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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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| X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For Fiscal Year Ended December 31, 1998
-----------------------
OR
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| | 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
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(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.
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Yes X No
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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 29, 1999 was approximately $321,985,638. 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 $14.625 and there were a total of 23,810,852 shares of Common Stock
outstanding.
Documents Incorporated by Reference:
Document Part
------------------------------------ --------
Definitive Proxy Statement for III
1999 Annual Stockholders Meeting
ITEM 1. BUSINESS
--------
General
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Seitel, Inc. (the "Company") is a leading diversified energy company
providing seismic data and related geophysical technology used in oil and gas
exploration and production. The Company sells its proprietary
information-technology to oil and gas companies and has developed an evolving
crude oil and natural gas exploration and production company. 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 primarily 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, and
Olympic Seismic, Ltd., a wholly-owned Canadian subsidiary. The data library,
which consists of both two-dimensional ("2D") and three-dimensional ("3D") data,
is marketed to major and independent 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.
At December 31, 1998, the Company owned approximately 920,000 linear miles
of 2D and approximately 11,750 square miles of 3D seismic data which it
maintained in its library and marketed an additional 270,000 linear miles of 2D
data. Subsequent to December 31, 1998 the Company acquired the entire database
of Amoco Canada consisting of 235,000 linear miles of 2D and 2,790 square miles
of 3D seismic data. The Company's seismic data library now constitutes the
largest seismic data base marketed publicly in North America based solely on
management's knowledge and beliefs regarding the industry. The Company's U.S.
seismic surveys extend to virtually every major domestic exploration and
development region, with the majority of the seismic surveys covering onshore
and offshore the U.S. Gulf Coast. In addition, the Company's international
seismic surveys are concentrated in Western Canada and the Continental Shelf
offshore the United Kingdom and Ireland.
The Company's marketing team of 20 seismic sales specialists markets data
from its library and from newly initiated 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 energy 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 12 member staff of geotechnical professionals dedicated
to its seismic operations, who have in excess of 225 years of collective
geophysical experience. Together, the marketing team and geotechnical
professionals help clients evaluate their respective seismic requirements,
design seismic data programs to meet market demand, and supervise the
reprocessing of data in the Company's library to enhance future resales.
Three-dimensional seismic data provides 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 presents 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, uneconomic wells and non-commercial wells 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
remains 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 creates data using "group shoot" programs. Prior to undertaking
a seismic survey, the Company pre-contracts a majority of the cost of the
project by arranging multi-client participation or "group shoots." In a group
shoot program, several oil and gas companies share in the expense of a survey
and thereby materially reduce their respective cost of the survey, while the
Company reduces its initial capital requirements associated with the seismic
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 is
added to the Company's library. (Seismic data cannot be transferred by a
licensee to another party; each individual user must purchase a respective
license.) The Company contracts with selected seismic acquisition crew companies
to conduct both onshore and offshore seismic surveys.
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.
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 oil and gas
exploration, development and ownership of hydrocarbon reserves through
partnering relationships with oil and gas companies. The Company's strategy is
to combine its 3D and 2D seismic expertise 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, the Company's wholly-owned exploration and
production subsidiary, DDD Energy, Inc. ("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. DDD Energy has
conducted over 1,900 square miles of advanced 3D surveys, located primarily in
the Gulf Coast areas of onshore Texas, Louisiana, Alabama and Mississippi, as
well as California and Arkansas. DDD Energy's working interest in these projects
ranges from approximately 10% to 90%, with an average working interest of
approximately 31%. More than 200 square miles of 3D surveys are scheduled to be
conducted in 1999 by DDD Energy and its partners. 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. 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.
Since inception, DDD Energy has participated in the drilling of 281 wells,
191 of which were commercially productive for a 68% success rate.
Customers
- ---------
The Company markets its seismic data to major and independent oil and gas
companies. No one customer accounted for as much as 10% of the Company's
revenues during the years 1998, 1997 or 1996. As a result, the Company does not
believe that the loss of any customer would have a material adverse impact on
its seismic business. The Company believes the size of its customer base is due
to its seismic technology and capabilities and the increasing size of its
data-library base.
Competition
- -----------
The creation and resale of seismic data are highly competitive in the
United States. There are a number of independent oil-service companies that
create and market seismic data, and numerous oil and gas companies create
seismic data and maintain their own seismic data banks. Some of the Company's
competitors have longer operating histories, greater financial resources and
larger sales volumes than the Company. However, the number of independent
seismic companies has decreased significantly during the last decade due to
difficult industry conditions. In 1985, there were approximately 150 independent
seismic companies operating in the United States, of which approximately 15 were
significant competitors. In 1998, 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 oil and gas 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 oil and gas 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 oil and gas 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 operations, 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 experience high initial flow 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 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, 1998, the Company and its subsidiaries had 110 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, 72 are related
to the seismic operations and 21 are related to the oil and gas operations. The
balance provides 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.
Risk Factors
- ------------
ANY INVESTMENT IN OUR SECURITIES INVOLVES RISK. INVESTORS SHOULD CAREFULLY
CONSIDER, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, THE
RISKS DESCRIBED BELOW BEFORE MAKING ANY INVESTMENT DECISION.
Decreases in Energy Industry Spending Could Adversely Affect Our Business.
-------------------------------------------------------------------------
Demand for our seismic data depends primarily upon the level of spending by
oil and gas companies for exploration, production and development activities.
These spending levels may increase and decrease with increases and decreases in
the commodity prices for oil and gas, so that demand for our seismic data may be
affected to some degree by market prices for natural gas and crude oil, which
have historically been very volatile. As a result of recent weakness in oil and
gas commodity prices, the level of overall oil and gas industry activity has
declined from levels experienced in recent years. If our customers' capital
spending decreases in line with overall recent industry trends, it could have a
significant adverse effect upon the demand for our services and our results of
operations and cash flow. Revenues generated by our oil and gas exploration and
development business increase and decrease with increases and decreases in the
market prices of oil and gas. Also, factors beyond our control may affect our
oil and gas operations. These factors include the level of supply of natural gas
and oil, the availability of adequate pipeline and other transportation and
processing facilities and the marketing of competitive fuels.
Drilling Hazards and Dry Holes Could Affect Our Oil and Gas Activities.
----------------------------------------------------------------------
Our oil and gas operations are subject to hazards incident to the drilling
of oil and gas wells, such as cratering, explosions, uncontrollable flows of
oil, gas or well fluids, fires, pollution, or other environmental risks, as well
as to the risk that we may not encounter any commercially productive natural gas
or oil reserves. Some of these hazards can cause personal injury and loss of
life, severe damage to and destruction of property and equipment, environmental
damage and suspension of operations. We seek to reduce dry hole risks by
utilizing 3D seismic data, where appropriate, to help us determine where to
drill. However, since we do not act as operator in our oil and gas drilling
business, we are dependent upon our petroleum company partners to conduct
operations in a manner so as to minimize these operating risks. In accordance
with industry practice, we maintain insurance against some, but not all, of
these operating risks. We cannot be sure that adequate insurance will be
available in the future, or that we will be able to maintain adequate insurance
on terms and conditions we find acceptable. As a result of the risks inherent in
oil and gas operations, the success of our oil and gas exploration, development
and production activities is uncertain.
Loss of Key Personnel Could Adversely Affect Our Business.
---------------------------------------------------------
Our operations are dependent upon a relatively small group of management
and technical personnel. The loss of one or more of these individuals could have
a material adverse effect on us. We use equity ownership and other incentives to
attract and retain our employees. In addition, we have employment agreements
with our President and Chief Executive Officer, Paul A. Frame, Executive Vice
President and Chief Operating Officer, Horace A. Calvert, and Executive Vice
President of Finance and Chief Financial Officer, Debra D. Valice.
Regional Events May Affect Our Geographically Concentrated Operations.
---------------------------------------------------------------------
Most of the seismic data in our seismic data library, as well as most of
our existing interests in oil and gas properties, are located along the coast
and offshore in the U.S. Gulf of Mexico. Because of this concentration, any
regional events that increase costs, reduce availability of equipment or
supplies, reduce demand or limit production will impact us more adversely than
if we were more geographically diversified.
Extensive Governmental Regulation of Our Business Affects Our Daily
---------------------------------------------------------------------------
Operations.
----------
The oil and gas industry in general is subject to extensive governmental
regulation, which may be changed from time to time in response to economic or
political conditions. In particular, our oil and gas exploration and production
is subject to federal and state regulations governing environmental quality and
pollution control, state limits on allowable rates of production by well or
proration unit, and other similar regulations. State and federal regulations
generally are intended to prevent waste of natural gas and oil, protect rights
to produce natural gas and oil between owners in a common reservoir, control the
amount of natural gas and oil produced by assigning allowable rates of
production and control contamination of the environment. Environmental
regulations affect our operations on a daily basis. Also, we believe that the
trend toward more expansive and stricter environmental laws and regulations will
continue. The implementation of new, or the modification of existing, laws or
regulations affecting the oil and gas industry could have a material adverse
impact on us.
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% | | 17.3% |
| | 100% | ---------------------------- --------------------------
| | * |
| ---------------------------
|
| ---------------------------
|----| Exsol, Inc. |
| | 100% |
| | * |
| ---------------------------
|
| ---------------------------
|----| Geo-Bank, Inc. |
| | 100% |
| | * |
| ---------------------------
|
| --------------------------- ----------------------------
|----| Seitel Gas & Energy |---------|Seitel Natural Gas, Inc. |
| | Corp. | |100% * |
| | 100% * | ----------------------------
| ---------------------------
|
| ---------------------------
+----| Seitel Power Corp. |
| 100% |
| * |
---------------------------
* Dormant
ITEM 2. PROPERTIES
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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, 1998, 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, 1998. Gross oil and gas wells include 10
with multiple completions. All of the wells are operated by the Company's oil
and gas company partners. A "gross" well is a well in which the Company owns a
working interest. "Net" wells refer to the sum of the fractional working
interests owned by the Company in gross wells.
Gross Wells Net Wells
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Oil 52 12.35
Gas 114 32.05
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
---------- --- ----- ---------- --- -----
1998
- ----
Texas .57 1.68 2.25 1.10 - 1.10
Mississippi 1.00 1.00 2.00 - - -
Louisiana 1.50 1.75 3.25 .66 .33 .99
California .15 .15 .30 - - -
Arkansas - .13 .13 - - -
Michigan - .25 .25 - - -
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 - - -
As of December 31, 1998, the Company was participating in the drilling of 2
gross and .52 net wells.
