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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-14488
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[LOGO]
SEITEL, INC.
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(Exact name of registrant as specified in charter)
Delaware 76-0025431
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
50 Briar Hollow Lane, 7/th/ Floor West 77027
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Houston, Texas (Zip Code)
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(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 881-8900
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of August 16, 2002, there were 25,375,683 shares of the Company's common
stock, par value $.01 per share outstanding.
Page 1 of 39
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Income (Unaudited)
for the Three Months Ended June 30, 2002 and 2001 (Restated) 4
Consolidated Statements of Income (Unaudited)
for the Six Months Ended June 30, 2002 and 2001 (Restated) 5
Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 2001 and for the
Six Months Ended June 30, 2002 (Unaudited) 6
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2002 and 2001 (Restated) 7
Notes to Consolidated Interim Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 35
PART II. OTHER INFORMATION
Page 2 of 39
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
June 30, December 31,
2002 2001
---------- -----------
ASSETS
Cash and cash equivalents $ 7,169 $ 25,223
Receivables
Trade, net 41,411 56,095
Notes and other, net 660 4,210
Net seismic data library 415,968 455,845
Net other property and equipment 22,366 11,927
Oil and gas operations held for sale 32,075 93,956
Investment in marketable securities 1,341 2,501
Deferred income taxes 18,839 -
Prepaid expenses, deferred charges and other 11,367 11,712
--------- ---------
TOTAL ASSETS $ 551,196 $ 661,469
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 42,559 $ 45,243
Income taxes payable 1,082 2,646
Oil and gas operations held for sale 4,747 3,962
Debt
Senior notes 255,000 255,000
Line of credit 770 1,319
Term loans 10,210 9,375
Financial guaranty 540 -
Obligations under capital leases 8,616 2,656
Deferred income taxes - 351
Deferred revenue 75,321 97,330
--------- ---------
TOTAL LIABILITIES 398,845 417,882
--------- ---------
COMMITMENTS AND CONTINGENCIES
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
25,811,601 and 25,810,603 at June 30, 2002
and December 31, 2001, respectively 258 258
Additional paid-in capital 166,465 166,456
Retained earnings (deficit) (6,542) 91,624
Treasury stock, 435,918 and 735,918 shares at cost at
June 30, 2002 and December 31, 2001, respectively (5,373) (9,072)
Notes receivable from officers and employees (2,285) (3,776)
Accumulated other comprehensive loss (172) (1,903)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 152,351 243,587
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 551,196 $ 661,469
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3 of 39
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three Months Ended June 30,
----------------------------
2002 2001
--------- -----------
(Restated)
REVENUE(1) $ 47,102 $ 24,663
EXPENSES
Depreciation and amortization 20,355 10,761
Cost of sales 185 472
Selling, general and administrative expenses 15,480 8,213
Impairment of seismic data library 25,696 -
Special charges 8,763 202
--------- ---------
70,479 19,648
--------- ---------
INCOME (LOSS) FROM OPERATIONS (23,377) 5,015
Interest expense, net (5,540) (3,039)
Loss on sale of marketable securities (564) -
--------- ---------
Income (loss) from continuing operations before
provision for income taxes (29,481) 1,976
Provision (benefit) for income taxes (8,395) 739
--------- ---------
Income (loss) from continuing operations (21,086) 1,237
Discontinued operations (2):
Loss from operations (including loss
from disposal of $56,764) (57,835) (6,854)
Income tax benefit - (2,399)
--------- ---------
Loss from discontinued operations (57,835) (4,455)
--------- ---------
NET LOSS $ (78,921) $ (3,218)
========= =========
Net income (loss) per share:
Basic:
Income (loss) from continuing operations $ (.83) $ .05
Loss from discontinued operations (2.28) (.18)
--------- ---------
Net loss $ (3.11) $ (.13)
========= =========
Diluted:
Income (loss) from continuing operations $ (.83) $ .05
Loss from discontinued operations (2.28) (.17)
--------- ---------
Net loss $ (3.11) $ (.12)
========= =========
Weighted average number of common and
common equivalent shares:
Basic 25,370 25,060
========= =========
Diluted 25,370 26,340
========= =========
- -------
(1) Non-cash revenue and the percentage of total revenue for the
three months ended June 30, 2002 and 2001 are $16,029,000 (34.0%) and
$3,330,000 (13.5%), respectively.
(2) See Note D for pro forma effects, in 2001, of change in accounting
principal.
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 39
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Six Months Ended June 30,
-------------------------
2002 2001
---------- ----------
(Restated)
REVENUE(1) $ 69,615 $ 54,910
EXPENSES
Depreciation and amortization 38,161 24,405
Cost of sales 230 643
Selling, general and administrative expenses 25,946 17,612
Impairment of seismic data library 25,696 -
Special charges 8,787 677
---------- ----------
98,820 43,337
---------- ----------
INCOME (LOSS) FROM OPERATIONS (29,205) 11,573
Interest expense, net (10,184) (6,049)
Loss on sale of marketable securities (82) -
---------- ----------
Income (loss) from continuing operations before provision for income
taxes and cumulative effect of change in accounting principle (39,471) 5,524
Provision (benefit) for income taxes (12,155) 2,294
---------- ----------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle (27,316) 3,230
Discontinued operations(2):
Loss from operations (including loss
from disposal of $56,764) (58,711) (3,718)
Income tax benefit - (1,301)
---------- ----------
Loss from discontinued operations (58,711) (2,417)
---------- ----------
Cumulative effect of change in accounting principle, net of tax (11,162) -
---------- ----------
NET INCOME (LOSS) $ (97,189) $ 813
========== ==========
Net income (loss) per share:
Basic:
Income (loss) from continuing operations before
cumulative effect of accounting change $ (1.08) $ .13
Loss from discontinued operations (2.33) (.10)
Cumulative effect of accounting change (.44) -
---------- ----------
Net income (loss) $ (3.85) $ .03
========== ==========
Diluted:
Income (loss) from continuing operations before
cumulative effect of accounting change $ (1.08) $ .12
Loss from discontinued operations (2.33) (.09)
Cumulative effect of accounting change (.44) -
---------- ----------
Net income (loss) $ (3.85) $ .03
========== ==========
Weighted average number of common and common equivalent shares:
Basic 25,223 24,921
========== ==========
Diluted 25,223 26,311
========== ==========
- ---------
(1) Non-cash revenue and the percentage of total revenue for the six months
ended June 30, 2002 and 2001 are $21,668,000 (31.1%) and $7,693,000
(14.0%), respectively.
(2) See Note D for Pro Forma effects, in 2001, of change in accounting
principle.
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5 of 39
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Notes
Receivable Accumulated
Additional Retained from Other
Common Stock Paid-In Earnings Treasury Stock Officers & Comprehensive
------------------- ---------------------
Shares Amount Capital (Deficit) Shares Amount Employees Income (Loss)
-------- -------- --------- ---------- --------- -------- --------- -------------
Balance, December 31, 2000 25,306,517 $ 253 $ 159,543 $ 106,617 (635,918) $ (7,667) $ (4,965) $ (191)
Net proceeds from issuance
of common stock upon
exercise of options 504,086 5 6,398 - - - - -
Tax reduction from exercise
of stock options - - 515 - - - - -
Treasury stock purchased - - - - (100,000) (1,405) - -
Payments received on
notes receivable from
officers and employees - - - - - - 1,189 -
Net loss - - - (14,993) - - - -
Foreign currency translation
adjustments - - - - - - - (1,733)
Unrealized gain on marketable
securities net of income
tax expense of $14 - - - - - - - 21
---------- -------- --------- ---------- --------- -------- -------- --------
Balance, December 31, 2001 25,810,603 $ 258 $ 166,456 $ 91,624 (735,918) $ (9,072) $ (3,776) $ (1,903)
Net proceeds from issuance
of common stock upon
exercise of options 998 - 9 - - - - -
Issuance of common stock
in connection with
employment contract - - - (172) 50,000 616 - -
Pearlman common stock issuance - - - (805) 250,000 3,083 - -
Payments received on
notes receivable from
officers and employees - - - - - - 336 -
Allowance for notes receivable - - - - - - 1,155 -
Net loss - - - (97,189) - - -
Foreign currency translation
adjustments - - - - - - - 1,425
Unrealized gain on marketable
securities - - - - - - - 1
Reclassification adjustment for
losses included in income,
net of tax benefit of $75 - - - - - - - 305
---------- -------- --------- ---------- --------- -------- -------- --------
Balance, June 30, 2002
(unaudited) 25,811,601 $ 258 $ 166,465 $ (6,542) (435,918) $ (5,373) $ (2,285) $ (172)
========== ======== ========= ========== ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6 of 39
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Six Months Ended June 30,
-----------------------------
2002 2001
------------- ------------
(Restated)
Cash flows from operating activities:
Reconciliation of net income (loss) to net cash provided by operating activities
of continuing operations:
Net income (loss) $(97,189) $ 813
Loss from discontinued operations, net of tax 58,711 2,417
Cumulative effect of change in accounting principle, net of tax 11,162 --
Depreciation, depletion and amortization 38,287 24,433
Impairment of seismic data library 25,696 --
Allowance for collection on notes receivable 8,749 --
Deferred income tax benefit (13,139) (3,961)
Non-cash sales (21,668) (7,693)
Loss on sale of marketable securities 82 --
Write-off of deferred financing costs 321 --
Common stock issued as compensation 444 --
Decrease (increase) in receivables 14,630 (597)
Increase in other assets (1,779) (1,018)
Decrease in deferred revenue (8,957) (697)
Increase (decrease) in accounts payable and other liabilities 1,381 (10,312)
-------- --------
Net cash provided by operating activities of continuing operations 16,731 3,385
-------- --------
Cash flows from investing activities:
Cash invested in seismic data (36,208) (36,503)
Cash paid to acquire property and equipment (7,592) (1,538)
Cash received from disposal of property and equipment 2,398 --
Net proceeds from sale of marketable securities 1,356 --
-------- --------
Net cash used in investing activities of continuing operations (40,046) (38,041)
-------- --------
Cash flows from financing activities:
Borrowings under line of credit 15,879 82,060
Principal payments under line of credit (16,472) (56,060)
Borrowings on term loan 2,514 --
Principal payments on term loans (1,783) --
Principal payments on capital lease obligations (1,153) (47)
Proceeds from issuance of common stock 9 5,967
Costs of debt and equity transactions (10) (471)
Repurchase of common stock -- (1,405)
Loans to officers, employees and directors (65) --
Payments on notes receivable from officers and employees 750 938
-------- --------
Net cash provided by (used in) financing activities
of continuing operations (331) 30,982
-------- --------
Effect of exchange rate changes 1,637 (582)
Net cash provided by discontinued operations 3,955 763
-------- --------
Net decrease in cash and cash equivalents (18,054) (3,493)
Cash and cash equivalents at beginning of period 25,223 10,216
-------- --------
Cash and cash equivalents at end of period $ 7,169 $ 6,723
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest (net of amounts capitalized) $ 8,945 $ 6,162
-------- --------
Income taxes $ 2,665 $ 9,727
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
Page 7 of 39
SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions of Regulation S-X. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain reclassifications have been made to the amounts in the prior year's
financial statements to conform to the current year's presentation. Operating
results for the six months ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002. For
further information, refer to the financial statements and notes thereto for the
year ended December 31, 2001 contained in the Company's Annual Report on Form
10-K and any amendments thereto, as filed with the Securities and Exchange
Commission.
The Company's financial statements have been prepared on a basis that
assumes the Company will continue as a going concern. As more fully described in
Note H, the Company is not in compliance with various covenants in its debt
agreements. The independent auditors' report on the Company's 2001 financial
statements contains a "going concern" qualification based on the Company's
non-compliance with its debt agreements, which indicates their belief that there
is substantial doubt about the Company's ability to continue to recover assets
and satisfy liabilities in the normal course of business. The Company's
independent auditors have advised the Company that, if the Company's
non-compliance with its debt agreements is not satisfactorily resolved, the
auditors' report relative to the Company's December 31, 2002 financial
statements would include a "going concern" qualification. The Company is working
with its lenders toward a long-term modification of the Senior Note Agreements,
but there can be no assurance that the Company will be successful in its
negotiations. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability of
assets or the amounts of liabilities that may result from the outcome of this
uncertainty.
Because of the level of the Company's debt and the Company's non-compliance
with certain covenants, (1) a substantial portion of the Company's cash flow
from operations must be dedicated to debt service and payments of such
obligations and, to the extent so used, will not be available for operational
purposes, (2) the Company's ability to obtain additional financing in the future
may be limited, and (3) the Company's flexibility in reacting to changes in
the operating environment and economic conditions may be limited. If the Company
is unable to successfully conclude its negotiations with its lenders, it may be
forced to take actions such as reducing or delaying capital expenditures,
reducing costs, selling assets, refinancing or restructuring its debt or other
obligations and seeking additional equity capital. The Company may not be able
to take any of these actions on satisfactory terms or at all.
As a result of the Company's current financial condition and the
possibility that the Company may be unable to satisfy its future obligations,
certain customers of the Company have refused to enter into large data licensing
agreements for delivery of future data and some contractors have refused to
provide services to the Company without receiving payment in advance. A
significant loss of customers or agreements with contractors may have a material
adverse effect on the financial condition of the Company.
NOTE B-REVENUE RECOGNITION
Revenue from Data Acquisition
Revenue from the creation of new seismic data under the Company's
acquisition contracts is recognized using the percentage-of-completion method of
accounting based upon costs incurred to date as a percentage of total estimated
costs. Under these contracts, the Company creates new seismic data designed in
conjunction with its customers and specifically suited to the geology of the
area using the most appropriate technology available. Contracts typically result
in one or more customers paying 65% or more of the direct creation costs in
exchange for a license or licenses to use the resulting data. Customers make
periodic payments throughout the creation period, which generally correspond to
costs to be incurred. These payments are non-refundable once the costs of
creation are incurred. The creation process generally occurs in the following
stages: permitting, surveying, drilling, recording and processing. At each
stage, the customers receive legally enforceable rights and access to, and the
benefits of, the results of all work performed. The customers also receive
access to and use of the newly acquired, processed data. The customers may have
exclusive access to the work performed and exclusive use of the newly acquired,
processed data for a limited term, which is generally less than nine months
after final delivery of the processed data. The customers' access to and use of
the results of the work performed and of the newly acquired, processed data is
governed by a long-term (generally twenty years or more) license agreement,
which is a separate agreement from the acquisition contract. The Company's
acquisition contracts require the customer either to have a license agreement in
place or to execute one at the time the acquisition contract is signed. The
Company maintains sole ownership of the newly acquired data, which is added to
its library, and is free to license the data to other customers when the
original customers' exclusivity ends.
Page 8 of 39
Revenue from Data Licenses
The Company licenses data from its seismic data library to customers under
four basic forms of contracts.
