 31,557 $ 15,249 $ 8,679
Pro forma $ 17,039 $ 10,050 $ 5,631
Basic earnings per share As reported $ 1.48 $ .78 $ .47
Pro forma $ .80 $ .51 $ .31
Diluted earnings per share As reported $ 1.43 $ .74 $ .42
Pro forma $ .78 $ .49 $ .28
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
1997, 1996 and 1995, respectively: (1) risk-free interest rates ranging from
5.79% to 6.79%, 5.9% to 7.03% and 5.54% to 7.02%; (2) dividend yield of 0%, 0%
and 0%; (3) stock price volatility ranging from 37.23% to 45.77%, 46.49% to
62.62% and 47.18% to 65.06%; and (4) expected option lives ranging from 1.67 to
10 years, 5 to 10 years and 2.8 to 10 years. The weighted-average fair value of
options granted during 1997, 1996 and 1995 was $9.98, $11.20 and $9.66 per
option, respectively, for options granted at fair market value and $10.15 and
$9.43 per option for options granted above fair market value in 1997 and 1995,
respectively. 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, 1997, 60,000 shares have been reserved for issuance
under this plan and directors have accumulated 1,643 deferred shares in their
accounts which will begin to be distributed in January 1998 in five equal annual
installments.
F-16
NOTE H--COMMON STOCK
On November 20, 1997, the shareholders of the Company approved an increase
in the Company's authorized common stock to 50,000,000 shares to facilitate a
two-for-one stock split, effected in the form of a 100% stock dividend, which
was approved by the Board of Directors on October 7, 1997. The two-for-one stock
split was paid in the form of a stock dividend to shareholders of record as of
December 3, 1997. All numbers of shares and per share amounts in the
accompanying consolidated financial statements and footnotes have been restated
to give effect to the two-for-one stock split except where noted.
In December 1997, the Company's Board of Directors approved the expenditure
of up to $25 million to repurchase the Company's common stock. During December
1997, the Company repurchased 175,000 shares of common stock at a cost of
$2,973,000.
The Company may offer from time to time in one or more series (i) unsecured
debt securities, which may be senior or subordinated, (ii) preferred stock, par
value $0.01 per share, and (iii) common stock, par value $.01 per share, or any
combination of the foregoing, up to an aggregate of $41,041,600 pursuant to an
effective shelf registration statement filed with the Securities and Exchange
Commission.
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 $2.69 per share. The Company recorded related compensation
expense due to the below market interest rate on these loans of $43,000, $48,000
and $56,000 for the years ended December 31, 1997, 1996 and 1995, 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 1997, 1996 and 1995, the Company received
$96,000, $190,000 and $156,000 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, 1997, no preferred stock had been issued.
NOTE J--ACCOUNTING FOR SALES OF STOCK BY SUBSIDIARY COMPANIES
The Company recognizes gains or losses on sales of stock by its subsidiary
companies when such sales are not made as part of a larger plan of corporate
reorganization. Such gains or losses are based upon the difference between the
book value of the Company's investment in the subsidiary immediately after the
sale and the historical book value of the Company's investment immediately prior
to the sale.
On August 11, 1997, the Company's wholly-owned seismic data acquisition
crew subsidiary, Eagle, completed an initial public offering ("Offering") in
which the Company sold 1,880,000 of its 3,400,000 shares of Eagle common stock
as a selling stockholder. As a result of the Offering, the Company now owns
1,520,000 shares of Eagle common stock, or 17.9% of the outstanding shares of
Eagle. The Company received net proceeds of $29,723,000 from its participation
in the Offering, resulting in a pre-tax gain, net of costs, on the sale of Eagle
common stock of $18,449,000. Additionally, the Company recorded a pre-tax gain,
net of costs, of $10,750,000 representing an increase in the Company's
underlying equity of Eagle as a result of Eagle's issuance of stock in
connection with the Offering.