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of December 31, 1998. The table does
not include additional acreage, which the Company may earn upon completion of
pending 3D seismic data projects. "Gross" acres refer to the number of acres in
which the Company owns a working interest. "Net" acres refer to the sum of the
fractional working interests owned by the Company in gross acres.
Developed Acres Undeveloped Acres
---------------------------- -----------------------------
Gross Net Gross Net
------------- ------------ ------------- -------------
California - - 138,726 41,786
Texas 25,106 11,267 88,651 24,120
Louisiana 6,864 1,446 79,672 24,164
Mississippi 4,100 1,321 26,806 16,239
Michigan 260 130 6,000 2,000
Arkansas - - 3,600 450
Alabama 160 5 1,516 270
------------- ------------ ------------- -------------
Total 36,490 14,169 344,971 109,029
============= ============ ============= =============
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, 1998 reserves with any federal
agencies.
Net Production Average Average Sales Price
--------------------- -------------------------
Year Ended Oil Gas Production Oil Gas
December 31, (Mbbls) (Mmcf) Cost per Mcfe (Bbls) (Mcf)
1998 386 6,216 $.55 $11.78 $2.27
1997 420 6,926 .55 16.83 2.63
1996 363 4,902 .44 18.52 2.28
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.
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 1998 and 1997 as reported by the New York Stock Exchange.
1998 1997(1)
------------------------------- -------------------------------
High Low High Low
------------- ------------- ------------- -------------
First Quarter $ 17.25 $ 13.19 $ 22.31 $ 15.69
Second Quarter 19.31 14.69 19.50 16.31
Third Quarter 17.25 8.69 22.81 18.44
Fourth Quarter 16.00 9.56 25.88 16.00
(1) All stock market prices have been restated to reflect the two-for-one
stock split in December 1997.
On March 29, 1999, the closing price for the Common Stock was $14.625. To
the best of the Company's knowledge, there are approximately 1,265 record
holders of the Company's Common Stock as of March 29, 1999.
Dividend Policy
- ---------------
The Company did not pay cash dividends during 1997 or 1998, 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,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ----------- ----------
Revenue $ 144,857 $ 127,556 $ 106,002 $ 74,439 $ 70,902
Expenses and costs:
Depreciation, depletion and
amortization 69,890 49,679 39,249 26,872 27,181
Impairment of oil and gas
properties - 9,560 - - -
Cost of sales 4,874 17,953 19,402 13,071 10,499
Selling, general and
administrative 26,599 23,043 19,165 15,393 14,672
----------- ---------- ---------- ----------- ----------
101,363 100,235 77,816 55,336 52,352
----------- ---------- ---------- ----------- ----------
Income from operations 43,494 27,321 28,186 19,103 18,550
Interest expense, net (5,540) (3,554) (2,900) (3,078) (3,198)
Equity in earnings (loss) of
affiliate 222 146 (186) - -
Gain on sale of subsidiary
stock - 18,449 - - -
Increase (decrease) in under-
lying equity of affiliate (193) 10,750 - - -
Extinguishment of volumetric
production payment - (4,133) - - -
----------- ---------- ---------- ----------- ----------
Income from continuing
operations before provision
for income taxes and
extraordinary item 37,983 48,979 25,100 16,025 15,352
Provision for income taxes 13,623 17,422 8,863 5,898 5,681
----------- ---------- ---------- ----------- ----------
Income from continuing
operations before
extraordinary item 24,360 31,557 16,237 10,127 9,671
Loss from discontinued
operations, net of tax - - (988) (1,196) (52)
Loss on disposal of
discontinued operations,
net of tax - - - (252) -
----------- ---------- ---------- ----------- ----------
Income before extraordinary
item 24,360 31,557 15,249 8,679 9,619
Extraordinary charge on early
extinguishment of debt, net
of tax - - - - (304)
----------- ---------- ---------- ----------- ----------
Net income $ 24,360 $ 31,557 $ 15,249 $ 8,679 $ 9,315
=========== ========== ========== =========== ==========
Statement of Operations Data: Year Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ----------- ----------
Earnings per share: (1)
Basic:
Income from continuing
operations before
extraordinary item $ 1.07 $ 1.48 $ .83 $ .55 $ .68
Discontinued operations - - (.05) (.08) -
Extraordinary item - - - - (.02)
----------- ---------- ---------- ----------- ----------
Net income $ 1.07 $ 1.48 $ .78 $ .47 $ .66
=========== ========== ========== =========== ==========
Diluted:
Income from continuing
operations before
extraordinary item $ 1.05 $ 1.43 $ .79 $ .49 $ .55
Discontinued operations - - (.05) (.07) -
Extraordinary item - - - - (.02)
----------- ---------- ---------- ----------- ----------
Net income $ 1.05 $ 1.43 $ .74 $ .42 $ .53
=========== ========== ========== =========== ==========
Weighted average shares: (1)
- Basic 22,720 21,380 19,646 18,408 14,212
- Diluted 23,124 22,050 20,660 20,976 18,237
-----------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------------------------
Balance Sheet Data: 1998 1997 1996 1995 1994
----------- ----------- ----------- ------------ -----------
Data bank, net $ 262,950 $ 180,936 $ 126,998 $ 105,369 $ 95,801
Oil and gas properties, net 148,977 112,915 86,572 42,424 21,389
Total assets 495,767 365,682 294,679 209,567 166,769
Total debt 150,690 90,566 86,488 61,283 16,927
Stockholders' equity 237,587 207,273 155,641 120,378 101,329
Stockholders' equity per
common share outstanding
at December 31 $ 9.98 $ 9.19 $ 7.51 $ 6.38 $ 5.74
Common shares outstanding at
December 31 (1) 23,805 22,548 20,724 18,874 17,652
(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.
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.
1998 1997 1996
------------ ------------ ------------
Seismic:
Revenue $ 125,863 $ 85,560 $ 67,138
Amortization 57,117 35,163 30,477
Cost of sales 191 394 448
Oil and Gas:
Revenue 18,994 25,680 18,255
Depletion 11,872 12,666 7,212
Impairment of oil and gas properties - 9,560 -
Cost of sales 4,683 5,168 3,134
Geophysical Services:
Revenue - 16,316 20,609
Depreciation - 983 951
Cost of sales - 12,391 15,820
Other depreciation 901 867 609
Selling, general and administrative 26,599 23,043 19,165
Net interest expense 5,540 3,554 2,900
Equity in earnings (loss) of affiliate 222 146 (186)
------------ ------------ ------------
Income from continuing operations before provision
for income taxes and special items (1) 38,176 23,913 25,100
Provision for income taxes 13,692 8,498 8,863
------------ ------------ ------------
Income from continuing operations before special items(1)$ 24,484 $ 15,415 $ 16,237
============ ============ ============
Net income $ 24,360 $ 31,557 $ 15,249
============ ============ ============
- ----------------------------------
(1) Special items for the year ended December 31, 1998 include a
pre-tax loss of $193,000 related to the decrease in the
underlying equity of an affiliate. Special items for the year
ended December 31, 1997 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.
Results of Operations
- ---------------------
Seismic
-------
Revenue from the marketing of seismic data was $125,863,000, $85,560,000
and $67,138,000 during 1998, 1997 and 1996, 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 due to the increased probability of drilling success
achieved when employing 3-D seismic data in the evaluation of drilling
prospects. The Company believes the demand for its seismic data remains strong
despite weakness in the energy sector driven by depressed oil and gas prices.
This commodity price environment requires oil and gas companies to increase
reserves and daily production at nominally lower finding costs per barrel in
order to sustain profits. By properly utilizing 3D seismic data, exploration
companies can significantly increase drilling success rates and reduce the
occurrence of dry holes. Although the acquisition of 3D seismic data does
require a greater investment compared to 2D seismic, new technology has made
multi-client 3D seismic data more economical to smaller independent oil and gas
companies. By participating in group shoots, oil and gas companies can share the
cost of expensive surveys that they could not otherwise make on their own.
Further, oil and gas companies have learned that 3D seismic can increase
recoveries of reserves from existing mature oil fields by optimizing the
drilling location of development wells while also revealing additional step-out
locations that had not been apparent using 2D seismic. Additionally, management
believes that the Company will continue to experience a steady demand for its 2D
data library as oil and gas companies initially use 2D seismic to evaluate
prospects. Although many exploration and production companies are reducing their
capital expenditures in response to low commodity prices, management believes
that seismic data expenditures will likely be one of the last areas where
reductions are made because seismic is the information tool that can allow
companies to lower exploration and development costs. Exploration and production
company employees can work for years on defining prospects to be drilled without
employing most oilfield services, but without seismic data, these geo-scientists
and engineers would not have the essential tools to generate and delineate
drilling prospects.
Data bank amortization amounted to $57,117,000, $35,163,000 and $30,477,000
for the years ended December 31, 1998, 1997 and 1996, respectively. As a
percentage of revenue from licensing seismic data, data bank amortization was
46%, 42% and 47% for 1998, 1997 and 1996, 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 generally amortized on a straight-line basis. For a discussion of the
Company's accounting policy related to seismic data amortization refer to Note A
of the Company's Consolidated Financial Statements.
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, the 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.