Under the first form of contract, the customer licenses and selects data
from the data library at the time the contract is entered into.
Under the second form of contract, referred to as a "review and possession"
contract, the customer obtains the right to review a certain quantity of data
for a limited period of time. During the review period, the customer may select
specific data from that available for review to hold long-term under its license
agreement. Any data not selected for long-term licensing must be returned to the
Company at the end of the review period.
Under the third form of contract, referred to as a "library card" contract,
the customer initially receives only access to data. The customer may then
select specific data, from the collection of data to which it has access, to
hold long-term under its license agreement. The lengths of the selection periods
under the library card contracts vary.
Under the fourth form of contract, referred to as a "review only" contract,
the customer obtains rights to review a certain quantity of data for a limited
period of time, but does not obtain the right to select specific data to hold
long-term.
The usage of all data delivered to the customer, whether for review only or
to hold long-term, is governed by a license agreement, which is a separate
agreement from the contracts. The Company's contracts require the customer
either to have a license agreement in place or to execute one at the time the
contract is signed. The term of the license agreement is generally twenty years
or more and governs all data delivered to the customer during the term. Payment
terms under the contracts are typically less than eighteen months. All payments
due are non-cancelable and all payments made are non-refundable. The customer
has complete access to all available data covered by the contracts on the date
the contract is executed. The contracts permit selection of the data in its
present form, and the Company is under no obligation to make any enhancements,
modifications or additions to the data unless specific terms are included, upon
which revenue would be deferred until performance is met. The customer's rights
under the contracts are non-transferable without payment of an additional fee.
Copies of the data are available to the customer immediately upon request.
Revenue from licensing of seismic data is recognized when the Company has
contracted with the customer for a fixed sales price; a licensing agreement is
in place; the customer has selected specific data under the terms of the
contract or the contract has expired without full selection having occurred; and
collectibility of the sales price is reasonably assured. The Company recognizes
revenue for the particular data selected as each specific selection of data is
made by the customer. If selections are not completed by the expiration date of
the contract, the Company then recognizes any remaining revenue under that
contract. In each case (selection or expiration), the earnings process is
complete. The Company does not recognize revenue for amounts billed in advance
of being earned until these conditions are met. For revenue that is deferred,
the Company defers the direct costs (primarily commissions) related to the
revenues. Revenue from licensing of seismic data is presented net of revenue
shared with other entities.
Revenue from Non-Cash Data Licenses
In certain cases, the Company grants its customer a non-exclusive license
to specific, selected data or access to data to be used in its operations (not
for resale) in exchange for ownership of seismic data from the customer. These
exchanges are referred to as non-cash or non-monetary data exchanges. Where the
customer receives access to data, the customer may then select specific data to
hold under a long-term license; the lengths of the selection periods vary, but
are generally three to five years. The Company records a data library asset for
the seismic data acquired at the time the contract is entered into and defers
revenue recognition on the transaction until the customer selects the data.
These transactions are accounted for as non-monetary exchanges since the data
that the Company receives is distinct from the data that it is licensing to the
customer. Because the Company receives ownership of distinct seismic data to be
added to its library in exchange for a data license, the exchange is not a
"like-kind" exchange. These transactions are valued at the fair value of the
data received or delivered, whichever is more readily determinable.
Page 9 of 39
The Company determines the fair value of data exchanged by first
determining the value of the license granted to the customer. It does so by
evaluating the range of cash transactions by the Company for licenses of similar
data during either the prior six months (for licenses in the United States) or
the prior twelve months (for licenses in Canada). In evaluating the range of
cash transactions, the Company does not consider transactions that are
disproportionately high or low. The Company then also considers the value of the
data received from the customer. In determining the value of the data received,
the Company considers the age, quality, current demand and future marketability
of the data, as well as the cost that would be required to create the data. In
significant exchanges, the Company also engages an independent third party to
confirm the fairness of the Company's valuation of the data received. In the
United States, the Company applies a limitation on the value it assigns per
square mile on the data exchanged. In Canada, in the event of a difference
greater than 2% between the value of the license granted and the value of the
data received, the Company assigns the lower value to the exchange. In 2001, the
Company obtained third party fairness opinions on all non-cash exchanges valued
at $800,000 or more. Effective January 1, 2002, the Company intends to obtain
third party fairness opinions on all non-cash exchanges of $500,000 or more. The
Company intends to obtain these opinions on an annual basis, usually in
connection with the preparation of its annual financial statements.
For the three months ended June 30, 2002 and 2001, the Company recorded
seismic data library assets of $5,323,000 and $8,079,000, respectively, from
non-monetary exchanges of seismic data. For the six months ended June 30, 2002
and 2001, the Company recorded seismic data library assets of $8,348,000 and
$20,644,000, respectively, from non-monetary exchanges of seismic data. These
exchanges included exchanges in which the Company and the customer issued cash
payments.
For the three months ended June 30, 2002 and 2001, the Company recognized
revenue of $15,781,000 and $3,083,000, respectively, from selections of data on
non-monetary exchanges that had previously been deferred. For the six months
ended June 30, 2002 and 2001, the Company recognized revenue of $21,400,000 and
$5,694,000, respectively, from selections of data on non-monetary exchanges that
had previously been deferred.
Revenue from Data Technology Services
To date, revenue from the Company's data technology services has not been
significant. Such revenue is recognized as the services are provided.
NOTE C - SPECIAL CHARGES
During the three and six months ended June 30, 2002 and 2001, the Company
incurred various charges and expenses that have been classified as special
charges, which are set forth below (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
Description 2002 2001 2002 2001
- -------------------------------------- ------------ ------------ ------------ ------------
Company funds improperly
converted for the personal
benefit of former executive $ 13 $ 202 $ 37 $ 677
Allowance for former executives'
advances and receivables 4,951 - 4,951 -
Pearlman common stock issuance
and cash payment 3,799 - 3,799 -
------------ ------------ ------------ ------------
$ 8,763 $ 202 $ 8,787 $ 677
============ ============ ============ ============
Company funds improperly converted for the personal benefit of former
executive - During the three months ended June 30, 2002, the Company's former
president and chief executive officer, Paul Frame, resigned, and the
Page 10 of 39
Company's former chief financial officer, Debra Valice, was terminated. In
connection with the departure of these executives from the Company, the
Company's Board of Directors initiated an investigation into the possible
improper conversion of corporate funds for personal use. Based on the results of
the investigation, the Company believes that, during the period from January 1,
2001 through the date of his resignation, Mr. Frame caused the Company to pay
certain expenses that were personal in nature. These costs were previously
reflected in "selling, general and administrative" expenses in its 2001
financial statements and financial statements for the three months ended March
31, 2002, but have been reclassified to "special charges" as shown above.
The Company is seeking reimbursement from Mr. Frame for these costs, and
the Company believes it has meritorious arguments in its pursuit of
reimbursement of these funds. Given the uncertainty surrounding the recovery of
these costs, the Company has continued to report these costs as expenses for the
applicable periods. Refer to Note K for further discussion.
Allowance for former executives' advances and receivables - Prior to their
departure from the Company, the Company had advanced or loaned Mr. Frame and Ms.
Valice an aggregate of $4.4 million. Approximately $1.2 million of such loans
were secured by shares of the Company's common stock and had been reported as a
component of equity in the Company's financial statements. The Company is
seeking payment by these former executives for these advances and loans. In
addition, the Company recorded debt of approximately $540,000 relating to its
guaranty of a bank's line of credit to Mr. Frame. Mr. Frame has defaulted on the
line of credit. The bank has asserted that the Company is obligated to repay the
outstanding principal amount under the guaranty and has accelerated the debt.
The Company intends to seek reimbursement from Mr. Frame for this amount. The
Company has terminated its guaranty arrangement, such that it is not a guarantor
for any borrowings in excess of $540,000. However, given the uncertainty
surrounding the ability of the Company to collect these amounts, the Company has
provided a full allowance for these amounts as of June 30, 2002. The Company
believes it has meritorious arguments in its pursuit of these recoveries.
Reimbursement of additional funds from Mr. Frame and Ms. Valice may be
sought following the results of further investigation by the Company.
Pearlman common stock issuance and cash payment - In February 2002, the
Board of Directors accepted the resignation of Herbert M. Pearlman as Chairman
of the Board. In connection therewith, Mr. Frame entered into a modified
employment agreement with Mr. Pearlman, which the Board of Directors of the
Company did not authorize Mr. Frame to sign. In April 2002, pursuant to Mr.
Frame's direction, the Company issued Mr. Pearlman 250,000 shares of Company
stock valued at $2,277,500 and made a cash payment of $1,521,499 for the
associated personal tax liability. The Company believes that there was no valid
modified employment agreement and believes that such agreement is not binding on
the Company or enforceable by Mr. Pearlman. The share issuance and related cash
payment are considered by the Company as an advance of amounts under his
existing employment agreement. Due to the inherent uncertainty associated with
the Company's litigation with Mr. Pearlman (see Note K), the Company recorded a
full allowance for this advance during the three months ended June 30, 2002.
Also, the Company has suspended payments that might otherwise be due Mr.
Pearlman under his existing employment agreement, and the Company is not
recording any further related expense under that agreement.
NOTE D-SEISMIC DATA LIBRARY
During the six months ended June 30, 2002, the Company recorded reductions to
its seismic data library, which total approximately $78.5 million and are set
forth below:
(a) $26.0 million of amortization expense, as a result of applying its
amortization policy to revenues;
(b) a cumulative effect of a change in accounting principle of approximately
$17.2 ($11.2 million after tax) million relating to the Company's created
seismic data library, which was recorded as of January 1, 2002;
(c) required amortization expense of approximately $4.4 million and $9.6
million in the three and six months ended June 30, 2002, respectively,
relating to the Company's new accounting policy with respect to created
seismic data; and
(d) an impairment loss of approximately $25.7 million related to its Rocky
Mountain region data and its Gulf of Mexico offshore data in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
See discussion of these items below.
Data Bank Amortization and Change in Accounting Principle
The seismic library consists of seismic surveys that are to be licensed to
customers on a non-exclusive basis. Costs directly or indirectly 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
into the seismic library. The Company records its investment in the seismic
library in a manner consistent with its capital investment and operating
decision analysis, which results in the seismic library being recorded and
amortized on a survey-by-survey basis.
Prior to the change in accounting principle that relates to the Company's
created seismic data and is described below, the Company's accounting policy
with respect to amortization of its data library was as follows: (a) the seismic
data that the Company creates was amortized on the income forecast method, which
is discussed below, (b) purchased data is generally amortized on a straight-line
basis over 10 years and (c) significant purchased data (those surveys that are
individually in excess
Page 11 of 39
of five percent of the net book value of the Company's seismic library)
is amortized using the greater of the income forecast method or the 10-year
straight-line method. The policies described in (b) and (c) did not change as
a result of the change in accounting principle.
The Company applies the income forecast method by forecasting the ultimate
revenue expected to be derived from a particular data survey over its estimated
useful economic life. That forecast is made by the Company at project
initiation. Generally, the Company has estimated that it will earn revenue
equivalent to 233% of the cost it incurs in creating the data, which yields an
amortization rate of approximately 43% of revenue. If and when the revenue
performance of a seismic survey indicates that the data may not generate the
originally forecasted revenue, the Company reevaluates the expected future
revenue of the survey. If the Company determines the ultimate revenue for the
survey is expected to be less than the original estimate of total revenue it
made at project initiation, the Company increases the amortization rate
attributable to future revenue.
As of June 30, 2002, approximately 64% of the net book value of the
Company's created seismic library is being amortized at a 43% rate, and
approximately 25% of the net book value of the Company's created seismic library
is being amortized at rates between 55% and 80%. In addition, there are ten
surveys, which represent 11% of the created seismic library's net book value as
of June 30, 2002, that have amortization rates ranging from 14% to 42%, relating
to surveys in which amounts funded by customers reduced the recorded cost of
the survey. The Company will continue to evaluate the performance of its
surveys, and as appropriate, will increase the amortization rate (on a
prospective basis) applicable to specific surveys based on its evaluation of
revenue trends, oil and gas prospectivity and other relevant commercial factors.
In the second quarter of 2002, the Company evaluated and changed the method
by which it amortizes its created seismic library in an effort to increase the
transparency of its methodology and to be more consistent with other industry
competitors. Under its new accounting policy, the Company calculates created
data amortization as the greater of the income forecast method or 10-year
straight-line amortization. This policy is applied on a cumulative basis, at the
individual survey level and on a quarterly basis. Under this policy, the Company
first records amortization using the income forecast method. The cumulative
income forecast amortization is then compared to the cumulative straight-line
amortization determined using a 10-year life based on the age of the survey. If
the cumulative straight-line amortization is higher for a specific survey,
additional amortization is recorded. This requirement is applied regardless of
future-year revenue estimates for the survey and does not consider the existence
of deferred revenue with respect to the survey.
The Company reported the adoption of this new method as a cumulative effect
of a change in accounting principle retroactively as of January 1, 2002.
Accordingly, the Company recorded a pre-tax charge of $17.2 million (after-tax
charge of $11.2 million) as of January 1, 2002; a pre-tax charge of $5.2 million
for the three months ended March 31, 2002; and a pre-tax charge of $4.4 million
for the three months ended June 30, 2002.
Pro forma net income for the three and six months ended June 30, 2001,
assuming the new amortization policy had been applied retroactively in each
period, was as follows (in thousands, except per share amounts):
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
Description 2001 2001
- -------------------------------------- -------------- --------------
Income (loss) from continuing
operations:
As reported $ 1,237 $ 3,230
Pro forma (1,872) (1,432)
Income (loss) from continuing
operations per share:
As reported, basic $ .05 $ .13
Pro forma, basic (.07) (.06)
As reported, diluted .05 .12
Pro forma, diluted (.07) (.06)
Net income (loss):
As reported $ (3,218) $ 813
Pro forma (6,327) (3,849)
Net income (loss) per share:
As reported, basic $ (.13) $ .03
Pro forma, basic (.25) (.15)
As reported, diluted (.12) .03
Pro forma, diluted (.25) (.15)
Data Bank Impairment
As events or conditions require, the Company evaluates the recoverability
of its seismic library in accordance with SFAS No. 144. The Company evaluates
its seismic library for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. The Company evaluates
its
Page 12 of 39
seismic data library in the following components: (a) Gulf of Mexico offshore
data, (b) Gulf of Mexico onshore data, (c) Rocky Mountain region data (including
U.S. areas outside the Gulf of Mexico), (d) Canadian data and (e) international
data outside of North America (each being hereinafter referred to as a "library
component"). These library components were determined in a manner consistent
with the management of the Company's operations, and the Company believes that
they constitute the lowest levels of independently identifiable cash flows.