F-17
NOTE K--RELATED PARTY TRANSACTIONS
The Company owed Eagle and its subsidiaries $12,500,000 at December 31,
1997 for seismic data acquisition services provided to the Company and its
subsidiaries subsequent to the Offering date. The Company incurred charges of
$22,200,000 for these services from the period August 11, 1997 through December
31, 1997. Costs incurred from these services were based on agreed upon
contractual amounts and terms similar to contracts with third party contractors.
The Company and Eagle entered into a Master Separation Agreement ("the
Agreement") for the purpose of defining their continuing relationship after the
Offering. The Agreement provides for the Company and Eagle to enter into a
Sublease, a Registration Rights Agreement and a Tax Indemnity Agreement. Under
the Agreement, the Company and Eagle have indemnified each other with respect to
liabilities arising in connection with the operations of their respective
businesses prior to and after the date of consummation of the Offering including
liabilities under the Securities Act with respect to the Offering. The Sublease
between the Company and Eagle provides for the Company to sublease a portion of
its principal corporate offices to Eagle for a term of three years beginning
August 1997 at an annual rent of approximately $83,000. The Sublease also
provides for Eagle to utilize certain shared office equipment, such as phone
systems and central computer systems, for an additional charge. Pursuant to the
Registration Rights Agreement, Eagle has agreed to register the offer and sale
by the Company on a delayed and continuous basis from time to time of the shares
of common stock owned by the Company after the Offering at the expense of Eagle.
The Company and Eagle have entered into a Tax Indemnity Agreement to define
their respective rights and obligations relating to federal, state and other
taxes for periods before and after the Offering. Pursuant to the Tax Indemnity
Agreement, Eagle is required to pay the Company (to the extent not already paid)
its share of federal income taxes prior to the date of consummation of the
Offering, and is responsible for federal income taxes from its operations on and
after the date of the Offering. Any subsequent refunds, additional taxes or
penalties or other adjustments relating to Eagle's federal income taxes for
periods prior to the date of consummation of the Offering shall be for the
benefit of or be borne by the Company. Similar provisions apply under the Tax
Indemnity Agreement to other taxes, such as state and local taxes.
The Company owed Helm Resources, Inc. and its subsidiaries ("Helm"), a
company that has three executive officers who are directors of the Company,
$76,000 and $23,000 as of December 31, 1997 and 1996, 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 $76,000,
$80,000 and $78,000 for these general and administrative expenses during 1997,
1996 and 1995, respectively. Management believes that these expenses, which were
specifically related to the Company's business, represented costs which would
have been incurred in similar amounts 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 1994 through 1997 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 2.5% of the total
investment made by such partnership and DDD Energy, Inc. for the partnership
formed in 1997, 3% 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
arm's-length.
F-18
NOTE L--MAJOR CUSTOMERS
No customers accounted for 10% or more of revenues during the years 1997,
1996 or 1995.
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 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 and $1,196,000
for the years ended December 31, 1996 and 1995, net of an income tax benefit of
$580,000 for 1996 and $703,000 for 1995. 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.
Revenue from the discontinued operations was $13,116,000 for the year ended
December 31, 1995. No assets or liabilities relating to the discontinued
operations remained at December 31, 1997.
Note N--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.
F-19
Significant non-cash investing and financing activities are as follows:
1. During 1997, the Company recorded an increase in the underlying equity
of Eagle of $13,031,000, before costs, as a result of Eagle's issuance
of stock in connection with their offering.
2. During 1996 and 1995, the Company issued 428,608 and 330,592,
respectively, shares of its common stock upon the conversion and
exchange of $1,989,000 and $1,534,000, respectively, of its 9%
convertible subordinated debentures. In connection with these
conversions and exchanges, unamortized bond issue costs totaling
$109,000 and $98,000 during 1996 and 1995, respectively, have been
charged to additional paid-in capital.