Oil and Gas
-----------
Oil and gas revenue was $18,994,000, $25,680,000 and $18,255,000 during
1998, 1997 and 1996, respectively. The decrease in oil and gas revenue from 1997
to 1998 is primarily due to lower realized commodity prices along with lower
natural gas production. The production decline from certain of the Company's
shallow short-lived producing properties has not yet been offset by production
from new wells. Certain wells with high initial flow rates had decline curves
earlier and greater than was expected. Additionally, some development wells have
not been drilled in the time frame anticipated by the Company as a result of
some of its partners delaying plans to drill such wells due to lower commodity
prices, reallocation of budget funds and consolidations within the industry. The
increase in oil and gas revenue from 1996 to 1997 is primarily due to higher
production resulting from more wells being on line in 1997 along with higher
realized gas prices. The first year of oil and gas operations for the Company
was 1993. Since then, the Company has steadily increased its exploration and
development efforts resulting in 92 wells producing at December 31, 1996
increasing to 122 at December 31, 1997 and to 144 at December 31, 1998. Net
volume and price information for the Company's oil and gas production for the
years ended December 31, 1998, 1997 and 1996 is summarized in the following
table (amounts include deliveries made under the terms of a volumetric
production payment agreement effective from July 1, 1996 to June 30, 1997):
Year Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Natural gas volumes (mmcf) 6,216 6,926 4,902
Average natural gas price ($/mcf) $ 2.27 $ 2.63 $ 2.28
Crude oil/condensate volumes (mbbl) 386 420 363
Average crude oil/condensate price ($/bbl) $ 11.78 $ 16.83 $ 18.52
Depletion of oil and gas properties, excluding the impairment in 1997
discussed below, was $11,872,000, $12,666,000 and $7,212,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, which amounted to $1.39, $1.34
and $1.02, respectively, per mcfe of gas produced during such periods. The
increase in the rates between 1996, 1997 and the first three quarters of 1998
reflects the amount of exploration and development costs incurred increasing at
a higher rate than the proven reserve base. The rate in the fourth quarter of
1998 decreased to $.95 per mcfe of gas produced from $1.55 per mcfe for the
first three quarters of 1998. This decrease in the rate is due to the
significant increase in the Company's proved reserves as determined by the
Company's independent petroleum engineers resulting from both new discoveries in
1998 and positive revisions to previous reserve estimates. Management currently
anticipates that the Company's depletion rate will be less than $1.00 per mcfe
of gas produced during 1999.
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 was primarily due to lower commodity prices as compared
to the December 31, 1996 and 1997 prices.
Oil and gas production costs amounted to $.55, $.55, and $.44 per mcfe of
gas produced during 1998, 1997 and 1996, respectively. The increase in the rate
from 1996 to 1997 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.
Geophysical Services
--------------------
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 and $20,609,000 for 1997 and 1996, 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 decrease in cost of sales 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% and 21% for 1997 and 1996, respectively.
Corporate and Other
-------------------
The Company's selling, general and administrative expenses were $26,599,000
in 1998, $23,043,000 in 1997 and $19,165,000 in 1996. 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 18% in 1996,
1997 and 1998.
The Company's interest expense was $5,963,000 in 1998, $4,609,000 in 1997
and $4,063,000 in 1996. The increase in interest expense 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 whereas in 1996 $52.5 million was outstanding
for the entire year and $22.5 million was outstanding for approximately nine
months. The increase from 1997 to 1998 was primarily due to increased borrowings
made under the Company's revolving line of credit during 1998.
Interest income was $423,000 in 1998, $1,055,000 in 1997 and $1,163,000 in
1996. The decreases between years were primarily due to the fluctuations 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. 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 in 1997. Additionally, the Company
recorded a pre-tax gain, net of costs, of $10,750,000 in 1997, 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. In 1998, Eagle issued stock
in connection with two acquisitions, which caused the Company to record a
pre-tax loss of $193,000. The Company's equity in earnings of Eagle was $146,000
for the period from August 11, 1997 to December 31, 1997 and was $222,000 for
the year ended December 31, 1998.
As a result of the offering, the Company now owns 1,520,000 shares of Eagle
common stock, or 17.3% of the outstanding shares of Eagle, at a book value of
$15,544,000 or $10.23 per share. The Company accounts for its investment in
Eagle using the equity method whereby such investment is based on the Company's
historical cost plus the Company's share of (i) Eagle earnings and losses and
(ii) Eagle's equity as a result of issuances of stock. In accordance with the
accounting literature, an investment in a company accounted for under the equity
method is carried on such basis rather than based on the fair market value of
the stock unless an "other than temporary" decline in the market value of the
stock has occurred. Once an "other than temporary" decline in the market value
of the stock occurs, an impairment in the carrying value of the investment
should be recorded. An "other than temporary" decline is deemed to have occurred
if the fair market value is depressed for a period of more than nine to twelve
months. Eagle's stock has been trading at a price below the Company's carrying
value since August 1998. If the weakness in commodity prices continues, and, in
turn the oilfield service sector market values remain depressed, the Company may
be required to record a non-cash, non-operating charge for impairment in the
carrying value of its investment in Eagle during 1999. At December 31, 1998, the
fair market value of the Company's investment in Eagle was $5,890,000 or $3.875
per share as quoted by NASDAQ. These shares are subject to certain trading
restrictions.
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 oil and gas exploration and production
operations in order to maximize profitability and growth opportunities. During
1996, a loss from discontinued operations was recorded totaling $988,000, which
is net of an income tax benefit of $580,000. The loss resulted from changes in
market prices to purchase gas supply. Such loss represented the final charge
related to the discontinued operations.
Liquidity and Capital Resources
- -------------------------------
The Company's cash flow from operations was $97,493,000, $76,161,000 and
$67,332,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The increase from 1997 to 1998 was primarily due to (i) an increase in cash
received from customers due to higher revenue in 1998 and (ii) a decrease in
cash paid to suppliers and employees due to lower cost of sales incurred in 1998
resulting from the 1997 spin-off of the Company's crew subsidiary and increased
payable balances at December 31, 1998. The increase from 1996 to 1997 was
primarily due to an increase in cash received from customers due to higher
revenues in 1997 offset by a decrease resulting from a non-recurring volumetric
production payment that was received in 1996.
On March 16, 1998, the Company increased its $50 million unsecured
revolving line of credit facility to $75 million. 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. There was no balance outstanding on the revolving line of credit
at March 29, 1999.
On December 11, 1998, the Company entered into an agreement for a one-year,
$25 million, unsecured revolving line of credit. On February 12, 1999, all
amounts outstanding under the revolving line of credit had been paid and the
line of credit was cancelled.
On December 28, 1995, the Company completed a private placement of three
series of unsecured Senior Notes totaling $75 million. The Company
contemporaneously issued its Series A Notes and Series B Notes, which total
$52.5 million and bear interest at a fixed rate of 7.17%. On April 9, 1996, the
Company issued its Series C Notes, which total $22.5 million and bear interest
at a fixed rate of 7.48%. The Series A Notes mature on December 30, 2001, and
require annual principal payments of $8.3 million 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 which began on December 30,
1998. Interest on all series of the notes is payable semi-annually on June 30
and December 30.
On February 12, 1999, the Company completed a private placement of three
series of unsecured Senior Notes totaling $138 million. The Series D Notes total
$20 million, bear interest at a fixed rate of 7.03% and mature on February 15,
2004, with no principal payments due until maturity. The Series E Notes total
$75 million, bear interest at a fixed rate of 7.28% and mature on February 15,
2009, with annual principal payments of $12.5 million beginning February 15,
2004. The Series F Notes total $43 million, bear interest at a fixed rate of
7.43% and mature on February 15, 2009, with no principal payments due until
Maturity. Interest on all series of the notes is payable semi-annually beginning
on August 15, 1999. The Company used a portion of the proceeds to repay amounts
outstanding under its $75 million and $25 million revolving lines of credit; the
remainder will be used for capital expenditures.
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.
In 1997, two of the Company's wholly-owned subsidiaries obtained two
separate three-year term loans totaling $361,000. The loans bear interest 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 $11,000. The balance outstanding on the loans at March 29, 1999,
was $141,000.
On October 2, 1998, the Company completed a sale of 794,300 shares of its
common stock to its employees. The Company granted five-year loans to its
employees for the purchase of which 60% of the loan amount is being paid in
equal monthly, quarterly or annual payments, as applicable, and a balloon
payment of the remaining 40% is due on October 2, 2003.
From January 1, 1998, through March 29, 1999, the Company received
$1,067,000 from the exercise of common stock purchase warrants and options and
the Company's 401(k) stock purchases. In connection with these exercises, the
Company will also receive approximately $357,000 in tax savings.
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 1998, gross seismic data bank additions and capitalized oil and gas
exploration and development costs amounted to $139,117,000 and $47,934,000
respectively. Included in the oil and gas exploration and development costs are
$6,323,000 for the purchase of oil and gas interests owned by certain
partnerships in exchange for 355,733 shares of the Company's common stock,
payment of $824,000 and assumption of liabilities totaling $1,555,000. The
remainder of these capital expenditures, as well as taxes, interest expenses,
cost of sales and general and administrative expenses, were funded by operations
and borrowings under the Company's revolving line of credit.
Currently, the Company anticipates capital expenditures for 1999 to total
approximately $169 million. Such expenditures include approximately $149 million
for the creation of proprietary seismic data, and approximately $20 million for
oil and gas exploration and development efforts. The Company believes its
current cash balances, revenues from operating sources and proceeds from the
exercise of common stock purchase warrants and options, combined with its
available revolving line of credit, should be sufficient to fund the 1999
capital expenditures, along with expenditures for operating and general and
administrative expenses. If these sources are not sufficient to cover the
Company's anticipated expenditures or if the Company were to increase its
planned capital expenditures for 1999, the Company could arrange for additional
debt or equity financing during 1999; however, there can be no assurance that
the Company would be able to accomplish any such debt or equity financing on
satisfactory terms. If such debt or equity financing is not available on
satisfactory terms, the Company could reduce its current capital budget or any
proposed increases to its capital budget, and fund expenditures with cash flow
generated from operating sources.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. Statement 133 is effective for fiscal years beginning after
June 15, 1999 and cannot be applied retroactively. Statement 133 must be applied
to (a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1, 1998). The
Company has not yet quantified the impact of adopting Statement 133. However,
the Company anticipates that application of the statement will not have a
material effect on its consolidated financial statements.
Year 2000
- ---------
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists concerning
the potential effects associated with such compliance, but systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
Compliance Program. In order to address the Year 2000 issue, the Company
appointed the Chief Operating Officer ("COO") to assure that key automated
systems and related processors would remain functional through the year 2000.
The COO and the Company's Information System's Manager addressed the project by
reviewing the information technology ("IT") and non-information technology
systems to determine whether they were Year 2000 compliant. Also, they prepared
a formal questionnaire for all significant suppliers, customers, and service
providers to determine the extent to which the Company was vulnerable to those
third parties' failure to remediate the Year 2000 problem.
Company's State of Readiness. A review and assessment of the information
technology and non-information technology systems was completed as of January
31, 1999 and did not identify any material systems which are not Year 2000
compliant. The Company has prepared a formal questionnaire for all significant
suppliers, customers and service providers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate the Year 2000
problem. Such questionnaire is in the process of being sent to all significant
suppliers, customers and service providers. The Company has requested that these
companies respond no later than June 30, 1999. The Company has received oral
assurances of Year 2000 compliance from many of the third parties with whom it
has relationships. The Company believes that its operations will not be
significantly disrupted even if third parties with whom the Company has
relationships are not Year 2000 compliant.