In accordance with SFAS No. 144, the impairment evaluation is based first
on a comparison of the undiscounted cash flows and the carrying value of the
library component, and, if necessary, the second step of the impairment
evaluation compares the fair value of the library component, which is generally
based on discounting forecasts of cash flows associated with the assets, to the
library component's carrying amount. Any impairment loss is recorded as the
difference between the library component's carrying amount and fair value.
For purposes of evaluating potential impairment losses, the Company
estimates the future cash flows attributable to a library component by
evaluating historical revenue trends, oil and gas prospectivity in particular
regions, general economic conditions affecting its customer base and expected
changes in technology. The cash flow estimates exclude expected future revenues
attributable to non-monetary exchanges and future data creation projects.
The estimation of future cash flows is highly subjective, inherently
imprecise and can change materially from period to period based on the factors
described in the preceding paragraph, among others. Accordingly, if conditions
change in the future, the Company may record further impairment losses relative
to its seismic library, which could be material to any particular reporting
period.
During the three months ended June 30, 2002, the Company recorded a
non-cash impairment loss on its Gulf of Mexico offshore and its Rocky Mountain
region seismic data totaling $25.7 million. Based on industry conditions and the
recent revenue performance of these library components, the Company determined
that its estimate of future cash flows in these library components would not be
sufficient to recover the carrying value of such data. As a result, the Company
estimated the fair value of these library components by discounting their
estimated net cash flows. The resulting difference between the estimated fair
value and the carrying value was recorded as an impairment loss. Beginning in
the third quarter of 2002, the Company will adjust the amortization rates
applied to surveys in these regions to consider the effect of the impairment
loss.
NOTE E-DISCONTINUED OPERATIONS
In June 2002, the Company's Board of Directors unanimously adopted a plan
to dispose of the Company's oil and gas operations by sale. Accordingly, the
Company's consolidated financial statements have been revised to report the oil
and gas operations as discontinued operations.
In connection therewith, on July 3, 2002, the Company entered into a
purchase and sale agreement with an independent oil and gas company for the sale
of a majority of its oil and gas assets. The initial sale was completed on
August 2, 2002. The purchase and sale agreement gives the purchaser the option
to purchase all or a portion of the Company's remaining oil and gas assets until
September 2, 2002. If all assets are not sold in connection with this option,
the Company will continue to market these assets for sale. The Company expects
the disposal to be completed by June 30, 2003.
As a result of its decision to dispose of these operations, the Company
recorded a non-cash impairment loss of $56.8 million, determined as the sum of
(i) the sale proceeds to be received, net of cost to sell, (ii) the present
value of future net cash flows from its remaining estimated proved oil and gas
reserves and (iii) the lower of cost or fair value of unproved properties,
compared to the net carrying value of its oil and gas assets.
Revenue from discontinued operations was $3,743,000 and $5,788,000 for the
three months ended
Page 13 of 39
June 30, 2002 and 2001, respectively, and $6,386,000 and $13,865,000 for the six
months ended June 30, 2002 and 2001, respectively. Pre-tax losses from the
discontinued operations were $57,835,000 and $6,854,000 for the three months
ended June 30, 2002 and 2001, respectively, and $58,711,000 and $3,718,000 for
the six months ended June 30, 2002 and 2001, respectively.
The Company uses the full-cost method of accounting for its oil and gas
operations.
NOTE F-RESTATEMENT OF FINANCIAL STATEMENTS
Effective for the year ended December 31, 2001, the Company determined that
the timing and amount of reported revenue from certain data licensing contracts
and certain data acquisition contracts warranted revision to the reported
results for the nine months ended September 30, 2001 and the year ended December
31, 2000. As a result, the financial statements for the three and six months
ended June 30, 2001 have been restated in the accompanying financial statements.
The revisions to revenue recognition under the seismic data licensing
agreements are based upon the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." The effect of these revisions is to defer revenue, which would have
been recognized under the Company's previous accounting method, under certain
seismic data licensing agreements until selection of specific data is made by
the customer. The deferral in revenue resulted in an increase in deferred
revenue. Associated with the deferral of the revenue on these contracts, the
Company also deferred the direct costs (primarily commissions) related to the
revenue, which resulted in an increase in prepaid expenses. The Company also
recognized a reduction in amortization expense, which is recorded as an
adjustment to accumulated amortization, and in income tax expense, which is
recorded as an adjustment to deferred taxes. The total effects of all revisions
to revenue recognition related to the seismic data licensing arrangements for
the three and six months ended June 30, 2001 are summarized in the tables on the
following pages.
The revisions also reflect adjustments for the amount and timing of revenue
previously recognized under certain data acquisition contracts. In 2001, the
Company entered into certain acquisition contracts under which both the Company
and the customer jointly participated in the acquisition services. Consequently,
the Company did not assume the sole risk of service throughout the acquisition
process. The Company recognized revenue under these contracts consistent with
its revenue recognition policy for acquisition contracts. The Company has
determined that revenue previously recognized for amounts funded by customers
under these contracts should be used to reduce the Company's recorded cost of
creating the seismic data. The Company continues to have sole ownership of the
newly created data. The reduction of revenue resulting from these revisions also
reduced the Company's amortization expense, which is recorded as an adjustment
to accumulated amortization, and income tax expense, which is recorded as an
adjustment to deferred taxes. The total effects of all revisions to revenue
recognition related to certain data acquisition contracts for the three and six
months ended June 30, 2001 are summarized in the tables on the following pages.
Page 14 of 39
Accordingly, such financial statements have been restated as follows:
Three Months Ended June 30, 2001 (Unaudited)
----------------------------------------------------------------
(in `000's except per share amounts)
Adjustments Adjustments
for for
Data Data
As Licensing Acquisition As
Reported Agreements Contracts Restated
----------- ------------ ------------ ------------
Statements of Operations Data:
Revenue $ 37,627 $ (8,490) $ (4,474) $ 24,663/(1)/
Depreciation, depletion & amortization 16,966 (4,214) (1,991) 10,761
Cost of sales 472 - - 472
SG&A expense 8,771 (583) 25 8,213
Special charges 202 - - 202
----------- ------------ ------------ ------------
Income (loss) from operations 11,216 (3,693) (2,508) 5,015
Interest expense and other, net (3,049) - 10 (3,039)
(Provision) benefit for income taxes (2,940) 1,327 874 (739)
----------- ------------ ------------ ------------
Income (loss) from continuing
operations 5,227 (2,366) (1,624) 1,237
Loss from discontinued operations,
net of income tax benefit (4,455) - - (4,455)
----------- ------------ ------------ ------------
Net income (loss) $ 772 $ (2,366) $ (1,624) $ (3,218)
=========== ============ ============ ============
Net income (loss) per share:
Basic:
Income (loss) from continuing
operations $ .21 $ (.09) $ (.06) $ .05
Loss from discontinued operations (.18) - - (.18)
----------- ------------ ------------ ------------
Net income (loss) $ .03 $ (.09) $ (.06) $ (.13)
=========== ============ ============ ============
Diluted:
Income (loss) from continuing
operations $ .20 $ (.09) $ (.06) $ .05
Loss from discontinued operations (.17) - - (.17)
----------- ------------ ------------ ------------
Net income (loss) $ .03 $ (.09) $ (.06) $ (.12)
=========== ============ ============ ============
(1) Non-cash revenue and the percentage of total revenue are $3,330,000 and
13.5%, respectively.
Page 15 of 39
Six Months Ended June 30, 2001 (Unaudited)
-----------------------------------------------------------------------
(in `000's except per share amounts)
Adjustments Adjustments
for for
Data Data
As Licensing Acquisition As
Reported Agreements Contracts Restated
------------ -------------- --------------- -------------
Statements of Operations Data:
------------------------------
Revenue $ 78,528 $ (17,395) $ (6,223) $ 54,910/(1)/
Depreciation, depletion & amortization 35,457 (8,163) (2,889) 24,405
Cost of sales 643 - - 643
SG&A expense 18,746 (1,203) 69 17,612
Special charges 677 - - 677
------------ -------------- --------------- -------------
Income (loss) from operations 23,005 (8,029) (3,403) 11,573
Interest expense and other, net (6,059) - 10 (6,049)
(Provision) benefit for income taxes (6,240) 2,758 1,188 (2,294)
------------ -------------- --------------- -------------
Income (loss) from continuing
operations 10,706 (5,271) (2,205) 3,230
Loss from discontinued operations,
net of income tax benefit (2,417) - - (2,417)
------------ -------------- --------------- -------------
Net income (loss) $ 8,289 $ (5,271) $ (2,205) $ 813
============ ============== =============== =============
Net income (loss) per share:
Basic:
Income (loss) from continuing
operations $ .43 $ (.21) $ (.09) $ .13
Loss from discontinued operations (.10) - - (.10)
------------ -------------- --------------- -------------
Net income (loss) $ .33 $ (.21) $ (.09) $ .03
============ ============== =============== =============
Diluted:
Income (loss) from continuing
operations $ .41 $ (.21) $ (.09) $ .12
Loss from discontinued operations (.09) - - (.09)
------------ -------------- --------------- -------------
Net income (loss) $ .32 $ (.21) $ (.09) $ .03
============ ============== =============== =============
(1) Non-cash revenue and the percentage of total revenue are $7,693,000 and
14.0%, respectively.
Page 16 of 39
NOTE G-INCOME TAXES
The major components of the net deferred income tax asset (liability)
reflected in the Company's consolidated balance sheets at June 30, 2002 and
December 31, 2001 were as follows (in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Deferred revenue $ 13,054 $ 15,241
Seismic data amortization 10,412 (5,922)
Oil and gas assets 6,839 (13,767)
Canadian net operating loss carryforward 2,931 4,729
Other, net 7,538 (397)
-------- --------
40,774 (116)
Less: valuation allowance (21,935) (235)
-------- --------
Total deferred tax asset (liability) $ 18,839 $ (351)
======== ========
The net income tax benefit for the three and six months ended June 30, 2002
includes $21.7 million, in valuation allowance charges related to deferred tax
assets. The Company performed its intraperiod tax allocation under the
"incremental" method, as prescribed by paragraph 35 of SFAS No. 109.
Accordingly, the loss from discontinued operations has not been allocated any
tax benefit during the six months ended June 30, 2002.
The Company considered (i) its non-compliance with its debt agreements and
the absence of assurance that the Company's discussions with its creditors will
be successfully concluded, (ii) the fact that the independent auditors' report
regarding its 2001 financial statements contain a "going concern" qualification,
and (iii) the notification by its independent auditors that, if the
non-compliance with the debt agreements is not satisfactorily resolved, their
report on the Company's December 31, 2002 financial statements would include a
"going concern" qualification, as negative evidence relative to the realization
of its deferred tax assets. The Company has recorded a valuation allowance for
its deferred tax assets that are not assured of realization by either offsetting
existing taxable differences or carryback to open tax years.
The net benefit for the six months ended June 30, 2002 included $6.0
million in benefit related to the cumulative effect of change in accounting
principle.
NOTE H-FINANCING ARRANGEMENTS
The following is a summary of the Company's debt (in thousands):
June 30, December 31,
2002 2001
------------ --------------
Senior notes, Series B, 7.17%, maturing in equal
amounts of $5,500 through 2002 $ 5,500 $ 5,500
Senior notes, Series C, 7.48%, maturing in equal
amounts of $4,500 through 2002 4,500 4,500
Senior notes, Series D, 7.03%, maturing in 2004 20,000 20,000
Senior notes, Series E, 7.28%, maturing in equal
amounts of $12,500 beginning 2004
through 2009 75,000 75,000
Senior notes, Series F, 7.43%, maturing in 2009 43,000 43,000
Senior notes, Series G, 7.04%, maturing in 2006 20,000 20,000
Senior notes, Series H, 7.19%, maturing in 2008 50,000 50,000
Senior notes, Series I, 7.34%, maturing in 2011 37,000 37,000
Seitel, Inc. revolving credit agreement - -
Subsidiary revolving credit agreement,
variable rate 770 1,319
Term loan, variable rate maturing
$1,250 in 2002, $2,500 in 2003
and $4,375 in 2004 8,125 9,375
Demand reducing credit facility, variable rate 2,085 -
------------ --------------
$ 265,980 $ 265,694
============ ==============
Senior Notes: The Company has eight outstanding series of unsecured Senior
Notes totaling $255 million at June 30, 2002. The Agreements provide for
interest on the Series B and C Senior Notes, which is payable semi-annually on
June 30 and December 30, interest on the Series D, E and F Senior Notes to be
payable semi-annually on February 15 and August 15, and interest on the Series
G, H and I Notes to be payable semi-annually on April 15 and October 15. Accrued
interest of $6,130,000 is included in accounts payable and accrued liabilities
at June 30, 2002. As noted above, the Series B and C Senior Notes have an
aggregate principal payment of $10 million due December 31, 2002. The Company is
currently negotiating with its Senior Noteholders to extend the maturity of
these series of notes.
Page 17 of 39
The Standstill Agreements executed by the Company and the Noteholders (see
discussion below under "Non-Compliance with Debt Covenants-Senior Notes")
provide for an increase of 25 basis points on the interest rate under the Senior
Notes from June 21, 2002 through and including October 15, 2002. Additionally,
in July 2002, the Senior Noteholders provided their consent for the sale of the
Company's oil and gas assets. In accordance with the terms of the consent, all
outstanding interest accrued as of August 2, 2002 under the Senior Notes,
totaling $7.1 million, was paid out of the proceeds of the sale of the Company's
oil and gas assets. Also, the consent requires the Company to pay interest
monthly on the notes (aggregating approximately $1.6 million monthly) beginning
September 2, 2002.
Lines of Credit: On June 29, 2001, the Company replaced its existing $75
million line of credit with a new $75 million unsecured revolving line of credit
facility that was to mature on June 29, 2004. As of December 31, 2001, no
amounts were outstanding, and the Company had no availability on this revolving
line of credit during the six months ended June 30, 2002 as a result of its
non-compliance with certain covenants. The Company terminated this facility in
June 2002. In connection with the termination, the Company recorded
approximately $321,000 of deferred financing cost in interest expense.
The Company's wholly owned subsidiary, Olympic Seismic Ltd. ("Olympic"),
has a revolving credit facility, which allows it to borrow up to $5 million
(Canadian dollars) by way of prime based loans, bankers' acceptances or letters
of credit. Prime based loans and bankers' acceptances bear interest at the rate
of the bank's prime rate plus 0.35% per annum and 0.50% per annum, respectively.
Letter of credit fees are based on scheduled rates in effect at the time of
issuance. The facility is secured by Olympic's assets, but is not guaranteed by
Seitel, Inc. or any of its other United States subsidiaries. Available
borrowings under the facility are equivalent to $2 million (Canadian dollars)
plus 75% of trade receivables less than 90 days old, the total not to exceed $5
million (Canadian dollars). The facility is subject to repayment upon demand and
is available from time to time at the Bank's sole discretion. The anniversary
date of the facility was May 16, 2002, which has been extended to August 31,
2002. The Company is currently in negotiations with the Bank to renew this
facility.