3. During 1996, the Company issued 264,150 shares of its common stock in
exchange for a 50% equity interest in a marine seismic company.
4. 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.
5. During 1995, the Company licensed seismic data valued at $1,534,000,
in exchange for the purchase of property and equipment and seismic
data for its library.
6. During 1997, 1996 and 1995, capital lease obligations totaling
$374,000, $41,000 and $10,000, respectively, were incurred when the
Company entered into leases for property and equipment.
7. During 1995, the Company acquired $330,000 of property and equipment
by incurring a directly related term loan.
F-20
Note O--INDUSTRY SEGMENTS
Financial information by industry segment for the three years ended
December 31, 1997, was as follows (in thousands):
Exploration Corporate
and and Consolidating
Seismic Production Other Eliminations Consolidated
------------ ------------ ------------- ----------- -------------
1997
- ----
Unaffiliated revenue $ 101,876 $ 25,680 $ - $ - $ 127,556
Intersegment revenue (a) 5,166 - - (5,166) -
------------ ------------ ------------- ----------- -------------
Total revenue $ 107,042 $ 25,680 $ - $ (5,166) $ 127,556
============ ============ ============= =========== =============
Depreciation, depletion
and amortization $ 36,146 $ 22,226(b) $ 867 $ - $ 59,239
============ ============ ============= =========== =============
Operating income (loss) $ 40,846 $ (4,309) $ (8,255) $ (961) $ 27,321
Interest expense, net - - (3,554) - (3,554)
Equity in earnings
of affiliate 146 - - - 146
Gain on sale of
subsidiary stock 18,449 - - - 18,449
Gain on increase in
underlying equity
of affiliate 10,750 - - - 10,750
Extinguishment of
volumetric production
payment - (4,133) - - (4,133)
------------ ------------ ------------- ----------- -------------
Income from continuing
operations before
income taxes $ 70,191 $ (8,442) $ (11,809) $ (961) $ 48,979
============ ============ ============= =========== =============
Identifiable assets $ 218,396 $ 120,023 $ 32,429 $ (5,166) $ 365,682
============ ============ ============= =========== =============
Capital expenditures $ 97,950(c) $ 64,418 $ 247 $ - $ 162,615
============ ============ ============= =========== =============
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 $ 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
============ ============ ============= =========== =============
F-21
Exploration Corporate
and and Consolidating
Seismic Production Other Eliminations Consolidated
------------- ------------- ------------ ------------ -------------
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.
(b) Includes a non-cash impairment of oil and gas properties totaling
$9,560,000.
(c) Includes capital expenditures for geophysical equipment totaling
$8,478,000.
F-22
Note P--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1997 and 1996.
Quarter Ended
-------------------------------------------------------------
(In thousands, except per share amounts) March 31 June 30 Sept. 30 Dec. 31
---------- ----------- ----------- -----------
1997
- ----
Revenue $ 27,219 $ 34,673 $ 30,793 $ 34,871
Gross profit(1) 12,682 16,338 15,166 6,000
Provision for income taxes 2,228 3,040 12,002 152
Net income 4,084 5,404 21,696 373
Earnings per share:(2) (3)
Basic .20 .26 1.00 .02
Diluted .19 .25 .98 .02
1996
- ----
Revenue $ 20,266 $ 27,180 $ 30,307 $ 28,249
Gross profit(1) 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:(2) (3)
- Basic:
Income from continuing operations .16 .21 .24 .21
Loss from discontinued operations - (.05) - -
Net income .16 .16 .24 .21
- Diluted:
Income from continuing operations .14 .20 .22 .19
Loss from discontinued operations - (.05) - -
Net income .14 .15 .22 .19
(1) Gross profit represents revenue less data bank amortization, depletion
of oil and gas properties, impairment of oil and gas properties and
cost of sales.
(2) Earnings per share for all periods presented have been restated to
reflect the adoption of SFAS No. 128, "Earnings Per Share," and the
effects of the two-for-one stock split in December 1997 discussed in
Note H.