Costs to Address Year 2000 Compliance Issues. The Company believes that it
will not be required to make any material expenditures to address the Year 2000
problem as it relates to its existing systems. To date, costs incurred to
address Year 2000 compliance have been internal in nature and have been charged
to income as incurred. Such costs have been funded from cash provided by
operating activities. However, uncertainty exists concerning the potential costs
and effects associated with any Year 2000 compliance, and the Company intends to
continue to make efforts to ensure that third parties with whom it has
relationships are Year 2000 compliant. The Company is not aware of any IT
projects that have been delayed due to the Year 2000 compliance program.
Risk of Non-Compliance and Contingency Plan. The goal of the Year 2000
project has been to ensure that all of the critical systems and processes, which
are under the direct control of the company, remain functional. However, because
certain systems and processes may be interrelated with systems outside of the
control of the company, there can be no assurance that all implementations will
be successful. The principal area of risk to the Company is thought to be the
contracting of seismic acquisition crews and vessels. A likely worst case
scenario is that despite the Company's efforts, there could be a failure of the
global positioning system used by seismic acquisition crews and vessels that the
Company contracts which could result in the temporary cessation of the
acquisition of seismic data. However, the Company believes that the risk of such
occurrence is low based upon its discussions concerning Year 2000 compliance
with third party seismic contractors. As part of the Year 2000 project,
contingency plans will be developed to respond to any potential failures as they
may be identified. There can be no assurance that unexpected Year 2000
compliance problems of either the Company or its vendors, customers and service
providers would not materially and adversely affect the Company's business,
financial condition or operating results. The Company will continue throughout
1999 to consider the likelihood of a material business interruption due to the
Year 2000 issue.
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, 1998.
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. See Item 1 - Business-Risk Factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to market risk, including adverse changes in
commodity prices, interest rates and foreign currency exchange rates as
discussed below.
Commodity Price Risk
- --------------------
The Company produces and sells natural gas, crude oil, condensate and
natural gas liquids. As a result, the Company's financial results can be
significantly affected as these commodity prices fluctuate widely in response to
changing market forces. 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 1998 and as of December 31, 1998 did not have any open commodity price
hedges. The Company continually reviews and may alter its hedged positions.
Interest Rate Risk
- ------------------
The Company may enter into various financial instruments, such as interest
rate swaps, to manage the impact of changes in interest rates. Currently, the
Company has no open interest rate swap or interest rate lock agreements.
Therefore, the Company's exposure to changes in interest rates primarily results
from its short-term and long-term debt with both fixed and floating interest
rates. The following table presents principal or notional
amounts (stated in thousands) and related average interest rates by year of
maturity for the Company's debt obligations and their indicated fair market
value at December 31, 1998:
FAIR
1999 2000 2001 2002 TOTAL VALUE
--------- --------- --------- -------- --------- --------
Liabilities - Long-Term Debt:
Variable Rate $ 19,000 $ - $ 66,500 $ - $ 85,500 $ 85,500
Average Interest Rate 6.41% - 6.33% - 6.35% -
Fixed Rate $ 18,461 $ 18,378 $ 18,333 $ 10,000 $ 65,172 $ 65,149
Average Interest Rate 7.25% 7.25% 7.25% 7.31% 7.26% -
Foreign Currency Exchange Rate Risk
- -----------------------------------
The Company conducts business in the Canadian dollar and pounds sterling
and is therefore subject to foreign currency exchange rate risk on cash flows
related to sales, expenses, financing and investing transactions. Exposure from
market rate fluctuations related to activities in Canada, where the Company's
functional currency is the Canadian dollar, and in the Cayman Islands, where the
Company's functional currency is pounds sterling, is not material at this time.
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 1999 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, 1998 and 1997 F-2
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997, and 1996 F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 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 (23)
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)
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 (23)
4.9 Form of Bonus Warrant Certificate granted to an employee of
the Company in November 1997 and expiring in November 2002
(23)
(3) Exhibits, continued...
4.10 Seitel, Inc. 1998 Employee Stock Purchase Plan including
Form of Common Stock Purchase Warrant (25)
4.11 Amendment No. 1 to the Seitel, Inc. 1998 Employee Stock
Purchase Plan (27)
4.12 Form of Departure Warrant granted to certain employees of
the Company in August 1997 (26)
4.13 Form of Employment Warrant granted to an employee of the
Company in April 1998 and expiring in April 2008 (26)
4.14 Form of Employment Warrant granted to an employee of the
Company in April 1998 and expiring in April 2008 (26)
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 (23)
10.9 Amendment to Increase Number of Shares Available for
Granting Options under the Seitel, Inc. 1993 Incentive Stock
Option Plan (23)
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 (23)
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.
(23)
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
(23)
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
(23)
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 (23)
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 (23)
10.30 Amendment to Employment Agreement dated effective as of
June 10, 1998 between the Company and Debra D. Valice (24)
10.31 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)
10.32 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)
10.33 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)
10.34 Revolving Credit Agreement dated as of July 22, 1996, among
Seitel, Inc. and The First National Bank of Chicago (19)
10.35 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...
10.36 Second Amendment to Revolving Credit Agreement dated as of
July 22, 1996, among Seitel, Inc. and The First National
Bank of Chicago (22)
10.37 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)
10.38 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)
10.39 Third Amendment to Revolving Credit Agreement dated as of
March 16, 1998 among Seitel, Inc. and The First National
Bank of Chicago (23)
10.40 Ratable Note in the amount of $40,000,000 among Seitel,
Inc. and The First National Bank of Chicago dated March 16,
1998 (23)
10.41 Ratable Note in the amount of $35,000,000 among Seitel,
Inc. and Bank One, Texas, N.A. dated as of March 16, 1998
(23)
10.42 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)
10.43 Incentive Compensation Agreement (10)
10.44 Shareholder Value Bonus Agreement effective as of March 18,
1994 (13)
10.45 Amendment to Shareholder Value Bonus Agreement effective as
of March 18, 1994 (15)
10.46 Seitel, Inc. 1995 Shareholder Value Incentive Bonus Plan
(16)
10.47 Terms Agreement dated July 28, 1994, between the Company
and Bear, Stearns & Co., Inc. (13)
10.48 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)
10.49 Revolving Credit Agreement dated as of December 11, 1998,
between the Company and Suntrust Bank, Atlanta *
10.50 Note Purchase Agreement dated as of February 12, 1999,
between the Company and the Series D Purchasers, the Series
E Purchasers and the Series F Purchasers *
21.1 Subsidiaries of the Registrant *
23.1 Consent of Arthur Andersen LLP *
23.2 Consent of Forrest A. Garb & Associates, Inc.*
(b) Reports on Form 8-K filed during the quarter ended December 31,
1998:
NONE
------------------
* 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.
(18) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(3) Exhibits, continued...
(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.
(23) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(24) Incorporated by reference to the Company's Form 10-Q for the
quarter ended June 30, 1998.
(25) Incorporated by reference to the Company's Registration
Statement on Form S-8, No. 333-63383 as filed with the
Securities and Exchange Commission on September 15, 1998.
(26) Incorporated by reference to the Company's Registration
Statement on Form S-8, No. 333-64557 as filed with the
Securities and Exchange Commission on September 29, 1999.
(27) Incorporated by reference to Post Effective Amendment No. 2
to the Company's Registration Statement on Form S-8, No.
333-63383 as filed with the Securities and Exchange
Commission on October 2, 1998.
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, 1999.
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, 1999
- -------------------------- Board of Directors
Herbert M. Pearlman
/s/ Paul A. Frame President and Chief March 30, 1999
- -------------------------- Executive Officer,
Paul A. Frame Director
/s/ Horace A. Calvert Executive Vice President March 30, 1999
- -------------------------- and Chief Operating
Horace A. Calvert Officer, Director
/s/ Debra D. Valice Executive Vice President- March 30, 1999
- -------------------------- Finance, Chief Financial
Debra D. Valice Officer, Secretary and
Treasurer, Director
/s/ David S. Lawi Director March 30, 1999
- --------------------------
David S. Lawi
/s/ Walter M. Craig, Jr. Director March 30, 1999
- --------------------------
Walter M. Craig, Jr.