Term Loans: On August 28, 2001, the Company's wholly owned subsidiary,
Seitel Data, Ltd., obtained a term loan totaling $10 million for the purchase of
certain seismic data, some of which secures the debt. The loan is for a term of
three years, maturing on October 1, 2004, and bears interest at the rate of
LIBOR plus 2.9%. Monthly principal payments total $208,000.
On January 14, 2002, the Company's wholly owned subsidiary, SEIC Business
Trust (the "Trust"), entered into a demand reducing credit facility to borrow $4
million (Canadian dollars) by way of prime based loans. Payments of $166,670
(Canadian dollars) are due on the last day of each month. The funds were drawn
down on January 30, 2002 to finance the purchase of seismic data. The loans bear
interest at the bank's prime rate plus 0.50%. The facility is secured by the
Trust's assets and guaranteed by Olympic Seismic Ltd. and SEIC Holdings Ltd.
Financial Guaranty: The Company recorded debt of approximately $540,000
relating to its guaranty of a bank's line of credit to Mr. Frame. Mr. Frame has
defaulted on the line of credit. The bank has asserted that the Company is
obligated to repay the outstanding principal amount under the guaranty and has
accelerated the debt. See Note C.
NON-COMPLIANCE WITH DEBT COVENANTS
Senior Notes
The financial covenants in the Senior Notes include, among other
restrictions, maintenance of minimum net worth and limitations on total debt,
interest coverage, liens, debt issuance and disposition of assets. As a result
of the restatement of its financial statements, the Company was not in
compliance with the limitation on total debt covenant in the Senior Note
Agreements dated December 28, 1995 and February 12, 1999 at September 30, 2001.
In addition, as a result of the restatement of its financial statements and the
impairment of oil and gas properties recorded in the fourth quarter of 2001, the
Company was not in compliance with this same financial covenant in these
agreements at December 31, 2001. The Company received an amendment from the
Senior Noteholders that waived noncompliance with the limitation on total debt
covenant in the third and fourth quarters of 2001 and increased the ratio of
allowed debt to total capitalization through March 31, 2003, after which date
the original financial covenants will again be imposed.
As a result of increased interest expense and decreased revenue in the
first quarter of 2002, the Company was not in compliance with the interest
coverage covenant as of March 31, 2002 in the Senior Note Agreements dated
December 28, 1995, February 12, 1999 and October 15, 2001. Additionally, as of
March 31, 2002, the Company was not in compliance with the limitation on
restricted payments and investments covenant in the Senior Note Agreement dated
February 12, 1999. The Company received waivers from the Senior Noteholders for
the covenants it was not in compliance with; such waivers continued through May
24, 2002. Effective June 21, 2002, the Company entered into a standstill
agreement with its Senior Noteholders pursuant to which the Senior Noteholders
agreed not to exercise remedies available to them under the Senior Note
Agreements as a result
Page 18 of 39
of existing defaults until July 17, 2002. Effective as of July 17, 2002, the
Company reached an agreement with the Senior Noteholders to extend the
standstill agreement for an additional 90 days until October 15, 2002. During
the 90 day standstill period, various existing covenants are suspended and
replaced with certain enumerated covenants, including the requirement that the
Company receive Senior Noteholder approval to make certain investments or
payments out of the ordinary course of business, incur additional debt, create
liens or sell assets. The standstill may terminate prior to October 15, 2002 if,
among other things,
(i) there is an event of default by the Company under the standstill
agreement or any subsequent defaults under the existing Senior Note
Agreements;
(ii) the Company defaults on the payments of any non-excluded debt of
$5,000,000 or more; or
(iii) the Company does not provide the Noteholders with a form of
business plan by August 19, 2002, and an acceptable business plan
by August 31, 2002.
As of June 30, 2002, the Company was not in compliance with the interest
coverage covenant in the Senior Note Agreements dated December 28, 1995,
February 12, 1999 and October 15, 2001. However, under the terms of the
standstill agreement, such non-compliance has been waived.
The Company is working with the Senior Noteholders toward a long-term
modification of the Senior Note Agreements. If the Company is unable to obtain
such long-term modifications, the Senior Noteholders could elect to accelerate
the debt. Based on the Company's current financial condition, if the debt were
to be accelerated, the Company would be unable to satisfy the obligation. If
such an acceleration occurred, the Company would seek additional or replacement
sources of financing. However, there can be no assurance that the Company
would be able to obtain such financing on satisfactory terms or at all.
Other Debt
The Company's now terminated Revolving Line of Credit agreement included
interest coverage and leverage ratio covenants, among others. As a result of the
restatement of its financial statements, the Company was not in compliance with
its leverage ratio covenant at September 30, 2001. In addition, as a result of
the restatement and the impairment of oil and gas properties in the fourth
quarter of 2001, the Company was not in compliance with this covenant as of
December 31, 2001. The Company was not in compliance with the interest coverage
or leverage ratio covenants as of March 31, 2002. Due to its non-compliance with
the applicable covenants during the six months ended June 30, 2002, the Company
was unable to utilize this facility. In June 2002, the Company terminated the
facility, which resulted in a write-off of $321,000 of deferred financing costs.
In addition, the Company was not in compliance with the leverage ratio
covenant and the interest coverage covenant of the Seitel Data, Ltd. term loan
at June 30, 2002 and March 31, 2002 and the leverage ratio covenant at September
30, 2001 and December 31, 2001. Additionally, the Company was not in compliance
with the net worth covenant at June 30, 2002. The lender has issued a notice of
default but has not accelerated the debt.
SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN
As a result of the Company's non-compliance with certain of the covenants
of its debt agreements, the Company's 2001 financial statements contain a "going
concern" qualification. The Company's independent auditors have advised the
Company that, if the non-compliance with the debt agreements is not
satisfactorily resolved, their report on the December 31, 2002 financial
statements will also contain a "going concern" qualification.
NOTE I-EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings per Share," basic earnings per
share is computed based on the weighted average number of shares of common stock
outstanding during the periods. Diluted earnings per share is computed based on
the weighted average number of shares of common stock plus the assumed issuance
of common stock for all potentially dilutive securities. The computations of
basic and diluted per share amounts for the Company's continuing operations for
the three and six months ended June 30, 2002 and 2001 consist of the following
(in thousands except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ----------- ----------
Income (loss) from continuing
operations before change in
accounting principle $ (21,086) $ 1,237 $ (27,316) $ 3,230
========== =========== =========== ==========
Basic weighted average shares 25,370 25,060 25,223 24,921
Effect of dilutive securities: (1)
Options and warrants - 1,280 - 1,390
---------- ----------- ----------- ----------
Diluted weighted average shares 25,370 26,340 25,223 26,311
========== =========== =========== ==========
Per share income (loss):
Basic $ (.83) $ .05 $ (1.08) $ .13
Diluted $ (.83) $ .05 $ (1.08) $ .12
Page 19 of 39
(1) During the three months ended June 30, 2002 and 2001 and the six months
ended June 30, 2002 and 2001, a weighted average number of options and
warrants to purchase 8,987,000, 279,000, 8,885,000 and 196,000 shares of
common stock were outstanding, respectively, but were not included in the
computation of diluted per share income because they were antidilutive.
NOTE J-STATEMENT OF CASH FLOW INFORMATION
During the six months ended June 30, 2002 and 2001, the Company had
non-cash additions to its seismic data library totaling $8,616,000 and
$22,643,000, respectively. Of these amounts, $8,348,000 and $20,644,000 resulted
from non-exclusive licensing of data in exchange for ownership of data during
the six months ended June 30, 2002 and 2001, respectively. The balance of
$268,000 and $1,999,000 for the six months ended June 30, 2002 and 2001,
respectively, resulted from non-cash additions related to certain data creation
costs, which were offset from amounts due from the customer for data license
fees. This remaining balance is also included in non-cash sales in the
Consolidated Statements of Cash Flows.
During the six months ended June 30, 2002, capital lease obligations
totaling $7,137,000 were incurred when the Company entered into leases for
property and equipment and a warehouse.
NOTE K-COMMITMENTS AND CONTINGENCIES
Internal and Securities and Exchange Commission Investigation
During the course of a recent internal investigation, the Company
discovered that Mr. Frame and Ms. Valice may have improperly converted corporate
funds for their personal use, including certain unearned advances. The Company
is seeking immediate reimbursement from Mr. Frame of:
. $2,641,038 of "unearned advances" that he drew from Company funds;
. $750,000 of his personal attorneys' fees and legal settlement costs
that he caused the Company to pay;
. $695,805 in his personal automobile racing expenses that he caused
the Company to pay; and
. $148,309 for the purchase of a security system for his home that
he caused the Company to pay.
The Company is also seeking reimbursement from Ms. Valice of $621,293 of
"unearned advances" that she drew from Company funds.
The Company has notified the Securities and Exchange Commission ("SEC")
regarding the findings of the internal investigation. The SEC's Fort Worth
District Office has informed the Company that it has initiated an informal
inquiry into these events and the Company is fully cooperating with the inquiry.
As discussed below, Mr. Frame and Ms. Valice have each filed suit against the
Company alleging, among other things, breach of contract. The Company has filed
counterclaims against each to recover the above described funds owed by each to
the Company.
Litigation
The Company and certain of its former and current officers and directors
have been named as defendants in eleven lawsuits brought as class actions
alleging violations of the federal securities laws, all of which were
consolidated by an Order entered August 7, 2002, under Cause No. 02-1566, styled
In re Seitel, Inc. Securities Litigation, in the United States District Court
for the Southern District of Texas. The complaints generally allege that during
proposed class periods of May 5, 2000 through May 3, 2002 or July 13, 2000
through April 1, 2002, the defendants violated sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, by overstating revenues in violation of
generally accepted accounting principles. The plaintiffs seek an unspecified
amount of actual and exemplary damages, costs of court, pre- and post-judgment
interest and attorneys' fees. The Court has set a hearing for August 30, 2002 on
several motions for appointment of lead plaintiff and approval of lead counsel
for plaintiffs. By agreement of the parties, the defendants are not required to
answer or otherwise respond until after the court selects lead plaintiff and
lead counsel and the plaintiffs file a consolidated amended complaint. No
discovery has been conducted. The Company intends to vigorously defend these
lawsuits.
The Company has been named as a nominal defendant in seven stockholder
derivative actions filed in various courts: Chemical Valley & North Central West
Virginia Carpenters Pension Plan v. Frame, Valice, Hoffman, Pearlman, Craig,
Lerner, Steiglitz, Zeidman, Fuir, and Seitel, Inc., No. 2002-39404, In the
District Court of Harris County, Texas, 151/st/ Judicial District, Almekinder v.
Frame, Valice, Pearlman, Craig, Lerner, Stieglitz, Zeidman, Hoffman, and Seitel,
Inc., No. H-02-2960, In the United States District Court for the Southern
District of Texas; Basser v. Frame, Valice, Kendrick, Pearlman, Fiur, Zeidman,
Stieglitz, Craig, Lerner, and Seitel, Inc., No. H-02-1874, In the United States
Court for the Southern District of Texas; Berger v. Frame, Pearlman, Valice,
Craig, Stieglitz, Lerner, Zeidman, Fiur, and Seitel, Inc., No. 19534-NC, In the
Court of Chancery, State of Delaware, Castle County; Couture v. Frame, Valice,
Craig, Lerner, Stieglitz, Zeidman, Hoffman, and Seitel, Inc., No. 20002-37065,
In the 80th Judicial District Court, Harris County, Texas; Talley v. Frame,
Valice, Pearlman, Craig, Lerner, Stieglitz, Zeidman, Hoffman, and Seitel, Inc.,
In the 151st Judicial District Court, Harris County, Texas; and Zambie v. Frame,
Pearlman, Valice, Craig, Zeidman, Lerner, Steiglitz, Fiur, Ernst & Young, LLP,
and Seitel, Inc., In the 333rd Judicial District Court, Harris County, Texas.
The Plaintiffs generally allege that the defendants breached and conspired to
breach fiduciary duties to the Company and its shareholders by failing to
maintain adequate accounting controls and by using improper accounting and, as
applicable, auditing practices and procedures. Certain of the plaintiffs also
assert causes of action for mismanagement, waste of corporate assets and unjust
enrichment. The Zambie case also alleges professional negligence against Ernst &
Young LLP. The plaintiffs seek judgments for unspecified amounts of compensatory
damages, including return of salaries and other payments, exemplary damages,
attorneys' fees, experts' fees and costs. The Company's Board of Directors has
appointed a special litigation committee, which is conducting an independent
investigation of the allegations asserted in the derivative lawsuits, which it
expects to be completed in September 2002. No discovery has been conducted. The
defendants presently intend to seek to have all of the derivative cases stayed,
including discovery that has been served in the Talley case, pending completion
of that investigation.
The Company sued its former chairman of the board in Seitel, Inc. v.
Pearlman, C.A. No. H-02-1843, In the United States District Court in the
Southern District of Texas. The Company seeks a declaratory judgment with
respect to the employment agreement between Mr. Pearlman and the Company.
Following his resignation as chairman of the board, Mr. Pearlman and the Company
entered into negotiations for a restructuring of his employment agreement.
During the negotiations, a document was created that Mr. Pearlman now alleges
has superseded the employment agreement. The Company believes that neither its
Board of Directors nor any of its committees approved the document. The Company
seeks a judgment declaring the effect of Mr. Pearlman's resignation on the
employment agreement, whether the Company owes any amounts under the employment
agreement as a result of his resignation and, if so, how much, and a judgment
that the subsequent document is not binding on the Company and is not
enforceable by Mr. Pearlman against the Company. Mr. Pearlman has filed
counterclaims asserting that the Board of Directors approved the subsequent
document and asserts causes of action for breach of contract, fraud, negligent
misrepresentation and promissory estoppel. Mr. Pearlman seeks to be realigned as
the plaintiff in the action, and seeks actual damages in an amount exceeding
$4,000,000, punitive damages, attorneys' fees, costs and expenses. No discovery
has been conducted. The Company intends to vigorously pursue its claims and
defend against the counterclaims.
The Company has been sued by its former chief financial officer in Valice
v. Seitel, in the 55th Judicial District Court of Harris County, No. 2002-30195.
Ms. Valice filed suit against the Company alleging a breach of her employment
contract by virtue of her termination. The Company terminated her employment for
what it believes is "cause" under her contract, and the Company believes that
she is entitled to no recovery on her suit. The Company has filed a counter suit
against Ms. Valice seeking to recover over $621,000 in unearned advances she
received from the Company and has failed to repay. The Company intends to
vigorously defend the suit and pursue its counterclaim. Discovery is not yet
underway.