(3) 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.
Note Q--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.
F-23
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. and Forrest A.
Garb & Associates, Inc. at December 31, 1997 and Miller and Lents, Ltd. at
December 31, 1996, and by Forrest A. Garb & Associates, Inc. at December 31,
1995. 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.
Oil Gas
(Mbbl) (MMcf)
------------- -------------
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
Revisions of previous estimates (500) (3,863)
Repurchase of volumetric production payment 98 3,736
Extensions and discoveries 1,110 28,491
Production (364) (5,131)
------------ -------------
Proved reserves at December 31, 1997 2,638 46,994
============ =============
Proved developed reserves -
December 31, 1994 487 7,315
============ =============
December 31, 1995 1,178 10,219
============ =============
December 31, 1996 902 11,563
============ =============
December 31, 1997 1,744 18,483
============ =============
In addition to the proved reserves disclosed above, the Company owned
proved sulfur reserves of 174,000 long tons, 197,000 long tons and 239,000 long
tons at December 31, 1997, 1996 and 1995, respectively. In addition to the
production indicated above, in 1997 and 1996 the Company delivered 56,000 and
84,000 barrels, respectively, and 1,795 and 2,094 million cubic feet,
respectively, under the terms of a volumetric production payment agreement.
CAPITALIZED COSTS OF OIL AND GAS PROPERTIES: As of December 31, 1997 and
1996, the Company's capitalized costs of oil and gas properties were as follows
(in thousands):
December 31,
-------------------------
1997 1996
--------- ----------
Unevaluated properties $ 39,436 $ 30,709
Evaluated properties 107,206 65,336
--------- ----------
Total capitalized costs 146,642 96,045
Less: Accumulated depreciation,
depletion and amortization (33,727) (9,473)
--------- ----------
Net capitalized costs $ 112,915 $ 86,572
========= ==========
Of the total costs excluded from the amortization calculation as of
December 31, 1997, $18,014,000 was incurred during 1997, $12,937,000 was
incurred during 1996, $5,130,000 was incurred during 1995, and $3,355,000 was
incurred during 1994. 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.
F-24
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, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
------------ ---------- ----------
Acquisition of properties:
Evaluated $ 13,813 $ 23,090 $ 3,643
Unevaluated 10,857 7,000 5,549
Exploration costs 26,961 17,358 11,963
Development costs 12,318 3,913 1,505
------------ ---------- ----------
Total costs incurred $ 63,949 $ 51,361 $ 22,660
============ ========== ==========
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, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
----------- -------- ---------
Revenue $ 25,282 $ 17,921 $ 4,482
Production costs (5,155) (3,124) (1,553)
Depreciation, depletion and
amortization (12,666) (7,212) (1,625)
Impairment of oil and gas
properties (9,560) - -
----------- -------- ---------
Income (loss) before income
taxes (2,099) 7,585 1,304
Income tax benefit (expense) 735 (2,655) (456)
----------- -------- ---------
Results of operations $ (1,364) $ 4,930 $ 848
=========== ======== =========
In addition to the revenues and production costs disclosed above, the
Company had revenues from sulfur sales and related production costs of $398,000
and $13,000 respectively, for the year ended December 31, 1997, $334,000 and
$10,000, respectively, for the year ended December 31, 1996 and $324,000 and
$19,000, respectively, for the year ended December 31, 1995.
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.
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.
F-25
Management does not rely upon the following information in making
investment and operating decisions. The Company, along with its partners, bases
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.