/s/ William Lerner Director March 30, 1999
- --------------------------
William Lerner
/s/ John Stieglitz Director March 30, 1999
- --------------------------
John Stieglitz
/s/ Fred S. Zeidman Director March 30, 1999
- --------------------------
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 25, 1999
F-1
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
----------------------------------
1998 1997
---------- -----------
ASSETS
Cash and equivalents $ 3,161 $ 4,881
Receivables
Trade, less allowance for doubtful accounts of $936 and $561
at December 31, 1998 and 1997, respectively 59,244 45,482
Notes and other 581 1,202
Data bank 513,037 373,920
Less: Accumulated amortization (250,087) (192,984)
---------- -----------
Net data bank 262,950 180,936
Property and equipment, at cost:
Oil and gas properties, full-cost method of accounting,
including $53,458 and $39,436 not being amortized at
December 31, 1998 and 1997, respectively 194,576 146,642
Furniture, fixtures and other 6,237 5,442
---------- -----------
200,813 152,084
Less: Accumulated depreciation, depletion and amortization (49,542) (36,820)
---------- -----------
Net property and equipment 151,271 115,264
Investment in affiliate 15,544 15,054
Prepaid expenses, deferred charges and other assets 3,016 2,863
---------- -----------
TOTAL ASSETS $ 495,767 $ 365,682
========== ===========
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,
------------------------------------
1998 1997
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 31,839 $ 22,423
Accrued liabilities 6,882 5,330
Employee compensation payable 5,717 261
Payable to affiliate 27,117 12,500
Income taxes payable 1,056 1,242
Debt
Senior Notes 65,000 75,000
Line of credit 85,500 15,000
Term loans 172 477
Obligations under capital leases 18 89
Contingent payables 274 274
Deferred income taxes 28,039 18,050
Deferred revenue 6,566 7,763
----------- ------------
TOTAL LIABILITIES 258,180 158,409
----------- ------------
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 23,804,508 and
22,548,408 at December 31, 1998 and 1997, respectively 238 225
Additional paid-in capital 141,826 128,406
Retained earnings 107,102 82,742
Treasury stock, 175,818 shares at cost at December 31,
1998 and 1997 (2,977) (2,977)
Notes receivable from officers and employees (8,651) (1,109)
Accumulated other comprehensive income (loss) 49 (14)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 237,587 207,273
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 495,767 $ 365,682
=========== ============
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,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
REVENUE $ 144,857 $ 127,556 $ 106,002
EXPENSES
Depreciation, depletion and amortization 69,890 49,679 39,249
Impairment of oil and gas properties - 9,560 -
Cost of sales 4,874 17,953 19,402
Selling, general and administrative expenses 26,599 23,043 19,165
----------- ----------- -----------
101,363 100,235 77,816
----------- ----------- -----------
INCOME FROM OPERATIONS 43,494 27,321 28,186
Interest expense (5,963) (4,609) (4,063)
Interest income 423 1,055 1,163
Equity in earnings (loss) of affiliate 222 146 (186)
Gain on sale of subsidiary stock - 18,449 -
Increase (decrease) in underlying equity of affiliate (193) 10,750 -
Extinguishment of volumetric production payment - (4,133) -
----------- ----------- -----------
Income from continuing operations before provision for
income taxes 37,983 48,979 25,100
Provision for income taxes 13,623 17,422 8,863
----------- ----------- -----------
Income from continuing operations 24,360 31,557 16,237
Loss from discontinued operations, net of income tax
benefit of $580 for 1996 - - (988)
----------- ----------- -----------
NET INCOME $ 24,360 $ 31,557 $ 15,249
=========== =========== ===========
Earnings per share:
Basic:
Income from continuing operations $ 1.07 $ 1.48 $ .83
Loss from discontinued operations - - (.05)
----------- ----------- -----------
Net income $ 1.07 $ 1.48 $ .78
=========== =========== ===========
Diluted:
Income from continuing operations $ 1.05 $ 1.43 $ .79
Loss from discontinued operations - - (.05)
----------- ----------- -----------
Net income $ 1.05 $ 1.43 $ .74
=========== =========== ===========
Weighted average number of common and common equivalent shares:
Basic 22,720 21,380 19,646
=========== =========== ===========
Diluted 23,124 22,050 20,660
=========== =========== ===========
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 Accumulated
Common Stock Additional Treasury Stock from Other
Comprehensive------------------ Paid-In Retained --------------- Officers & Comprehensive
Income Shares Amount Capital Earnings Shares Amount Employees Income
-------- ---------- ------ ------- ------- ------- ------ -------- ----------
Balance, December 31, 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 sub-
ordinated debentures 214,304 2 1,878 - - - - -
Payments received on
notes receivable from
officers and employees - - - - - - 190 -
Net income $ 15,249 - - - 15,249 - - - -
Foreign currency
translation
adjustments 91 - - - - - - - 91
--------
Comprehensive income $ 15,340
======== ---------- ------ ------- ------- ------- ------ -------- ----------
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 -
Net income $ 31,557 - - - 31,557 - - - -
Foreign currency
translation
adjustments (31) - - - - - - - (31)
--------
Comprehensive income $ 31,526
======== ---------- ------ ------- ------- -------- ------ -------- ----------
Balance, December 31, 1997 22,548,408 225 128,406 82,742 (175,818) (2,977) (1,109) (14)
Net proceeds from
issuance
of common stock 106,067 1 983 - - - - -
Tax reduction from
exercise
of stock options - - 344 - - - - -
Sale of common stock to
officers and employees 794,300 8 8,183 - - - (8,191) -
Acquisition of oil and
gas properties 355,733 4 3,910 - - - - -
Payments received on
notes receivable from
officers and employees - - - - - - 649 -
Net income $ 24,360 - - - 24,360 - - - -
Foreign currency
translation
adjustments net of
income tax expense
of $67 63 - - - - - - - 63
--------
Comprehensive income $ 24,423
======== ---------- ------ ------- ------- ------- ------ -------- ----------
Balance, December 31, 1998 23,804,508 $ 238 $141,826 $107,102 (175,818)$(2,977) $ (8,651) $ 49
========== ====== ======= ======= ======= ====== ======== ==========
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,
------------------------------------------
1998 1997 1996
---------- --------- ----------
Cash flows from operating activities:
Cash received from customers $ 128,747 $ 123,795 $ 93,119
Proceeds from volumetric production payment - - 19,000
Cash paid to suppliers and employees (22,549) (41,652) (40,066)
Interest paid (5,792) (4,584) (4,148)
Interest received 398 955 1,181
Income taxes paid (3,311) (2,353) (1,754)
---------- --------- ----------
Net cash provided by operating activities 97,493 76,161 67,332
---------- --------- ----------
Cash flows from investing activities:
Cash invested in seismic data (119,267) (76,616) (49,716)
Cash invested in oil and gas properties (40,929) (55,480) (48,429)
Cash paid to acquire property and equipment (839) (8,772) (8,224)
Cash from disposal of property and equipment 17 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 -
Collections on loans made - 5,415 327
Loan made to unconsolidated affiliate - - (2,000)
Cost of investment made in unconsolidated affiliate - - (109)
---------- --------- ----------
Net cash used in investing activities (161,018) (109,043) (108,092)
---------- --------- ----------
Cash flows from financing activities:
Borrowings under line of credit agreement 108,812 63,500 -
Principal payments under line of credit
agreement (38,312) (48,500) -
Borrowings under term loans - 7,925 7,697
Principal payments on term loans (305) (2,301) (1,743)
Principal payments under capital lease
obligations (71) (828) (1,301)
Proceeds from issuance of senior notes - - 22,500
Principal payments under senior notes (10,000) - -
Proceeds from issuance of common stock 1,063 17,361 11,184
Costs of debt and equity transactions (79) (35) (860)
Repurchase of common stock - (2,735) -
Payments on notes receivable from officers
and employees 649 96 190
---------- --------- ----------
Net cash provided by financing activities 61,757 34,483 37,667
---------- --------- ----------
Effect of exchange rate changes 48 (60) (43)
---------- --------- ----------
Net increase (decrease) in cash and equivalents (1,720) 1,541 (3,136)
Cash and equivalents at beginning of period 4,881 3,340 6,476
---------- --------- ----------
Cash and equivalents at end of period $ 3,161 $ 4,881 $ 3,340
========== ========= ==========
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,
----------------------------------------------
1998 1997 1996
----------- ----------- -----------
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 24,360 $ 31,557 $ 15,249
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of subsidiary stock - (18,449) -
Decrease (increase) in underlying equity of affiliate 193 (10,750) -
Extinguishment of volumetric production payment - 4,133 -
Loss from discontinued operations, net of tax - - 988
Equity in loss (earnings) of affiliate (222) (146) 186
Depreciation, depletion and amortization 69,890 62,293 40,229
Deferred income tax provision 9,989 8,257 3,321
Non-cash sales (1,140) - -
Gain on sale of property and equipment (32) (16) (40)
Amortization of deferred revenue - (4,079) (5,740)
Increase in receivables (14,706) (3,544) (12,155)
Increase in other assets (314) (849) (1,143)
Discount on note receivable - (198) 198
Proceeds from volumetric production payment - - 19,000
Increase in accounts payable and other liabilities 9,475 7,952 10,996
----------- ----------- -----------
Total adjustments 73,133 44,604 55,840
----------- ----------- -----------
Net cash provided by (used in) operating activities of:
Continuing operations 97,493 76,161 71,089
Discontinued operations - - (3,757)
----------- ----------- -----------
Net cash provided by operating activities $ 97,493 $ 76,161 $ 67,332
=========== =========== ===========
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, 1998
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Seitel, Inc. (the "Company") is a leading diversified
energy company providing seismic data and related geophysical services to the
oil and gas industry and directly participates in exploration, development and
ownership of natural gas and crude oil reserves. The majority of the Company's
seismic surveys cover onshore and offshore the U.S. Gulf Coast region. The
Company's oil and gas exploration, development and production activities are on
properties located primarily in the onshore Gulf Coast areas of Texas,
Louisiana, Alabama and Mississippi, as well as California and Arkansas.
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to the following: competition, industry
conditions, volatility of oil and gas prices, operating risks, dependence of key
personnel, geographic concentration of operations and compliance with
governmental regulations.
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. Substantially all (greater than
90%) of the costs incurred to develop the Company's data bank have been for
programs created by the Company. The Company uses the income forecast method to
amortize the costs of seismic data programs it creates. Under the income
forecast method, seismic data costs are amortized in the proportion that revenue
for a period relates to management's estimate of ultimate revenues. Since
inception, management has established guidelines regarding its annual charge for
amortization. Under these guidelines, seismic data created by the Company is
amortized in a set period of time based on historical experience with both the
timing and amount of revenue. Management estimates that 90% of the costs
incurred in the creation of seismic data is amortized within five years of such
data becoming available for resale for two-dimensional seismic data and within
seven years of such data becoming available for resale for three-dimensional
seismic data. If anticipated sales fall below the benchmark guidelines,
amortization is accelerated. Depending on actual sales performance, the costs of
the Company's seismic data are fully amortized within 20 years or less. The
Company also purchases existing seismic data programs from other companies. The
costs of purchased seismic data programs are generally amortized on a
straight-line basis over ten years; however, the costs of a significant purchase
(greater than 5% of the net book value of the data bank), are amortized using
the greater of the income forecast method or ten-year straight-line method.
Under these amortization policies, the Company would expect the percentage of
net data bank as of December 31, 1998 to be amortized to be 13%, 15%, 16%, 14%,
12%, and 30% for the years ending December 31, 1999,
F-8
2000, 2001, 2002, 2003 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.
Net data bank at December 31, 1998 and 1997 was comprised of the following (in
thousands):
December 31,
-------------------------------
1998 1997
------------ ------------
2D data created by the Company $ 14,269 $ 17,625
3D data created by the Company 230,163 151,247
Data purchased by the Company 18,518 12,064
------------ ------------
Net data bank $ 262,950 $ 180,936
============ ============
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, 1998, exploration and development related
overhead costs of $1,795,000, $1,431,000 and $1,146,000, respectively, have been
capitalized to oil and gas properties. For the three years ended December 31,
1998, interest costs of $2,486,000, $2,105,000 and $1,525,000, 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. No such charges were recorded in 1998.