The Company has been sued by its former chief executive officer in Frame v.
Seitel, in the 113th Judicial District Court of Harris County, No. 2002-35891.
Mr. Frame filed suit against the Company alleging a breach of his employment
contract by virtue of his asserted termination. He also alleges a press release
announcing his resignation and advising that the Company was investigating
possible misappropriation of corporate funds for personal use by him was
defamatory. He also seeks a declaratory judgment that certain funds he received
from the Company were proper and do not have to be repaid. The Company has
answered and asserted various defenses including the fact that the allegedly
defamatory statements are true or substantially true and that its publication
was privileged. The Company also has filed a counter suit to recover the
approximately $4,200,000 in corporate funds that the Company believes he
inappropriately converted for his personal use and benefit. The Company intends
to vigorously defend the suit and pursue its counterclaim. Discovery is not yet
underway.
The litigation referred to above is in its early stages. Accordingly, the
Company is unable to determine a range of contingent liabilities associated with
such litigation. However, if one or more of the parties were to prevail against
the Company in one or more of the cases described above, the amounts of any
judgments against the Company or settlements that the Company may enter into
could be material to the Company's financial statements for any particular
reporting period. Based on its present evaluation of the merits of the
litigation referred to above, the Company does not believe any amounts should be
accrued based on SFAS No. 5, "Accounting For Contingencies." Accordingly, the
Company has not recorded any liabilities related to such litigation as of
June 30, 2002.
The Company is currently a party to a dispute with Winthrop Resources
Corporation ("Winthrop") arising out of an equipment lease signed by the parties
in October 2001. The Company sought to lease a majority of the equipment needed
to establish and operate certain data centers from Winthrop. Based on
representations from Winthrop, the Company expected to receive an operating
lease, but the Company determined the lease was, in fact, a capital lease.
Winthrop alleges that the Company's restatement of its financial statements was
a material adverse event and thus prevented further leasing. The Company made
all monthly payments called for under the lease until the July 1, 2002 payment,
at which time the Company suspended payment. The Company filed an application
for a temporary restraining order on July 12, 2002, which was granted on that
same day, seeking to enjoin Winthrop from repossession of certain equipment
pending the hearing on the application for a temporary injunction which hearing
was set for August 9, 2002, but was postponed by the parties. Winthrop filed
suit in Minnesota state court on July 15, 2002 in which it seeks contractual
damages and return of the leased equipment. Winthrop asserts the case in Texas
should be dismissed because the parties agreed in the lease that venue would be
in Minnesota. That motion to dismiss was scheduled to be heard at the August 9
hearing, but now is rescheduled to begin August 30, 2002. The Company and
Winthrop recently entered into a standstill agreement in both the Texas and
Minnesota actions so they can explore a settlement. No settlement agreement has
been executed, although discussions continue. The standstill agreement expires
at the resolution of the August 30 hearing.
In response to several shareholder derivative suits, the board of directors
of Seitel formed a Special Litigation Committee of the board. Robert Knauss was
elected to the board and appointed as the sole member of the Special Litigation
Committee. The task of the Committee is to investigate the allegations in the
shareholder derivative suits and to report back to the board of directors with
the results of the investigation.
New York Stock Exchange Listing
The Company received notification from the New York Stock Exchange ("NYSE")
that it had fallen below the NYSE continued listing standards due to the
Company's stock trading at a price of below $1.00 per share for a consecutive
30-day trading period. In accordance with the rules and procedures of the NYSE,
the Company has six months within which to cure this price per share deficiency,
prior to the NYSE commencing suspension and delisting procedures. The Company
has responded to the notification letter, informing the NYSE of the Company's
intent to cure the deficiency.
Page 20 of 39
Page 21 of 39
NOTE L-INDUSTRY SEGMENTS
Segment information has been prepared in accordance with SFAS No. 131. In
2002, the Company began disclosing its data technology services segment as a
separate reportable segment as a result of meeting certain quantitative
thresholds specified in SFAS No. 131. Selected financial information as of and
for the three and six months ended June 30, 2002 and 2001 is as follows (in
thousands):
Data
Technology Total
Seismic Services Segments
------------ ------------- -----------
As of and for the three months ended June 30, 2002
- --------------------------------------------------
Revenue from external purchasers $ 46,854 248 $ 47,102
Intersegment revenue -- 56 56
Depreciation, depletion and amortization 18,679 1,304 19,983
Impairment of seismic data 25,696 -- 25,696
Cost of sales 56 155 211
Selling, general and administrative expense 6,929 3,613 10,542
Segment operating income (loss) (4,506) (4,768) (9,274)
Capital expenditures (a) 19,021 3,543 22,564
Assets 475,712 19,139 494,851
As of and for the three months ended June 30, 2001(Restated)
- --------------------------------------------------
Revenue from external purchasers 24,647 16 24,663
Depreciation, depletion and amortization 10,356 129 10,485
Cost of sales 444 28 472
Selling, general and administrative expense 6,227 900 7,127
Segment operating income (loss) 7,620 (1,041) 6,579
Capital expenditures (a) 21,952 595 22,547
Assets 481,917 2,345 484,262
As of and for the six months ended June 30, 2002
- ------------------------------------------------
Revenue from external purchasers 69,314 301 69,615
Intersegment revenue -- 107 107
Depreciation, depletion and amortization 35,800 1,989 37,789
Impairment of seismic data 25,696 -- 25,696
Cost of sales 65 242 307
Selling, general and administrative expense 12,568 6,662 19,230
Segment operating income (loss) (4,815) (8,485) (13,300)
Capital expenditures (a) 39,934 11,820 51,754
Assets 475,712 19,139 494,851
As of and for the six months ended June 30, 2001(Restated)
- ------------------------------------------------
Revenue from external purchasers 54,841 69 54,910
Depreciation, depletion and amortization 23,883 246 24,129
Cost of sales 588 55 643
Selling, general and administrative expense 12,171 1,508 13,679
Segment operating income (loss) 18,199 (1,740) 16,459
Capital expenditures (a) 65,977 776 66,753
Assets 481,917 2,345 484,262
___________________
(a) Includes other ancillary equipment.
Page 22 of 39
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2002 2001 2002 2001
--------- ---------- ------- --------
(Restated) (Restated)
Income (loss) from continuing operations
before income taxes:
Total reportable segment
operating income (loss) $ (9,274) $ 6,579 $ (13,300) 16,459
Corporate selling general and
administrative expense (4,938) (1,086) (6,716) (3,933)
Special charges (8,763) (202) (8,787) (677)
Interest expense and other, net (6,104) (3,039) (10,266) (6,049)
Eliminations and other (402) (276) (402) (276)
--------- -------- --------- --------
Income (loss) from continuing
operations before income taxes $ (29,481) $ 1,976 (39,471) $ 5,524
========= ======== ========= ========
NOTE M-COMPREHENSIVE INCOME (LOSS)
The components of Other Comprehensive Income (Loss) for the six months
ended June 30, 2002 and 2001 are as follows (in thousands):
Six Months Ended June 30,
----------------------------
2002 2001
------------ ------------
Net income (loss) $(97,189) $ 813
Unrealized gains (losses) on securities held as available for sale:
Unrealized net holding gains (losses), net of income tax
benefit of $0 and $(256), respectively,
arising during period 1 (328)
Reclassification adjustment for losses included in
income, net of tax benefit of $75 305 -
Foreign currency translation adjustments 1,425 (853)
-------- -----
Comprehensive income (loss) $(95,458) $(368)
======== =====
NOTE N-RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," effective for business combinations after June
30, 2001 and No. 142, "Goodwill and Other Intangible Assets," effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives are no longer amortized
but are subject to annual impairment tests in accordance with the Statements.
Other intangible assets continue to be amortized over their useful lives. The
Company adopted the new rules on accounting for goodwill and other intangible
assets on January 1, 2002. The adoption did not have an impact on the Company's
financial position or results of operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. This Statement is effective for the Company on January
1, 2003. The Company does not believe the adoption of this standard will have a
material effect on the financial position or results of operations of the
Company.
Page 23 of 39
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and provides a single accounting model for long-lived
assets to be disposed of. The Company adopted this standard January 1, 2002. The
adoption of this standard did not have an impact on the Company's financial
position or results of operations.
NOTE 0 - RELATED PARTY TRANSACTION
The Company, through its wholly owned subsidiary Olympic Seismic Ltd., paid
approximately $31,000 in 2001 and approximately $715,000 during the first six
months of 2002 to Aeroscan International Inc. ("Aeroscan") for certain
acquisition data services. Approximately 4% of the equity of Aeroscan is owned
by each of Robert Simon, President of Seitel Data, Ltd., a wholly owned
subsidiary of the Company, and Kevin Callaghan, Chief Operating Officer of the
Company, and an additional approximately 6% of the equity of Aeroscan is owned
by other officers and employees of the Company. Mr. Callaghan also serves as a
director of Aeroscan.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION OF THE COMPANY'S FINANCIAL STATEMENTS
The Company's financial statements have been prepared on a basis that
assumes the Company will continue as a going concern. The Company is not in
compliance with various covenants in its debt agreements. The independent
auditors' report on the Company's 2001 financial statements contains a "going
concern" qualification based on the Company's non-compliance with its debt
agreements, which indicates their belief that there is substantial doubt about
the Company's ability to continue to recover assets and satisfy liabilities in
the normal course of business. The Company's independent auditors have advised
the Company that, if the Company's non-compliance with its debt agreements is
not satisfactorily resolved, the auditors' report relative to the Company's
December 31, 2002 financial statements would include a "going concern"
qualification. The Company is working with its lenders toward a long-term
modification of the Senior Note Agreements, but there can be no assurance that
the Company will be successful in its negotiations. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability of assets or the amounts of liabilities that may result
from the outcome of this uncertainty.
Because of the level of the Company's debt and the Company's non-compliance
with certain covenants, (i) a substantial portion of the Company's cash flow
from operations must be dedicated to debt service and payments of such
obligations and, to the extent so used, will not be available for operational
purposes, (ii) the Company's ability to obtain additional financing in the
future may be limited, and (iii) the Company's flexibility in reacting to
changes in the operating environment and economic conditions may be limited. If
the Company is unable to successfully conclude its negotiations with its
lenders, it may be forced to take actions such as reducing or delaying capital
expenditures, reducing costs, selling assets, refinancing or restructuring its
debt or other obligations and seeking additional equity capital. The Company may
not be able to take any of these actions on satisfactory terms or at all.
As a result of the Company's current financial condition and the
possibility that the Company may be unable to satisfy its future obligations,
certain customers of the Company have refused to enter into large data licensing
agreements for delivery of future data and some contractors have refused to
provide services to the Company without receiving payment in advance. A
significant loss of customers or agreements with contractors may have a material
adverse effect on the financial condition of the Company.
SIGNIFICANT ACCOUNTING POLICIES
Revenue from Data Acquisition
Revenue from the creation of new seismic data under the Company's
acquisition contracts is recognized using the percentage-of-completion method of
accounting based upon costs incurred to date as a percentage of total estimated
costs. Under these contracts, the Company creates new seismic data designed in
conjunction with its customers and specifically suited to the geology of the
area using the most appropriate technology available. Contracts typically result
in one or more customers paying 65% or more of the direct creation costs in
exchange for a license or licenses to use the resulting data. Customers make
periodic payments throughout the creation period, which generally correspond to
costs to be incurred. These payments are non-refundable once the costs of
creation are incurred. The creation process generally occurs in the following
stages: permitting, surveying, drilling, recording and processing. At each
stage, the customers receive legally enforceable rights and access to, and the
benefits of, the results of all work performed. The customers also receive
access to and use of the newly acquired, processed data. The customers may have
exclusive access to the work performed and exclusive use of the newly acquired,
processed data for a limited term, which is generally less than nine months
after final delivery of the processed data. The customers' access to and use of
the results of the work performed and of the newly acquired, processed data is
governed by a long-term (generally twenty years or more) license agreement,
which is a separate agreement from the acquisition contract. The Company's
acquisition contracts require the customer either to have a license agreement in
place or to execute one at the time the acquisition contract is signed. The
Company maintains sole ownership of the newly acquired data, which is added to
its library, and is free to license the data to other customers when the
original customers' exclusivity ends.
Revenue from Data Licenses
The Company licenses data from its seismic data library to customers under
four basic forms of contracts.
Under the first form of contract, the customer licenses and selects data
from the data library at the time the contract is entered into.
Under the second form of contract, referred to as a "review and possession"
contract, the customer obtains the right to review a certain quantity of data
for a limited period of time. During the review period, the customer may select
specific data from that available for review to hold long-term under its license
agreement. Any data not selected for long-term licensing must be returned to the
Company at the end of the review period.
Under the third form of contract, referred to as a "library card" contract,
the customer initially receives only access to data. The customer may then
select specific data, from the collection of data to which it has access, to
hold long-term under its license agreement. The lengths of the selection periods
under the library card contracts vary.
Under the fourth form of contract, referred to as a "review only" contract,
the customer obtains rights to review a certain quantity of data for a limited
period of time, but does not obtain the right to select specific data to hold
long-term.
The usage of all data delivered to the customer, whether for review only or
to hold long-term, is governed by a license agreement, which is a separate
agreement from the contracts. The Company's contracts require the customer
either to have a license agreement in place or to execute one at the time the
contract is signed. The term of the license agreement is generally twenty years
or more and governs all data delivered to the customer
Page 24 of 39
during the term. Payment terms under the contracts are typically less than
eighteen months. All payments due are non-cancelable and all payments made are
non-refundable. The customer has complete access to all available data covered
by the contracts on the date the contract is executed. The contracts permit
selection of the data in its present form, and the Company is under no
obligation to make any enhancements, modifications or additions to the data
unless specific terms are included, upon which revenue would be deferred until
performance is met. The customer's rights under the contracts are
non-transferable without payment of an additional fee. Copies of the data are
available to the customer immediately upon request.
Revenue from licensing of seismic data is recognized when the Company has
contracted with the customer for a fixed sales price; a licensing agreement is
in place; the customer has selected specific data under the terms of the
contract or the contract has expired without full selection having occurred; and
collectibility of the sales price is reasonably assured. The Company recognizes
revenue for the particular data selected as each specific selection of data is
made by the customer. If selections are not completed by the expiration date of
the contract, the Company then recognizes any remaining revenue under that
contract. In each case (selection or expiration), the earnings process is
complete. The Company does not recognize revenue for amounts billed in advance
of being earned until these conditions are met. For revenue that is deferred,
the Company defers the direct costs (primarily commissions) related to the
revenues. Revenue from licensing of seismic data is presented net of revenue
shared with other entities.