December 31,
(in thousands)
-----------------------------------------
1997 1996 1995
---------- ---------- ---------
Future gross revenue $ 162,762 $ 127,905 $ 43,724
Future production costs (21,417) (21,913) (8,951)
Future development costs (21,659) (10,101) (3,393)
Future income taxes (27,453) (26,524) (9,266)
---------- ---------- ---------
Future net cash flows 92,233 69,367 22,114
10 percent annual discount for estimated timing of cash flows (27,636) (17,277) (6,056)
---------- ---------- ---------
Standardized measure of discounted future net cash flows $ 64,597 $ 52,090 $ 16,058
========== ========== =========
The above table excludes future net cash flows before income taxes of
$3,187,000, $3,495,000 and $5,061,000, and discounted future net cash flows
before income taxes of $2,350,000, $2,427,000 and $3,926,000, as of December 31,
1997, 1996 and 1995, respectively, related to proved sulfur reserves.
The following are the principal sources of changes in the standardized
measure of discounted future net cash flows for the years ended December 31,
1997, 1996 and 1995 (in thousands):
1997 1996 1995
---------- ---------- ---------
Standardized measure, beginning of year $ 52,090 $ 16,058 $ 10,830
Extensions and discoveries, net of related costs 45,193 26,690 13,714
Sales of oil and gas produced, net of production costs (16,035) (9,057) (2,929)
Net changes in prices and production costs (28,384) 24,561 77
Change in future development costs (2,650) (355) 4,010
Development costs incurred during the period that reduced
future development costs 7,802 2,042 421
Revision of previous quantity estimates (8,927) 3,077 (12,192)
Repurchase of volumetric production payment 8,319 - -
Purchases of reserves in place - 18,309 5,583
Sale of volumetric production payment - (17,763) -
Accretion of discount 7,276 2,532 1,525
Net change in income taxes 1,988 (11,406) (2,583)
Change in production rates and other (2,075) (2,598) (2,398)
---------- ---------- ----------
Standardized measure, end of year $ 64,597 $ 52,090 $ 16,058
========== ========== ==========
F-26
EXHIBIT
INDEX
- -------- -------------------------------------------------------- ---------
Exhibit Title Page
Number
- -------- -------------------------------------------------------- ---------
3.6 Amendment to Certificate of Incorporation 52
filed November 21, 1997
4.8 Form of Executive Warrant Certificate granted 54
to certain employees of the Company in
November 1997 and expiring in November 2002
4.9 Form of Bonus Warrant Certificate granted to 66
an employee of the Company in November
1997 and expiring in November 2002
10.8 Amendment to Limit Options Granted to a Single 77
Participant under the Seitel, Inc.
1993 Incentive Stock Option Plan
10.9 Amendment to Increase Number of Shares 79
Available for Granting Options under the
Seitel, Inc. 1993 Incentive Stock Option Plan
10.18 The Company's 401(k) Plan adopted January 1, 1998 81
10.21 Amendment to Employment Agreement dated effective 110
as of January 1, 1998 between the
Company and Paul A. Frame, Jr.
10.23 Amendment to Employment Agreement dated effective 114
as of January 1, 1998 between the
Company and Horace A. Calvert
10.25 Amendment to Employment Agreement dated effective 118
as of January 1, 1998 between the
Company and Herbert M. Pearlman
10.27 Amendment to Employment Agreement dated effective 122
as of January 1, 1998 between the
Company and David S. Lawi
10.29 Amendment to Employment Agreement dated effective 126
as of January 1, 1998 between the
Company and Debra D. Valice
10.38 Third Amendment to Revolving Credit 129
Agreement dated as of March 16, 1998 among
Seitel, Inc. and The First National Bank of Chicago
10.39 Ratable Note in the amount of $40,000,000 139
among Seitel, Inc. and The First National
Bank of Chicago dated March 16, 1998
10.40 Ratable Note in the amount of $35,000,000 141
among Seitel, Inc. and Bank One, Texas,
N.A. dated as of March 16, 1998
21.1 Subsidiaries of the Registrant 143
23.1 Consent of Arthur Andersen LLP 145
23.2 Consent of Miller and Lents, Ltd. 147
23.3 Consent of Forrest A. Garb & Associates, Inc. 149