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 on the
undistributed earnings of its foreign subsidiaries, which amounted to
$1,601,000, $207,000 and $445,000 for the years ended December 31, 1998, 1997
and 1996, 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.
In certain cases, the Company grants seismic licenses to third parties for
data to be used in their operations (not for resale) in exchange for exclusive
ownership of seismic data from the third party. The Company recognizes revenue
for the licenses granted and records a data library asset for the seismic data
acquired. These transactions are accounted for as non-monetary exchanges and are
valued at the fair market value of such licenses based on values realized in
cash transactions to other parties for similar seismic data.
Cost of Sales: Cost of sales consists of expenses associated with oil and
gas production, seismic resale support services and the acquisition of seismic
data for non-affiliated parties (until August 11, 1997). The cost of
F-9
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.
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 period-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 stockholders'
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. As of December 31, 1998, the
Company did not have any open commodity price hedges. The estimated fair value
of open commodity price hedges as of December 31, 1997 was a gain of $183,000.
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: In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," basic earnings per share is
computed based on the weighted average shares of common stock outstanding during
the periods. Diluted earnings per share is computed based on the weighted
average shares of common stock plus the assumed issuance of common stock for all
potentially dilutive securities. Earnings per share computations to reconcile
basic and diluted income from continuing operations for the years 1998, 1997 and
1996 consist of the following (in thousands except per share amounts):
Year Ended December 31,
-------------------------------------------
1998 1997 1996
---------- ---------- ----------
Income from continuing operations $ 24,360 $ 31,557 $ 16,237
========== ========== ==========
Basic weighted average shares 22,720 21,380 19,646
Effect of dilutive securities: (1)
Options and warrants 404 670 932
Convertible subordinated debentures - - 82
---------- ---------- ----------
Diluted weighted average shares 23,124 22,050 20,660
========== ========== ==========
Per share income from continuing operations:
Basic $ 1.07 $ 1.48 $ .83
Diluted $ 1.05 $ 1.43 $ .79
- -------------------
(1) A weighted average year-to-date number of options and warrants to
purchase 187,000, 1,007,000 and 20,000 shares of common stock were
outstanding during 1998, 1997 and 1996, 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.
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 1998, 1997 and 1996.
F-10
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, 1998 and 1997, 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 $65,149,000 and $75,440,000 as of December 31, 1998 and 1997,
respectively. The book value of the Company's revolving lines of credit
approximates fair value due to the variable interest rates under the lines.
Impairment of Long-Lived Assets: In accordance with SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," the Company reviews long-lived assets 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
1998, 1997 or 1996.
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.
Comprehensive Income: In accordance with SFAS No. 130, "Reporting
Comprehensive Income," the Company has reported comprehensive income in the
consolidated statements of stockholders' equity for the three years ended
December 31, 1998. Accumulated other comprehensive income consists of foreign
currency translation adjustments.
Allowance for Doubtful Accounts: Activity in the Company's allowance for
doubtful accounts receivable consists of the following (in thousands):
December 31,
-----------------------------------
1998 1997
------------ ------------
Balance at beginning of period $ 561 $ 336
Additions to costs and expenses 400 225
Deductions for uncollectible receivables written off and recoveries (25) -
------------ ------------
Balance at end of period $ 936 $ 561
============ ============
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Statement 133 is effective for
fiscal years beginning after June 15, 1999 and cannot be applied retroactively.
Statement 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998). The Company has not yet quantified the impact
of adopting Statement 133. However, the Company anticipates that application of
the statement will not have a material effect on its consolidated financial
statements.
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, 1998, are comprised of the following (in thousands):
1998 1997 1996
---------- ---------- ----------
Current - Federal $ 3,018 $ 8,709 $ 5,214
- State 165 314 246
- Foreign 451 142 82
---------- ---------- ----------
3,634 9,165 5,542
---------- ---------- ----------
Deferred - Federal 9,463 8,256 3,321
- State - 1 -
- Foreign 526 - -
---------- ---------- ----------
9,989 8,257 3,321
---------- ---------- ----------
Tax provision - Federal 12,481 16,965 8,535
- State 165 315 246
- Foreign 977 142 82
---------- ---------- ----------
$ 13,623 $ 17,422 $ 8,863
========== ========== ==========
The differences between the U.S. Federal income taxes computed at the
statutory rate (35% for 1998, 35% for 1997 and 34.7% for 1996) and the Company's
income taxes for financial reporting purposes are as follows (in thousands):
1998 1997 1996
------- ------- -------
Statutory Federal income tax $ 13,294 $ 17,143 $ 8,716
State income tax, less Federal benefit 107 206 162
Other, net 222 73 (15)
------- ------- -------
Income tax expense $ 13,623 $ 17,422 $ 8,863
======= ======= =======
The components of the net deferred income tax liability reflected in the
Company's consolidated balance sheets at December 31, 1998 and 1997 were as
follows (in thousands):
Deferred Tax Assets
(Liabilities) at December 31,
-----------------------------------
1998 1997
---------- ----------
Alternative minimum tax credit carryforward $ 4,324 $ 3,541
Partnership earnings 945 499
Investment tax credits 44 44
Other 1,407 1,021
---------- ----------
Total deferred tax assets 6,720 5,105
Less: Valuation allowance (44) (44)
---------- ----------
Deferred tax assets, net of
valuation allowance 6,676 5,061
---------- ----------
Depreciation, depletion and amortization (30,615) (20,617)
Financial gain on sale of subsidiary stock (2,934) (2,494)
Other (1,166) -
---------- ----------
Total deferred tax liabilities (34,715) (23,111)
---------- ----------
Net deferred tax liability $ (28,039) $ (18,050)
========== ==========
As of December 31, 1998, the Company has an alternative minimum tax (AMT)
credit carryforward of approximately $4,324,000 which can be used to offset
regular Federal income taxes payable in future years. The AMT credit has an
indefinite carryforward period.
F-12
In connection with the exercise of non-qualified stock options and
common stock purchase warrants by employees during 1998, 1997 and 1996, the
Company received $344,000, $5,657,000 and $3,204,000, 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, 1998 and
1997 (in thousands):
December 31,
---------------------------
1998 1997
---------- ---------
Senior notes $ 65,000 $ 75,000
Borrowings under lines of credit 85,500 15,000
Term loans 172 477
---------- ---------
$ 150,672 $ 90,477
========== =========
Senior Notes: 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 the fixed rate of 7.17%. On April 9,
1996, the Company issued its Series C Notes, which total $22.5 million and bear
interest at a fixed rate of 7.48%. The Series A Notes mature on December 30,
2001, and require annual principal payments of $8.3 million 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 which began on
December 30, 1998. Interest on the Senior Notes is payable semi-annually on June
30 and December 30.
Lines of Credit: The Company has a $75 million unsecured revolving line of
credit facility that matures on March 16, 2001. The facility bears interest at a
rate determined by the ratio of the Company's debt to cash flow from operations.
Pursuant to the interest rate pricing structure, funds can currently be borrowed
at LIBOR plus 3/4%, the bank's prevailing prime rate, or the sum of the Federal
Funds effective rate for such day plus 1/2%. At December 31, 1998 and 1997,
$66.5 million and $15 million, respectively, was outstanding on this line of
credit at an average interest rate of 6.33% and 6.69%, respectively.
On December 11, 1998, the Company entered into an agreement for a $25
million unsecured revolving line of credit that matures on December 11, 1999.
The facility bears interest at a rate determined by the ratio of the Company's
debt to cash flow from operations. The interest rate pricing structure is the
same as in the Company's $75 million line of credit. At December 31, 1998, $19
million was outstanding on this line of credit at an average interest rate of
6.41%. Subsequent to December 31, 1998, the Company paid all amounts outstanding
under its $25 million line of credit and on February 12, 1999 the Company
cancelled its $25 million line of credit.
Term Loans: In 1997, two of the Company's wholly-owned subsidiaries
obtained two separate three-year term loans totaling $361,000. The loans bear
interest 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 $11,000.
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. The Company was in compliance with the
financial convenants at December 31, 1998.
Aggregate maturities of the Company's debt over the next four years are as
follows: $37,461,000 in 1999; $18,378,000 in 2000; $84,833,000 in 2001 and
$10,000,000 in 2002.
NOTE D--LEASE OBLIGATIONS
Assets recorded under capital leases obligations of $17,000 and $81,000 at
December 31, 1998 and 1997, respectively, are included in property and
equipment.
F-13
The Company leases office space under operating leases. Rental expense for
1998, 1997 and 1996 was approximately $757,000, $606,000 and $619,000,
respectively.
Future minimum lease payments for the five years subsequent to December 31,
1998 and in the aggregate are as follows (in thousands):
Capital Operating
Leases Leases
----------- -----------
1999 $ 19 $ 780
2000 - 740
2001 - 524
2002 - 265
2003 - -
----------- -----------
Total minimum lease payments 19 $ 2,309
===========
Less amount representing interest (1)
-----------
Present value of net minimum
lease payments $ 18
===========
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, 1998 and 1997, $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.
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.
The Company guarantees borrowings up to $750,000 made by its president
under a line of credit. The Company is only obligated to make payment in the
event of default by its president. The Company has a contractual right of offset
against any salary, bonus, commission or other amounts due from the Company to
its president for any amounts paid by the Company pursuant to this guaranty. At
December 31, 1998, $600,000 was outstanding on this line of credit, which
represented the maximum amount outstanding on this line of credit for the year.
The Company did not make any payments under this guaranty during 1998.
NOTE G--STOCK OPTIONS AND WARRANTS
The Company presently maintains four stock option plans under which the
Company's officers, directors and employees may be granted options or warrants
to purchase the Company's common stock. The exercise price, term and other
conditions applicable to each option granted under the Company's plans are
generally determined by the Compensation Committee at the time of grant and may
vary with each option granted. All options issued under the Company's plans are
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 vest under varying
schedules in accordance with the terms of the respective option agreements.
F-14
On December 3, 1998, the Company's Board of Directors approved a repricing
of the Company's then outstanding options whereby all options and warrants held
by employees with an exercise price greater than $13.94 ($2 above the market
price of the Company's common stock) were repriced to $13.94.