Revenue from Non-Cash Data Licenses
In certain cases, the Company grants its customer a non-exclusive license
to specific, selected data or access to data to be used in its operations (not
for resale) in exchange for ownership of seismic data from the customer. These
exchanges are referred to as non-monetary or non-cash data exchanges. Where the
customer receives access to data, the customer may then select specific data to
hold under a long-term license; the lengths of the selection periods vary, but
are generally three to five years. The Company records a data library asset for
the seismic data acquired at the time the contract is entered into and defers
revenue recognition on the transaction until the customer selects the data.
These transactions are accounted for as non-monetary exchanges since the data
that the Company receives is distinct from the data that it is licensing to the
customer. These transactions are valued at the fair value of the data received
or delivered, whichever is more readily determinable.
The Company determines the fair value of the data exchanged by first
determining the value of the license granted to the customer. It does so by
evaluating the range of cash transactions by the Company for licenses of similar
data during either the prior six months (for licenses in the United States) or
the prior twelve months (for licenses in Canada). In evaluating the range of
cash transactions, the Company does not consider transactions that are
disproportionately high or low. The Company then also considers the value of the
data received from the customer. In determining the value of the data received,
the Company considers the age, quality, current demand and future marketability
of the data, as well as the cost that would be required to create the data. In
significant exchanges, the Company also engages an independent third party to
confirm the fairness of the Company's valuation of the data received. In the
United States, the Company applies a limitation on the value it assigns per
square mile on the data exchanged. In Canada, in the event of a difference
greater than 2% between the value of the license granted and the value of the
data received, the Company assigns the lower value to the exchange. In 2001, the
Company obtained third party fairness opinions on all non-cash exchanges valued
at $800,000 or more. Effective January 1, 2002, the Company intends to obtain
third party fairness opinions on all non-cash exchanges of $500,000 or more. The
Company intends to obtain these opinions on an annual basis, usually in
connection with the preparation of its annual financial statements.
Data Bank Amortization and Change in Accounting Principle
Prior to the change in accounting principle that relates to the Company's
created seismic data and is described below, the Company's accounting policy
with respect to amortization of its data library was as follows: (a) the seismic
data that the Company creates was amortized on the income forecast method, which
is discussed below, (b) purchased data is generally amortized on a straight-line
basis over 10 years and (c) significant purchased data (those surveys that are
individually in excess
Page 25 of 39
of five percent of the net book value of the Company's seismic library) is
amortized using the greater of the income forecast method or the 10-year
straight-line method. The policies described in (b) and (c) did not change as a
result of the change in accounting principle.
The Company applies the income forecast method by forecasting the ultimate
revenue expected to be derived from a particular data survey over its estimated
useful economic life. That forecast is made by the Company at project
initiation. Generally, the Company has estimated that it will earn revenue
equivalent to 233% of the cost it incurs in creating the data, which yields an
amortization rate of approximately 43% of revenue. If and when the revenue
performance of a seismic survey indicates that the data may not generate the
originally forecasted revenue, the Company reevaluates the expected future
revenue of the survey. If the Company determines the ultimate revenue for the
survey is expected to be less than the original estimate of total revenue it
made at project initiation, the Company increases the amortization rate
attributable to future revenue.
In the second quarter of 2002, the Company evaluated and changed the method
by which it amortizes its created seismic library in an effort to increase the
transparency of its methodology and to be more consistent with other industry
competitors. Under its new accounting policy, the Company adopted an accounting
policy that calculates created data amortization as the greater of the income
forecast method or 10-year straight-line amortization. This policy is applied on
a cumulative basis, at the individual survey level and on a quarterly basis.
Under this policy, the Company first records amortization using the income
forecast method. The cumulative income forecast amortization is then compared to
the cumulative straight-line amortization determined using a 10-year life based
on the age of the survey. If the cumulative straight-line amortization is higher
for a specific survey, additional amortization is recorded. This requirement is
applied regardless of future-year revenue estimates for the survey and does not
consider the existence of deferred revenue with respect to the survey.
Data Bank Impairment
As events or conditions require, the Company evaluates the recoverability
of its seismic library in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company evaluates its seismic library for impairment
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. The Company evaluates its seismic data library in the
following components: (a) Gulf of Mexico offshore data, (b) Gulf of Mexico
onshore data, (c) Rocky Mountain region data (including U.S. areas outside the
Gulf of Mexico area), (d) Canadian data and (e) international data outside of
North America (each being hereinafter referred to as a "library component").
These library components were determined in a manner consistent with the
management of the Company's operations, and the Company believes that they
constitute the lowest levels of independently identifiable cash flows.
In accordance with SFAS No. 144, the impairment evaluation is based first
on a comparison of the undiscounted cash flows and the carrying value of the
library component, and, if necessary, the second step of the impairment
evaluation compares the fair value of the library component, which is generally
based on discounting forecasts of cash flows associated with the assets, to the
library component's carrying amount. Any impairment loss is recorded as the
difference between the library component's carrying amount and fair value.
For purposes of evaluating potential impairment losses, the Company
estimates the future cash flows attributable to a library component by
evaluating historical revenue trends, oil and gas prospectivity in particular
regions, general economic conditions affecting its customer base and expected
changes in technology. The cash flow estimates exclude expected future revenues
attributable to non-monetary exchanges and future data creation projects.
The estimation of future cash flows is highly subjective, inherently
imprecise and can change materially from period to period based on the factors
described in the preceding paragraph, among others. Accordingly, if conditions
change in the future, the Company may record further impairment losses relative
to its seismic library, which could be material to any particular reporting
period.
Page 26 of 39
RESULTS OF OPERATIONS
Overview
During the three and six months ended June 30, 2002 and 2001, the Company's
income (loss) from continuing operations, net of taxes, was comprised of the
following components (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- --------
Income (loss) from operations before
significant items
Significant items, net of tax: $ 3,643 $ 1,368 $ (2,571) $ 3,670
Impairment of seismic data (16,702) - (16,702) -
Unusual professional fees (1,180) - (1,180) -
Special charges (5,696) (131) (5,712) (440)
Deferred tax asset valuation allowance (1,151) - (1,151) -
--------- -------- --------- --------
Income (loss) from continuing operations $ (21,086) $ 1,237 $ (27,316) $ 3,230
========= ======== ========= ========
The increase in income from operations before significant items for the
three months ended June 30, 2002 and 2001 was primarily due to an increase in
the licensing of seismic data, net of related amortization expense and other
direct expenses, offset by additional expense in the 2002 period resulting from
the change in accounting principle. The decrease in income (loss) from
operations before significant items for the six months ended June 30, 2002 and
2001, primarily resulted from additional straight-line amortization on created
seismic data recorded in 2002 due to the change in accounting principle for its
created seismic data library as further discussed below.
The other components of income (loss) from continuing operations are
discussed below.
Seismic Operations
Revenue from the seismic division was $46,854,000 in the second quarter of
2002 compared to $24,647,000 in the second quarter of 2001. This increase in
revenue was due primarily to an increase in selections of specific data on
contracts whose revenue is initially deferred and a decrease in the deferral of
revenue on new licenses of existing data from the Company's data library.
Revenue from the seismic division was $69,314,000 in the first six months of
2002 compared to $54,841,000 in the first six months of 2001. This increase in
revenue was primarily due to an increase in selections of specific data on
contracts whose revenue was initially deferred. The following table summarizes
the components of the Company's seismic revenue for the three and six months
ended June 30, 2002 and 2001 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
Acquisition revenue $ 4,404 $ 6,086 $ 13,415 $ 15,806
New resale invoices 26,125 26,479 33,352 55,558
Deferral of revenue (13,829) (17,827) (17,276) (36,980)
Selections of data 29,927 9,324 39,353 19,561
Other 227 585 470 896
----------- ----------- ----------- ------------
Total seismic revenue $ 46,854 $ 24,647 $ 69,314 $ 54,841
=========== =========== =========== ============
Non-cash revenue $ 16,029 $ 3,330 $ 21,668 $ 7,693
=========== =========== =========== ============
During the six months ended June 30, 2002, the Company recorded reductions to
its seismic data library, which total approximately $78.5 million and are set
forth below:
(a) $26.0 million of amortization expense, as a result of applying its
amortization policy to revenues;
(b) a cumulative effect of a change in accounting principle of approximately
$17.2 million relating to the Company's created seismic data library, which
was recorded as of January 1, 2002;
(c) required amortization expense of approximately $4.4 million and $9.6
million in the three and six months ended June 30, 2002, respectively,
relating to the Company's new accounting policy with respect to created
seismic data; and
(d) an impairment loss of approximately $25.7 million related to its Rocky
Mountain region data and its Gulf of Mexico offshore data in accordance
with SFAS No. 144.
See discussion of these items below.
Depreciation, depletion and amortization consists of seismic data library
amortization and depreciation of fixed assets. Seismic data library amortization
was $18,715,000 during the second quarter of 2002 compared to $10,387,000 during
the second quarter of 2001 and was $35,551,000 during the first six months of
2002 compared to $23,695,000 during the first six months of 2001. The amount of
seismic data amortization fluctuates based on the level of seismic revenue, the
mix of data to which the revenue relates and the amount of straight-line
amortization required. As a percentage of revenue from licensing seismic data,
seismic data library amortization was 40% and 43% for the second quarters of
2002 and 2001, respectively, and was 52% and 44% for the first six months of
2002 and 2001, respectively. The decrease in the percentage between the second
Page 27 of 39
quarter periods was primarily due to increased revenue on 3D onshore purchased
data libraries that are amortized on a straight-line basis, which resulted in an
average amortization rate related to this data of 14% for the second quarter of
2002, partially offset by additional straight-line amortization on created
programs under the Company's newly adopted amortization policy regarding created
seismic data. The increase in the percentage between the six month periods was
primarily due the additional straight-line amortization on created programs
under the Company's newly adopted amortization policy. During the second quarter
and first six months of 2002, the Company recorded additional straight-line
amortization of $4,359,000 and $9,560,000, respectively, under its new
amortization policy.
During the second quarter of 2002, the Company recorded a non-cash
impairment charge on its Gulf of Mexico offshore and its Rocky Mountain region
seismic data totaling $25,696,000. Based on industry conditions and recent
revenue performance, the Company determined that its estimates of future cash
flows on these seismic data library components would not be sufficient to
recover the carrying value of such data. As a result, the Company estimated the
fair value of these seismic data components by discounting the estimated net
cash flows of the data. The resulting difference between the estimated fair
value and the carrying value was recorded as an impairment loss during the
second quarter of 2002.
Corporate and Other
The Company's selling, general and administrative expenses were $15,480,000
and $25,946,000 during the second quarter and first six months of 2002,
respectively, compared to $8,213,000 and $17,612,000 during the second quarter
and first six months of 2001, respectively. The increases between periods
primarily resulted from an increase in variable expenses, primarily commissions,
associated with the increases in revenue, as well as an increase in overhead
costs primarily related to salaries and consulting fees related to the growth of
the Company, including overhead costs associated with its wholly owned
subsidiary, Seitel Solutions. Additionally, during the second quarter of 2002,
the Company incurred legal and professional fees totaling $1,815,000 in
connection with (i) the Company's investigation into certain actions by former
executives, (ii) negotiations with its Senior Noteholders, (iii) review of the
Company's operations and development of a long-range business plan in connection
with its restructuring, and (iv) the Company's derivative and shareholder
lawsuits. Beginning July 1, 2002, the Company has implemented certain cost
reduction measures, including a reduction in work force, primarily at Seitel
Solutions. The Company is continuing to evaluate additional ways to reduce its
overhead costs. As a percentage of total revenue, these expenses were 33% and
37% for the second quarter and first six months of 2002, respectively, and 33%
and 32% for the second quarter and first six months of 2001, respectively.
During the three and six months ended June 30, 2002 and 2001, the
Company incurred various charges and expenses that have been classified as
special charges, which are set forth below (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- --------------------------------------
Description 2002 2001 2002 2001
- ----------------------------------------- ----------------- ----------------- ----------------- -----------------
Company funds improperly
converted for the personal
benefit of former executive $ 13 $ 202 $ 37 $ 677
Allowance for former executives'
advances and receivables 4,951 - 4,951 -
Pearlman common stock issuance
and cash payment 3,799 - 3,799 -
----------------- ----------------- ----------------- -----------------
$ 8,763 $ 202 $ 8,787 $ 677
================= ================= ================= =================
Company funds improperly converted for the personal benefit of former
executive - During the three months ended June 30, 2002, the Company's former
president and chief executive officer, Paul Frame, resigned, and the Company's
former chief financial officer, Debra Valice, was terminated. In connection with
the departure of these executives from the Company, the Company's Board of
Directors initiated an investigation into the possible improper conversion of
corporate funds for personal use. Based on the results of the investigation, the
Company believes that, during the period from January 1, 2001 through the date
of his resignation, Mr. Frame caused the Company to pay certain expenses that
were personal in nature. These costs were previously reflected in "selling,
Page 28 of 39
general and administrative" expenses in its 2001 financial statements and
financial statements for the three months ended March 31, 2002, but have been
reclassified to "special charges" as shown above.
The Company is seeking reimbursement from Mr. Frame for these costs, and
the Company believes it has meritorious arguments in its pursuit of
reimbursement of these funds. Given the uncertainty surrounding the recovery of
these costs, the Company has continued to report these costs as expenses for the
applicable periods.
Allowance for former executives' advances and receivables - Prior to their
departure from the Company, the Company had advanced or loaned Mr. Frame and Ms.
Valice an aggregate of $4.4 million. Approximately $1.2 million of such loans
were secured by shares of the Company's common stock and had been reported as a
component of equity in the Company's financial statements. The Company is
seeking payment by these former executives for these advances and loans. In
addition, the Company recorded debt of approximately $540,000 relating to its
guaranty of a bank's line of credit to Mr. Frame. Mr. Frame has defaulted on the
line of credit, and the bank has asserted that the Company is obligated to repay
the outstanding principal amount under this guaranty and has accelerated the
debt. The Company intends to seek reimbursement from Mr. Frame for this amount.
The Company has terminated its guaranty arrangement, such that it is not a
guarantor for any borrowings in excess of $540,000. However, given the
uncertainty surrounding the ability of the Company to collect these amounts, the
Company has provided a full allowance for these amounts as of June 30, 2002. The
Company believes it has meritorious arguments in its pursuit of these
recoveries.
Pearlman common stock issuance and cash payment - In February 2002, the
Board of Directors of the Company accepted the resignation of Herbert M.
Pearlman as Chairman of the Board. In connection therewith, Mr. Frame entered
into a modified employment agreement with Mr. Pearlman, which the Board of
Directors of the Company did not authorize Mr. Frame to sign. In April 2002,
pursuant to Mr. Frame's direction, the Company issued Mr. Pearlman 250,000
shares of Company stock valued at $2,277,500 and made a cash payment of
$1,521,499 for the associated personal tax liability. The Company believes that
there was no valid modified employment agreement and believes that such
agreement is not binding on the Company or enforceable by Mr. Pearlman. The
share issuance and related cash payment are considered by the Company as an
advance of amounts under his existing employment agreement. Due to the inherent
uncertainty associated with the Company's litigation with Mr. Pearlman, the
Company recorded a full allowance for this advance during the three months ended
June 30, 2002. Also, the Company has suspended payments that might otherwise be
due Mr. Pearlman under his existing employment agreement, and the Company is not
recording any further related expense under that agreement.