The following summarizes information with regard to the stock option and
warrant plans for the years ended December 31, 1998, 1997 and 1996 (shares in
thousands):
1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- ---------
Outstanding at beginning of year 5,659 $ 16.33 4,758 $ 11.50 4,860 $ 9.96
Granted 5,015 13.75 3,444 20.18 1,137 16.30
Exercised (102) 9.74 (1,809) 9.26 (1,145) 9.63
Cancelled (3,804) 19.00 (734) 20.53 (94) 12.55
-------- -------- --------
Outstanding at end of year 6,768 12.99 5,659 16.33 4,758 11.50
======== ======== ========
Options exercisable at end of year 5,363 4,147 4,125
======== ======== ========
Available for grant at end of year 1,170 1,256 2,849
======== ======== ========
The following table summarizes information for the options and warrants
outstanding at December 31, 1998 (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 12/31/98 Life in Years Price at 12/31/98 Price
- ------------------------ ------------- ------------- ----------- ------------- ---------
$ 2.69 - $ 11.94 1,387 4.07 $ 9.58 1,293 $ 9.41
$ 12.00 - $ 13.56 1,386 3.86 12.37 1,295 12.35
$ 13.75 - $ 13.75 36 5.96 13.75 - -
$ 13.94 - $ 13.94 3,772 4.61 13.94 2,610 13.94
$ 20.34 - $ 25.31 187 6.02 23.49 165 23.38
------------- -------------
$ 2.69 - $ 25.31 6,768 12.99 5,363 12.75
============= =============
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. APB Opinion No. 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):
1998 1997 1996
--------- --------- ---------
Net income As reported $ 24,360 $ 31,557 $ 15,249
Pro forma $ 15,159 $ 17,039 $ 10,050
Basic earnings per share As reported $ 1.07 $ 1.48 $ .78
Pro forma $ .67 $ .80 $ .51
Diluted earnings per share As reported $ 1.05 $ 1.43 $ .74
Pro forma $ .66 $ .78 $ .49
F-15
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
1998, 1997 and 1996, respectively: (1) risk-free interest rates ranging from
4.44% to 5.03%, 5.79% to 6.79% and 5.9% to 7.03%; (2) dividend yield of 0%, 0%
and 0%; (3) stock price volatility ranging from 44.34% to 57.10%, 37.23% to
45.77% and 46.49% to 62.62%, and (4) expected option lives ranging from .42 to
10 years, 1.67 to 10 years and 5 to 10 years. The weighted-average fair value of
options granted during 1998, 1997 and 1996 was $11.94, $9.98 and $11.20 per
option, respectively, for options granted at fair market value and $13.75 and
$10.15 per option for options granted above fair market value in 1998 and 1997,
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, 1998, 60,000 shares have been reserved for issuance
under this plan and directors have accumulated 1,643 deferred shares in their
accounts of which 328 shares have been distributed and 1,315 will be distributed
in annual equal installments from January 1999 to January 2002.
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. As of December
31, 1998, the Company has repurchased 175,000 shares of common stock at a cost
of $2,973,000 under this plan.
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 the purchase of 800,000 shares of the Company's
common stock at the then market price of $2.69 per share. Payment of 5% of the
original principal balance plus accrued interest are due annually August 1, with
a balloon payment of the remaining principal and interest due August 1, 2002. On
October 2, 1998, the Company granted five-year loans at an interest rate of 4%
to most of its employees for the purchase of 794,300 shares of the Company's
common stock at the then market price of $10.31 per share. Payment of 60% of the
loan amount plus accrued interest is being made in equal monthly, quarterly or
annual payments, as applicable, and a balloon payment of the remaining 40% is
due on October 2, 2003. The Company recorded related compensation expense due to
the below market interest rate on these loans of $54,000, $43,000 and $48,000
for the years ended December 31, 1998, 1997 and 1996, respectively. During 1998,
1997 and 1996, the Company received $649,000, $96,000 and $190,000 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, 1998, no preferred stock had been issued.
F-16
NOTE J--INVESTMENT IN EAGLE GEOPHYSICAL, INC.
On August 11, 1997, the Company's wholly-owned seismic data acquisition
crew subsidiary, Eagle Geophysical, Inc. ("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. 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 on the sale of Eagle common stock in
1997. Additionally, the Company recorded a pre-tax gain, net of costs, of
$10,750,000 in 1997 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.
In 1998, Eagle issued stock in connection with two acquisitions which
caused the Company to record a pre-tax loss of $193,000 for the year ended
December 31, 1998.
As a result of the Offering, the Company now owns 1,520,000 shares of Eagle
common stock or 17.3% of the outstanding shares of Eagle, at a book value of
$15,544,000 or $10.23 per share. The Company accounts for its investment in
Eagle using the equity method whereby such investment is based on the Company's
historical cost plus the Company's share of (i) Eagle earnings and losses and
(ii) Eagle's equity as a result of issuances of stock. In accordance with the
accounting literature, an investment in a company accounted for under the equity
method is carried on such basis rather than based on the fair market value of
the stock unless an "other than temporary" decline in the market value of the
stock has occurred. Once an "other than temporary" decline in the market value
of the stock occurs, an impairment in the carrying value of the investment
should be recorded. An "other than temporary" decline is deemed to have occurred
if the fair market value is depressed for a period of more than nine to twelve
months. Eagle's stock has been trading at a price below the Company's carrying
value since August 1998. If the weakness in commodity prices continues, and, in
turn the oilfield service sector market values remain depressed, the Company may
be required to record a non-cash, non-operating charge for impairment in the
carrying value of its investment in Eagle during 1999. At December 31, 1998, the
fair market value of the Company's investment in Eagle was $5,890,000 or $3.875
per share as quoted by NASDAQ.
NOTE K--RELATED PARTY TRANSACTIONS
The Company owed Eagle and its subsidiaries $27,117,000 and $12,500,000 at
December 31, 1998 and 1997, respectively, for seismic data acquisition services
provided to the Company and its subsidiaries subsequent to the Offering date.
The Company incurred charges of $79,900,000 and $22,200,000 for these services
for the year ended December 31, 1998 and from the period August 11, 1997 through
December 31, 1997, respectively. 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 provided 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. Under the
Sublease Agreement, the Company subleased a portion of its principal corporate
offices to Eagle and allowed Eagle to utilize certain shared office equipment
from August 1997 until September 1998. The Company received $88,000 and $47,000
for this sublease for the year ended December 31, 1998 and from the period from
August 11, 1997 through December 31, 1997, respectively. Pursuant to the
Registration Rights Agreement, Eagle registered 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.
Pursuant to the Tax Indemnity Agreement, Eagle paid the Company 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,
$2,000 and $76,000 as of December 31, 1998 and 1997,
F-17
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 $99,000, $76,000 and $80,000, for these general and
administrative expenses during 1998, 1997 and 1996, 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 invested in the exploration and
development of oil and gas properties on a working interest basis along with DDD
Energy, Inc. ("DDD Energy"). Each partnership's working interest amounted to
2.5% of the total investment made by such partnership and DDD Energy for the
partnership formed in 1997, 3% for the partnership formed in 1996 and 5% for the
partnerships formed in 1995 and 1994. On October 1, 1998, DDD Energy purchased
the oil and gas interests owned by each of the partnerships in exchange for
355,733 shares of the Company's common stock, payment of $824,000 and assumption
of each partnership's liabilities totaling $1,555,000.
NOTE L--MAJOR CUSTOMERS
No customers accounted for 10% or more of revenues during the years 1998,
1997 or 1996.
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 for the year
ended December 31, 1996, net of an income tax benefit of $580,000. 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. No assets or liabilities relating to the discontinued operations
remained at December 31, 1998.
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-18
Significant non-cash investing and financing activities are as follows:
1. During 1998, the Company issued 355,733 shares of its common stock
valued at $3,914,000 to acquire interests in certain oil and gas
properties and assumed liabilities totaling $1,555,000.
2. During 1998, the Company issued 794,300 shares of its common stock to
its officers and employees in exchange for notes receivable of
$8,191,000.
3. During 1996, the Company issued 428,608, shares of its common stock
upon the conversion and exchange of $1,989,000, of its 9% convertible
subordinated debentures. In connection with these conversions and
exchanges, unamortized bond issue costs totaling $109,000 have been
charged to additional paid-in capital.
4. During 1996, the Company issued 264,150 shares of its common stock in
exchange for a 50% equity interest in a marine seismic company.
5. 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.
6. During 1997 and 1996, capital lease obligations totaling $374,000 and
$41,000, respectively, were incurred when the Company entered into
leases for property and equipment.
NOTE O--INDUSTRY SEGMENTS
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in 1998 which changes the way the Company
reports information about its operating segments. The information for 1997 and
1996 has been restated from the prior year's presentation in order to conform to
the current year's presentation.
The Company operates in two reportable segments - seismic and exploration
and production. In 1997 and 1996, the Company had an additional reporting
segment - geophysical services. The long-term financial performance of each of
the reportable segments is affected by similar economic conditions. The
accounting policies of the segments are the same as those described in Footnote
A to these consolidated financial statements. Intersegment sales are accounted
for at prices comparable to those received from unaffiliated customers. The
Company evaluates performance of each reportable segment based on operating
income (loss) before selling, general and administrative expenses, interest
income and expense, income taxes, non-recurring items and accounting changes.
Financial information by reportable segment for the three years ended
December 31, 1998, was as follows (in thousands):
Exploration
and Total
Seismic Production Segments
----------- ------------ ------------
1998
Revenue from external purchasers $ 125,863 $ 18,994 $ 144,857
Depreciation, depletion
and amortization 57,117 11,872 68,989
Cost of sales 191 4,683 4,874
Segment operating income 68,555 2,439 70,994
Assets 317,292 156,623 473,915
Capital expenditures (a) 139,167 48,173 187,340
(a) Includes other ancillary equipment.
F-19
Exploration
and Geophysical Total
Seismic Production Services Segments
----------- ----------- ----------- ------------
1997
Revenue from external purchasers $ 85,560 $ 25,680 $ 16,316 $ 127,556
Intersegment revenue - - 18,456 18,456
Depreciation, depletion and
amortization 35,163 12,666 983 48,812
Impairment of oil and gas
properties - 9,560 - 9,560
Cost of sales 394 5,168 26,855 32,417
Segment operating income (loss) 50,003 (1,714) 6,934 55,223
Assets 219,288 122,930 - 342,218
Capital expenditures (a) 89,472 64,418 8,478 162,368
1996
Revenue from external purchasers $ 67,138 $ 18,255 $ 20,609 $ 106,002
Intersegment revenue - - 27,217 27,217
Depreciation, depletion
and amortization 30,477 7,212 951 38,640
Cost of sales 448 3,134 42,278 45,860
Segment operating income 36,213 7,909 4,597 48,719
Assets 164,547 93,565 24,810 282,922
Capital expenditures (a) 52,217 51,428 7,669 111,314
(a) Includes other ancillary equipment.
The following geographic information for the three years ended December 31,
1998 pertains to the Company's seismic segment (in thousands):
Other
United Foreign
States Canada Countries Total
----------- ----------- ----------- -----------
1998
Revenue from external customers $ 117,623 $ 7,370 $ 870 $ 125,863
Assets 301,704 13,797 1,791 317,292
1997
Revenue from external customers $ 82,228 $ 2,748 $ 584 $ 85,560
Assets 215,273 1,986 2,029 219,288
1996
Revenue from external customers $ 64,508 $ 1,502 $ 1,128 $ 67,138
Assets 160,566 1,899 2,082 164,547
All exploration and production activities are conducted in the United
States.
F-20
The following table reconciles segment information to consolidated totals:
(in thousands)
December 31,
--------------------------------------------------------
1998 1997 1996
----------- ----------- ------------
Revenue:
Revenue from external purchasers $ 144,857 $ 127,556 $ 106,002
Intersegment revenue - 18,456 27,217
Intercompany eliminations - (18,456) (27,217)
----------- ----------- ------------
Total consolidated revenue $ 144,857 $ 127,556 $ 106,002
=========== =========== ============
Depreciation, depletion and amortization:
Total reportable segment depreciation,
depletion and amortization $ 68,989 $ 48,812 $ 38,640
Corporate and other 901 867 609
----------- ----------- ------------
Total consolidated depreciation,
depletion and amortization $ 69,890 $ 49,679 $ 39,249
=========== =========== ============
Cost of Sales:
Total reportable segment cost of sales $ 4,874 $ 32,417 $ 45,860
Intercompany eliminations - (14,464) (26,458)
----------- ----------- ------------
Total consolidated cost of sales $ 4,874 $ 17,953 $ 19,402
=========== =========== ============
Income from continuing operations
before income taxes:
Total reportable segment operating
income $ 70,994 $ 55,223 $ 48,719
Selling general and
administrative expense (26,599) (23,043) (19,165)
Interest expense, net (5,540) (3,554) (2,900)
Equity in earnings (loss) of affiliate 222 146 (186)
Gain on sale of subsidiary stock - 18,449 -
Increase (decrease) in underlying
equity of affiliate (193) 10,750 -
Extinguishment of volumetric
production payment - (4,133) -
Eliminations and other (901) (4,859) (1,368)
----------- ----------- ------------
Income from continuing operations
before income taxes $ 37,983 $ 48,979 $ 25,100
=========== =========== ============
Assets:
Total reportable segment assets $ 473,915 $ 342,218 $ 282,922
Corporate and other 21,852 23,464 11,757
----------- ----------- ------------
Total consolidated assets $ 495,767 $ 365,682 $ 294,679
=========== =========== ============
F-21
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, 1998 and 1997.
Quarter Ended
---------------------------------------------------------
(In thousands, except per share amounts) March 31 June 30 Sept. 30 Dec. 31
--------- --------- ---------- ----------
1998
Revenue $ 30,927 $ 36,976 $ 38,332 $ 38,622
Gross profit(1) 14,851 18,123 17,825 20,195
Provision for income taxes 2,873 3,741 3,693 3,316
Net income 4,865 6,369 6,288 6,838
Earnings per share: (2)
Basic .22 .28 .28 .29
Diluted .21 .28 .28 .29
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)
Basic .20 .26 1.00 .02
Diluted .19 .25 .98 .02
(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) The sum of the individual quarterly earnings per share may not agree
with the year to date earnings 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-22
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 Forrest A. Garb & Associates, Inc. at
December 31, 1998, Miller and Lents, Ltd. and Forrest A. Garb & Associates, Inc.
at December 31, 1997 and Miller and Lents, Ltd. at December 31, 1996. 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, 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
Revisions of previous estimates 2,374 12,698
Purchases of reserves in place 284 2,898
Extensions and discoveries 2,428 17,685
Production (386) (6,216)
------------ ------------
Proved reserves at December 31, 1998 7,338 74,059
============ ============
Proved developed reserves -
December 31, 1995 1,178 10,219
============ ============
December 31, 1996 902 11,563
============ ============
December 31, 1997 1,744 18,483
============ ============
December 31, 1998 5,265 37,844
============ ============
In addition to the proved reserves disclosed above, the Company owned
proved sulfur reserves of 420,000 long tons, 174,000 long tons and 197,000 long
tons at December 31, 1998, 1997 and 1996, 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, 1998 and
1997, the Company's capitalized costs of oil and gas properties were as follows
(in thousands):
December 31,
------------------------
1998 1997
---------- ---------
Unevaluated properties $ 53,458 $ 39,436
Evaluated properties 141,118 107,206
---------- ---------
Total capitalized costs 194,576 146,642
Less: Accumulated depreciation,
depletion and amortization (45,599) (33,727)
---------- ---------
Net capitalized costs $ 148,977 $ 112,915
========== =========
F-23
Of the total costs excluded from the amortization calculation as of
December 31, 1998, $25,329,000 was incurred during 1998, $12,916,000 was
incurred during 1997, $8,793,000 was incurred during 1996, $3,748,000 was
incurred during 1995 and $2,672,000 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.
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, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
----------- ----------- ----------
Acquisition of properties:
Evaluated $ 4,701 $ 13,813 $ 23,090
Unevaluated 15,207 10,857 7,000
Exploration costs 22,708 26,961 17,358
Development costs 5,318 12,318 3,913
----------- ----------- ----------
Total costs incurred $ 47,934 $ 63,949 $ 51,361
=========== =========== ==========
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, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
----------- ----------- -----------
Revenue $ 18,663 $ 25,282 $ 17,921
Production costs (4,673) (5,155) (3,124)
Depreciation, depletion and amortization (11,872) (12,666) (7,212)
Impairment of oil and gas properties - (9,560) -
----------- ----------- -----------
Income (loss) before income taxes 2,118 (2,099) 7,585
Income tax benefit (expense) (741) 735 (2,655)
----------- ----------- -----------
Results of operations $ 1,377 $ (1,364) $ 4,930
=========== =========== ===========
In addition to the revenues and production costs disclosed above, the
Company had revenues from sulfur sales and related production costs of $331,000
and $10,000 respectively, for the year ended December 31, 1998, $398,000 and
$13,000 respectively, for the year ended December 31, 1997 and $334,000 and
$10,000, respectively, for the year ended December 31, 1996.
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 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-24
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,
----------------------------------------
1998 1997 1996
---------- --------- ----------
(in thousand)
Future gross revenue $ 248,608 $ 162,762 $ 127,905
Future production costs (43,065) (21,417) (21,913)
Future development costs (17,131) (21,659) (10,101)
Future income taxes (47,541) (27,453) (26,524)
---------- --------- ----------
Future net cash flows 140,871 92,233 69,367
10 percent annual discount for estimated timing of cash flows (59,328) (27,636) (17,277)
---------- --------- ----------
Standardized measure of discounted future net cash flows $ 81,543 $ 64,597 $ 52,090
========== ========= ==========
The above table excludes future net cash flows before income taxes of
$9,167,000, $3,187,000 and $3,495,000, and discounted future net cash flows
before income taxes of $4,310,000, $2,350,000 and $2,427,000, as of December 31,
1998, 1997 and 1996, respectively, related to proved sulfur reserves.
Natural gas prices have declined and oil prices have increased since
December 31, 1998. Accordingly, the discounted future net cash flows shown above
could be different if the standardized measure were calculated using prices in
effect at the end of the first quarter.
The following are the principal sources of changes in the standardized
measure of discounted future net cash flows for the years ended December 31,
1998, 1997 and 1996 (in thousands):
1998 1997 1996
--------- ---------- ----------
Standardized measure, beginning of year $ 64,597 $ 52,090 $ 16,058
Extensions and discoveries, net of related costs 34,102 45,193 26,690
Sales of oil and gas produced, net of production costs (13,990) (16,035) (9,057)
Net changes in prices and production costs (25,385) (28,384) 24,561
Change in future development costs 3,626 (2,650) (355)
Development costs incurred during the period that reduced
future development costs 4,330 7,802 2,042
Revision of previous quantity estimates 31,358 (8,927) 3,077
Repurchase of volumetric production payment - 8,319 -
Purchases of reserves in place 4,609 - 18,309
Sale of volumetric production payment - - (17,763)
Accretion of discount 8,328 7,276 2,532
Net change in income taxes (7,422) 1,988 (11,406)
Change in production rates and other (22,610) (2,075) (2,598)
--------- ---------- ----------
Standardized measure, end of year $ 81,543 $ 64,597 $ 52,090
========= ========== ==========
NOTE R - SUBSEQUENT EVENT
On February 12, 1999, the Company completed a private placement of three
series of unsecured Senior Notes totaling $138 million. The Series D Notes total
$20 million, bear interest at a fixed rate of 7.03% and mature on February 15,
2004, with no principal payments due until maturity. The Series E Notes total
$75 million, bear interest at a fixed rate of 7.28% and mature on February 15,
2009, with annual principal payments of $12.5 million beginning February 15,
2004. The Series F Notes total $43 million, bear interest at a fixed rate of
7.43% and mature on February 15, 2009, with no principal payments due until
maturity. Interest on all series of the notes is payable semi-annually beginning
on August 15, 1999. The Company used a portion of the proceeds to repay amounts
outstanding under its $75 million and $25 million revolving lines of credit; the
remainder will be used for capital expenditures.
F-25
EXHIBIT
INDEX
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Exhibit Title Page
Number
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10.49 Revolving Credit Agreement dated as of December 11, 1998,
between the Company and SunTrust Bank, Atlanta 53
10.50 Note Purchase Agreement dated as of February 12, 1999,
between the Company and the Series D Purchasers, the Series
E Purchasers and the Series F Purchasers 80
21.1 Subsidiaries of the Registrant 222
23.1 Consent of Arthur Andersen LLP 224
23.2 Consent of Forrest A. Garb & Associates, Inc. 226