Interest expense, net, was $5,540,000 and $3,039,000 for the second
quarters of 2002 and 2001, respectively, and $10,184,000 and $6,049,000 for the
six months ended June 30, 2002 and 2001, respectively. The increase in net
interest expense and other was primarily due to an increase in interest expense
related to the Series G, H and I Senior Notes issued in October and December
2001 that was partially offset by a decrease in interest expense related to the
Company's Revolving Line of Credit, as no balances were outstanding during the
second quarter and first six months of 2002. The increase was also due to the
write-off of deferred financing costs of $321,000 associated with the Company's
termination of its Revolving Line of Credit and to $370,000 paid by the Company
to secure amendments to its Senior Notes in the first six months of 2002.
During June 2002, the Company decided to sell certain marketable securities
that it held. As a result, the unrealized loss that was recorded as a component
of equity was recognized in the income statement as a permanent impairment of
the marketable security during the second quarter of 2002. In July 2002, the
Company completed the sale of these marketable securities and will report an
additional loss of approximately $158,000 in the third quarter of 2002.
The Company's effective income tax rate from continuing operations was 28%
and 31% for the second quarter and first six months of 2002, respectively,
compared to 37% and 42% for the second quarter and first six months of 2001,
respectively. The Company's effective tax rate for these periods differed from
the amount that results from applying the U.S. Federal income tax rate of 35%
due principally to the effect of foreign taxes, non-deductible expenses, and in
the three and six months ended June 30, 2002, valuation allowances.
Page 29 of 39
Discontinued Operations
In June 2002, the Company's Board of Directors unanimously adopted a plan
to dispose of the Company's oil and gas operations by sale. Accordingly, the
Company's consolidated financial statements have been revised to report the oil
and gas operations as discontinued operations.
In connection therewith, on July 3, 2002, the Company entered into a
purchase and sale agreement with an independent oil and gas company for the sale
of a majority of its oil and gas assets. The initial sale was completed on
August 2, 2002. The Company received cash proceeds of $23.8 million, with a
final adjustment, if any, to be made within 90 days following closing. The
purchase and sale agreement gives the purchaser the option to purchase all or a
portion of the Company's remaining oil and gas assets until September 2, 2002.
If all assets are not sold in connection with this option, the Company will
continue to market these assets for sale. The Company expects the disposal to be
completed by June 30, 2003.
As a result of its decision to dispose of these operations, the Company
recorded a non-cash impairment loss of $56,764,000, determined as the sum of (i)
sale proceeds received, net of cost to sell, (ii) the present value of future
net cash flows from its remaining estimated proved oil and gas reserves and
(iii) the lower of cost or fair value of unproved properties, compared to the
net carrying value of its oil and gas assets.
Revenue from the discontinued operations was $3,743,000 and $5,788,000 for
the three months ended June 30, 2002 and 2001, respectively, and $6,386,000 and
$13,865,000 for the six months ended June 30, 2002 and 2001, respectively.
Pre-tax losses from the discontinued operations were $57,835,000 and $6,854,000
for the three months ended June 30, 2002 and 2001, respectively, and $58,711,000
and $3,718,000 for the six months ended June 30, 2002 and 2001, respectively.
The decrease in revenue between periods was primarily due to lower market prices
in 2002 and, to a lesser extent, lower production volumes. The decrease in
pre-tax loss from the discontinued operations was primarily due to the loss on
the sale of the assets of $56,764,000 recorded during the second quarter of
2002.
Change in Accounting Principle
In the second quarter of 2002, the Company evaluated and changed the method
by which it amortizes its created seismic library in an effort to increase the
transparency of its methodology and to be more consistent with other industry
competitors. Under its new accounting policy, the Company calculates created
data amortization as the greater of the income forecast method or 10-year
straight-line amortization. The Company reported the adoption of this new method
as a cumulative effect of a change in accounting principle retroactively as of
January 1, 2002. Accordingly, the Company recorded a pre-tax charge of
$17,156,000 (after-tax charge of $11,162,000) as of January 1, 2002.
LIQUIDITY AND CAPITAL RESOURCES
On August 2, 2002, in connection with the sale of the majority of the
Company's oil and gas assets, the Company received cash proceeds of $23.8
million. Pursuant to the Noteholders' Consent, on such date, the Company paid
the Noteholders $7.1 million of such proceeds, which represented accrued
interest owed to the Noteholders.
As of August 15, 2002, the Company's cash balance was $20.4 million, of
which $8.9 million was in an escrow account in accordance with the Noteholders'
Consent in connection with such sale.
The Company's cash provided by (used in) operations was $16,731,000 and
$3,385,000 for the six months ended June 30, 2002 and 2001, respectively. The
increase from 2001 to 2002 was primarily attributable to increased collections
from customers.
Page 30 of 39
Senior Notes
On October 15, 2001, the Company completed the first funding, totaling $82
million, of a private placement of three series of unsecured Senior Notes
totaling $107 million. The second funding, for an additional $25 million, was
completed on December 27, 2001. The Series G Notes total $20 million, bear
interest at a fixed rate of 7.04% and mature on October 15, 2006. The Series H
Notes total $50 million, bear interest at a fixed rate of 7.19% and mature on
October 15, 2008. The Series I Notes total $37 million, bear interest at a fixed
rate of 7.34% and mature on October 15, 2011. Interest on the Series G, H and I
Notes is payable semi-annually on April 15 and October 15. As of August 15,
2002, the balance outstanding on the Series G, H and I Notes was $107 million.
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 the Series D, E and F Notes is payable semi-annually on
February 15 and August 15. As of August 15, 2002, the balance outstanding on the
Series D, E and F Notes was $138 million.
On December 28, 1995, the Company completed a private placement of three
series of unsecured Senior Notes totaling $75 million. The Company
contemporaneously issued its Series A Notes and Series B Notes, which total
$52.5 million and bear interest at a fixed rate of 7.17%. On April 9, 1996, the
Company issued its Series C Notes, which total $22.5 million and bear interest
at a fixed rate of 7.48%. The Series A Notes matured on December 30, 2001. 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 Series B and C Notes is payable semi-annually on June 30 and
December 30. As of August 15, 2002, the balance outstanding on the Series A, B,
and C Notes was $10 million.
The Standstill Agreements executed by the Company and the Noteholders (see
discussion below) provide for an increase of 25 basis points on the interest
under the Senior Notes from June 21, 2002 through and including October 15,
2002. Additionally, in July 2002, the Senior Noteholders provided their consent
for the sale of the Company's oil and gas assets. In accordance with the terms
of the consent, all outstanding interest accrued as of August 2, 2002 under the
Senior Notes totaling $7.1 million was paid out of the proceeds of the closing.
Also, the Noteholders' Consent requires the Company to pay interest monthly on
the notes (aggregating approximately $1.6 million) beginning September 2, 2002.
Lines of Credit
On June 29, 2001, the Company replaced its existing $75 million line of
credit with a new $75 million unsecured revolving line of credit facility that
was to mature on June 29, 2004. As of December 31, 2001, no amounts were
outstanding, and the Company had no availability on the revolving line of
credit. Due to the Company's inability to borrow on the line of credit resulting
from debt covenant violations, the Company terminated this facility in June
2002.
The Company's wholly owned subsidiary, Olympic Seismic Ltd. ("Olympic"),
has a revolving credit facility which allows it to borrow up to $5 million
(Canadian dollars) by way of prime based loans, bankers' acceptances, or letters
of credit. Prime based loans and bankers' acceptances bear interest at the rate
of the bank's prime rate plus 0.35% per annum and 0.50% per annum, respectively.
Letter of credit fees are based on scheduled rates in effect at the time of
issuance. The facility is secured by Olympic's assets, but is not guaranteed by
Seitel, Inc. or any of its other United States subsidiaries. Available
borrowings under the facility are determined as $2 million (Canadian dollars)
plus 75% of trade receivables less than 90 days old, the total not to exceed $5
million (Canadian dollars). The facility is subject to repayment upon demand and
is available from time to time at the Bank's sole discretion. The anniversary
date of the credit facility was May 16, 2002, which has been extended to August
31, 2002. The Company is currently in negotiations with the bank to renew this
facility. As of August 15, 2002, the balance outstanding on this revolving line
of credit was $799,000. Olympic is not a party to any of the debt issued by
Seitel, Inc.
Term Loans
On August 28, 2001, the Company's wholly owned subsidiary, Seitel Data,
Ltd., obtained a term loan totaling $10 million for the purchase of certain
seismic data, some of which secures the debt. The term of the loan is three
years, with maturity on October 1, 2004. The loan bears interest at the rate of
LIBOR plus 2.9%. Monthly principal payments total $208,000. The balance
outstanding on this loan on August 16 2002 was $7,708,000. This term loan has
similar financial covenants to the Company's Revolving Line of Credit.
On January 14, 2002, the Company's wholly owned subsidiary, SEIC Business
Trust (the "Trust"), entered into a demand reducing credit facility to borrow $4
million (Canadian dollars) by way of prime based loans. Payments of $166,670
(Canadian dollars) are due on the last day of each month. The funds were drawn
down on January 30, 2002 to finance the purchase of seismic data. The loans bear
interest at the bank's prime rate plus 0.50%. The facility is secured by the
Trust's assets and guaranteed by Olympic Seismic Ltd. and SEIC Holdings Ltd. The
balance outstanding on this loan on August 15, 2002 was $1,925,000.
Other Debt
During 2001 and 2002, the Company entered into capital leases for the
purchase of computer and data technology center furniture and equipment. The
lease agreements are for terms of approximately two years. Monthly principal and
interest payments total $335,000. As a result of a dispute with the lessor, the
Company has suspended payments on this lease beginning July 1, 2002, until such
time that a resolution is reached. The Company is currently in negotiations with
the lessor to revise the terms of the lease. The balance outstanding under these
capital leases was $6,028,000 on August 15, 2002.
On April 30, 2002, Olympic Seismic Ltd. ("Olympic") entered into a sale
leaseback agreement on a building and land located in Calgary, Alberta, Canada.
Proceeds of the sale were $3.6 million (Canadian dollars). The proceeds were
used to pay off Olympic's revolving line of credit and for general corporate
purposes. The term of the lease is a 20-year capital lease with lease payments
of: $336,000 (Canadian dollars) in years 1-5; $370,860 (Canadian dollars) in
years 6-10; $409,500 (Canadian dollars) in years 11-15; and $452,340 (Canadian
dollars) in years 16-20. The transaction resulted in a gain on the sale of
$737,000 which has been deferred and is being recognized into income over the
term of the lease.
Non-Compliance with Debt Covenants
Senior Notes
The financial covenants in the Senior Notes include, among other
restrictions, maintenance of minimum net worth and limitations on total debt,
interest coverage, liens, debt issuance and disposition of assets. As a result
of the restatement of its financial statements, the Company was not in
compliance with the limitation on total debt covenant in the Senior Note
Agreements dated December 28, 1995 and February 12, 1999. In addition, as a
result of the restatement of its financial statements and the impairment of oil
and gas properties recorded in the fourth quarter of 2001, the Company was not
in compliance with these same financial covenants in these agreements at
December 31, 2001. The Company received an amendment from the Senior Noteholders
that waived noncompliance with the limitation on total debt covenant in the
third and fourth quarters of 2001 and increased the ratio of allowed debt to
total capitalization through March 31, 2003, after which date the original
financial covenants will again be imposed.
As a result of increased interest expense and decreased revenue in the
first quarter of 2002, the Company, was not in compliance with the interest
coverage covenant as of March 31, 2002 in the Senior Note Agreements dated
December 28, 1995, February 12, 1999 and October 15, 2001. Additionally, as of
March 31, 2002, the Company was not in compliance with the limitation on
restricted payments and investments covenant in the Senior Note Agreement dated
February 12, 1999. The Company received waivers from the Senior Noteholders for
the covenants it was not in compliance with; such waivers continued through May
24, 2002. Effective as of June 21, 2002, the Company entered into a standstill
agreement with its Senior Noteholders pursuant to which the Noteholders agreed
not to exercise remedies available to them under the Senior Note Agreements as a
result
Page 31 of 39
of existing defaults until July 17, 2002. Effective as of July 17, 2002, the
Company reached an agreement with the Senior Noteholders to extend the
standstill agreement for an additional 90 days until October 15, 2002. During
the 90 day standstill period, various existing covenants are suspended and
replaced with certain enumerated covenants, including the requirement that the
Company receive Senior Noteholder approval to make certain investments or
payments out of the ordinary course of business, incur additional debt, create
liens or sell assets. The standstill may terminate prior to October 15, 2002 if,
among other things,
(i) there is an event of default by the Company under the standstill
agreement or any subsequent defaults under the existing Senior Note
Agreements;
(ii) the Company defaults on the payments of any non-excluded debt of
$5,000,000 or more; or
(iii) the Company does not provide the Noteholders with a form of business
plan by August 19, 2002, and an acceptable business plan by
August 31, 2002.
As of June 30, 2002, the Company was not in compliance with the interest
coverage covenant in the Senior Note Agreements dated December 28, 1995,
February 12, 1999 and October 15, 2001. However, under the terms of the
standstill agreement, such non-compliance has been waived.
The Company is working with the Noteholders toward a long-term modification
of the Senior Note Agreements. If the Company is unable to obtain such long-term
modifications, the Senior Noteholders could elect to accelerate the debt. Based
on the Company's current financial condition, if the debt were to be
accelerated, the Company would be unable to satisfy the obligation. If such an
acceleration occurred, the Company would intend to seek additional or
replacement sources of financing. However, there can be no assurances that the
Company would be able to obtain such financing on satisfactory terms or at all.
Other Debt
The Company's now terminated Revolving Line of Credit agreement included
interest coverage and leverage ratio covenants, among others. As a result of the
restatement of its financial statements, the Company was not in compliance with
its leverage ratio covenant at September 30, 2001. In addition, as a result of
the restatement and the impairment of oil and gas properties in the fourth
quarter of 2001, the Company was not in compliance with this covenant as of
December 31, 2001. The Company was not in compliance with the interest coverage
or leverage ratio covenants as of March 31, 2002. Due to its non-compliance with
the applicable covenants during the six months ended June 30, 2002, the Company
was unable to utilize this facility. In June 2002, the Company terminated the
facility, which resulted in a write-off of $321,000 of deferred financing costs.
In addition, the Company was not in compliance with the leverage ratio
covenant and the interest coverage covenant of the Seitel Data, Ltd. term loan
at June 30, 2002 and March 31, 2002 and the leverage ratio covenant at September
30, 2001 and December 31, 2001. Additionally, the Company was not in compliance
with the net worth covenant at June 30, 2002. The lender has issued a notice of
default but has not accelerated the debt.
Substantial doubt about the Company's ability to continue as a going
concern
As a result of the Company's non-compliance with certain of the covenants
of its debt agreements, the Company's 2001 financial statements contain a "going
concern" qualification. The Company's independent auditors have advised the
Company that, if the non-compliance with the debt agreements is not
satisfactorily resolved, their report on the December 31, 2002 financial
statements will also contain a "going concern" qualification.
Page 32 of 39
Capital Expenditures
During the first six months of 2002, capital expenditures for seismic data,
oil and gas property and other property and equipment amounted to $39,903,000,
$4,507,000 and $13,231,000, respectively. Of the seismic data additions,
$31,287,000 were cash additions and $8,616,000 were non-cash additions. These
capital expenditures, as well as taxes, interest expenses, cost of sales and
general and administrative expenses, were funded by operations, current cash
balances, proceeds from term loan and capital lease obligations.
The Company reviews and revises its capital expenditure budget periodically
based on the amount of capital expected to be available from operating or other
sources. Based on the assumption that the Company's Senior Notes will not be
accelerated, the Company currently anticipates capital expenditures for the
remainder of 2002 to total approximately $32.2 million, of which approximately
$29.7 million will be for seismic data library additions, approximately $2.3
million will be for oil and gas exploration and development efforts and
approximately $.2 million will be for computer equipment and data technology
center related purchases. Of the remaining estimated seismic data additions, the
Company estimates that $16.4 million will be cash additions and $13.3 million
will be non-cash additions. If the Company's cash balances, revenue from
operating sources and proceeds from the DDD Energy asset sale are not sufficient
to cover the Company's anticipated expenditures or if the Company were to
increase its planned capital expenditures for 2002, the Company could seek to
obtain additional debt or equity financing during 2002; however, there can be no
assurance that the Company would be able to accomplish any such debt or equity
financing on satisfactory terms or at all. If such debt or equity financing is
not available on satisfactory terms, the Company could reduce its current
capital budget or general and administrative expenses, and fund expenditures
with cash flow generated from operating sources.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. This Statement is effective for the Company on January
1, 2003. The Company does not believe the adoption of this standard will have a
material impact on the Company's financial position or results of operations.
Information Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Statements contained in this Report
about Seitel's future outlook, prospects and plans, including those that express
belief, expectation, estimates or intentions, as well as those that are not
statements of historical fact, are forward looking. The words "anticipates",
"anticipated", "will", "should", "estimates" and similar expressions are
intended to identify forward-looking statements. Forward looking
Page 33 of 39
statements represent Seitel's reasonable belief and are based on Seitel's
current expectations and assumptions with respect to future events. The
Company's expectations regarding its future capital expenditures are only its
forecasts regarding these expenditures. While Seitel believes its expectations
and assumptions are reasonable, they involve risks and uncertainties beyond
Seitel's control that could cause the actual results or outcome to differ
materially from the expected results or outcome. Such factors include any
significant change in the oil and gas industry or the economy generally, changes
in the exploration budgets of the Company's seismic data and related services
customers, actual customer demand for the Company's seismic data and related
services, the timing and extent of changes in commodity prices for natural gas,
crude oil and condensate and natural gas liquids and conditions in the capital
markets and equity markets during the periods covered by the forward looking
statements, the effect on our reported operating results and stock price as a
result of the Company's restatement of financial statements, any litigation or
action taken as a result of the Company's non-compliance with its debt
covenants, the ability of the Company to negotiate a successful resolution of
its non-compliance with its debt convenants with its Senior Noteholders, the
absence of the acceleration of the maturity of the Company's senior debt by its
noteholders or other material indebtedness, the level of the Company's cash
generated from operations and cash proceeds from its DDD Energy asset sale, the
Company's ability to obtain alternative debt or equity financing on satisfactory
terms if internally generated funds are insufficient to fund its capital needs
and the lack of any strategic disposition, acquisition or joint venture
involving the Company's businesses and assets. The forward-looking statements
contained in this Report speak only as of the date hereof, and Seitel disclaims
any duty to update these statements. The foregoing and other risk factors are
identified in the Company's Annual Report on Form 10-K, as amended, filed with
the Securities and Exchange Commission for the year ended December 31, 2001.
Recent Developments
Internal and SEC Investigation
During the course of a recent internal investigation, the Company
discovered that the former president and chief executive officer and the former
chief financial officer of the Company may have improperly converted corporate
funds for their personal use, including certain unearned advances. From the
former chief executive officer, the Company is seeking immediate reimbursement
of:
. $2,641,038 of "unearned advances" that he drew from Company funds;
. $750,000 of his personal attorneys' fees and legal settlement costs
that he caused the Company to pay;
. $695,805 in his personal automobile racing expenses that he caused the
Company to pay;
. $148,309 for the purchase of a security system for his home that he
caused the Company to pay.
The Company is also seeking reimbursement from its former chief financial
officer of $621,293 of "unearned advances" that she drew from Company funds.
Reimbursement of additional funds from Mr. Frame and Ms Valice may be sought
following the results of further investigation by the Company.
The Company has notified the Securities and Exchange Commission ("SEC")
regarding the findings of the internal investigation. The SEC's Fort Worth
District Office has informed the Company that it has initiated an informal
inquiry into theses events and the Company is fully cooperating with the
inquiry. As discussed below, the Company's former chief executive officer and
the former chief financial officer have each filed suit against the Company
alleging, among other things, breach of contract. The Company has filed
counterclaims against each to recover the above described funds owed by each to
the Company.
Sale of DDD Energy
On July 3, 2002, DDD Energy entered into a Purchase and Sale Agreement
with Rising Star Energy, LLC for the sale of a majority of the oil and gas
exploration and production properties and related assets of DDD Energy. The
transaction closed on August 2, 2002. After adjustments, the Company received
cash proceeds of $23.8 million with a final adjustment, if any, to be made
within 90 days following closing. The purchase agreement grants Rising Star an
option, exercisable within 30 days of closing, to purchase additional oil and
gas assets of DDD Energy and another subsidiary of the Company for up to $15
million, or to enter into a joint venture arrangement with the Company related
to these assets.
Additional Compensation for Chairman of the Board
Effective June 1, 2002 in accordance with the By-Laws of the Company, Fred
S. Zeidman was elected non-management Chairman of the Board. As a result of the
Company's current circumstances, Mr. Zeidman is devoting a substantial amount of
time and attention to the business affairs of the Company beyond that which
would ordinarily be required during the usual conduct of the business or the
discharge of his normal duties as Chairman of the Board of Directors. In
addition to normal director's fees, Mr. Zeidman is being compensated in the
amount of $17,500 per month for his engagement as Chairman of the Board, as well
as being provided health and dental benefits that are comparable to those
benefits received by employees of the Company. This arrangement will continue
until the Board of Directors determines that Mr. Zeidman's increased level of
service as Chairman of the Board is no longer required.
Page 34 of 39
New York Stock Exchange Listing
The Company has received notification from the New York Stock Exchange
("NYSE") that it had fallen below the NYSE continued listing standards due to
the Company's stock trading at a price of below $1.00 per share for a
consecutive 30-day trading period. In accordance with the rules and procedures
of the NYSE, the Company has six months within which to cure this price per
share deficiency, prior to the NYSE commencing suspension and delisting
procedures. The Company has responded to the notification letter, informing the
NYSE of the Company's intent to cure the deficiency.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including adverse changes in
commodity prices, interest rates and foreign currency exchange rates. Refer to
the Company's Form 10-K, as amended, for the year ended December 31, 2001 for a
detailed discussion of these risks. The Company has not had any significant
changes in the market risk exposures since December 31, 2001.
Interest Rate Risk
The Company may enter into various financial instruments, such as interest
rate swaps, to manage the impact of changes in interest rates. Currently, the
Company has no open interest rate swap or interest rate lock agreements.
Therefore, the Company's exposure to changes in interest rates primarily results
from its short-term and long-term debt with both fixed and floating interest
rates.
Foreign Currency Exchange Rate Risk
The Company conducts business in the Canadian dollar and pounds sterling
and is therefore subject to foreign currency exchange rate risk on cash flows
related to sales, expenses, financing and investing transactions. Currently, the
Company has no open foreign exchange contracts.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and certain of its former and current officers and directors
have been named as defendants in eleven lawsuits brought as class actions
alleging violations of the federal securities laws, all of which were
consolidated by an Order entered August 7, 2002, under Cause No. 02-1566, styled
In re Seitel, Inc. Securities Litigation, in the United States District Court
for the Southern District of Texas. The complaints generally allege that during
proposed class periods of May 5, 2000 through May 3, 2002 or July 13, 2000
through April 1, 2002, the defendants violated sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934, by overstating revenues in violation of
generally accepted accounting principles. The plaintiffs seek an unspecified
amount of actual and exemplary damages, costs of court, pre- and post-judgment
interest and attorneys' fees. The Court has set a hearing for August 30, 2002 on
several motions for appointment of lead plaintiff and approval of lead counsel
for plaintiffs. By agreement of the parties, the defendants are not required to
answer or otherwise respond until after the court selects lead plaintiff and
lead counsel and the plaintiffs file a consolidated amended complaint. No
discovery has been conducted. The Company intends to vigorously defend these
lawsuits.
The Company has been named as a nominal defendant in seven stockholder
derivative actions filed in various courts: Chemical Valley & North Central West
Virginia Carpenters Pension Plan v. Frame, Valice, Hoffman, Pearlman, Craig,
Lerner, Steiglitz, Ziedman, Fuir, and Seitel, Inc., No. 2002-39404, In the
District Court of Harris County, Texas, 151st Judicial District, Almekinder v.
Frame, Valice, Pearlman, Craig, Lerner, Stieglitz, Zeidman, Hoffman, and Seitel,
Inc., No. H-02-2960, In the United States District Court for the Southern
District of Texas; Basser v. Frame, Valice, Kendrick, Pearlman, Fiur, Zeidman,
Stieglitz, Craig, Lerner, and Seitel, Inc., No. H-02-1874, In the United States
Court for the Southern District of Texas; Berger v. Frame, Pearlman, Valice,
Craig, Stieglitz, Lerner, Zeidman, Fiur, and Seitel, Inc., No. 19534-NC, In the
Court of Chancery, State of Delaware, Castle County; Couture v. Frame, Valice,
Craig, Lerner, Stieglitz, Zeidman, Hoffman, and Seitel, Inc., No. 20002-37065,
In the 80th Judicial District Court, Harris County, Texas; Talley v. Frame,
Valice, Pearlman, Craig, Lerner, Stieglitz, Zeidman, Hoffman, and Seitel, Inc.,
In the 151st Judicial District Court, Harris County, Texas; and Zambie v. Frame,
Pearlman, Valice, Craig, Zeidman, Lerner, Steiglitz, Fiur, Ernst & Young, LLP,
and Seitel, Inc., In the 333rd Judicial District Court, Harris County, Texas.
The Plaintiffs generally allege that the defendants breached and conspired to
breach fiduciary duties to the Company and its shareholders by failing to
maintain adequate accounting controls and by using improper accounting and, as
applicable, auditing practices and procedures. Certain of the plaintiffs also
assert causes of action for mismanagement, waste of corporate assets and unjust
enrichment. The Zambie case also alleges professional negligence against Ernst &
Young LLP. The plaintiffs seek judgments for unspecified amounts of compensatory
damages, including return of salaries and other payments, exemplary damages,
attorneys' fees, experts' fees and costs. The Company's board of directors has
appointed a special litigation committee, which is conducting an independent
investigation of the allegations asserted in the derivative lawsuits, which it
expects to be completed in September 2002. No discovery has been conducted. The
defendants presently intend to seek to have all of the derivative cases stayed,
including discovery that has been served in the Talley case, pending completion
of that investigation.
Page 35 of 39
The Company sued its former chairman of the board in Seitel, Inc. v.
Pearlman, C.A. No. H-02-1843, In the United States District Court in the
Southern District of Texas. The Company seeks a declaratory judgment with
respect to the employment agreement between Mr. Pearlman and the Company.
Following his resignation as chairman of the board, Mr. Pearlman and the Company
entered into negotiations for a restructuring of his employment agreement.
During the negotiations, a document was created that Mr. Pearlman now alleges
has superseded the employment agreement. The Company believes that neither its
board of directors nor any of its committees approved the document. The Company
seeks a judgment declaring the effect of Mr. Pearlman's resignation on the
employment agreement, whether the Company owes any amounts under the employment
agreement as a result of his resignation and, if so, how much, and a judgment
that the subsequent document is not binding on the Company and is not
enforceable by Mr. Pearlman against the Company. Mr. Pearlman has filed
counterclaims asserting that the board of directors approved the subsequent
document and asserts causes of action for breach of contract, fraud, negligent
misrepresentation and promissory estoppel. Mr. Pearlman seeks to be realigned as
the plaintiff in the action and seeks actual damages in an amount exceeding
$4,000,000, punitive damages, attorneys' fees, costs and expenses. No discovery
has been conducted. The Company intends to vigorously pursue its claims and
defend against the counterclaims.
The Company has been sued by its former chief financial officer in Valice
v. Seitel, in the 55th Judicial District Court of Harris County, No. 2002-30195.
Ms. Valice filed suit against the Company alleging a breach of her employment
contract by virtue of her termination. The Company terminated her employment for
what it believes is "cause" under her contract, and the Company believes that
she is entitled to no recovery on her suit. The Company has filed a counter suit
against Ms. Valice seeking to recover over $621,000 in unearned advances she
received from the Company and has failed to repay. The Company intends to
vigorously defend the suit and pursue its counterclaim. Discovery is not yet
underway.
The Company has been sued by its former chief executive officer in Frame v.
Seitel, in the 113th Judicial District Court of Harris County, No. 2002-35891.
Mr. Frame filed suit against the Company alleging a breach of his employment
contract by virtue of his asserted termination. He also alleges a press release
announcing his resignation and advising that the Company was investigating
possible misappropriation of corporate funds for personal use by him was
defamatory. He also seeks a declaratory judgment that certain funds he received
from the Company were proper and do not have to be repaid. The Company has
answered and asserted various defenses including the fact that the allegedly
defamatory statements are true or substantially true and that its publication
was privileged. The Company also has filed a counter suit to recover the
approximately $4,200,000 in corporate funds that the Company believes he
inappropriately converted for his personal use and benefit. The Company intends
to vigorously defend the suit and pursue its counterclaim. Discovery is not yet
underway.
The Company is currently a party to a dispute with Winthrop Resources
Corporation ("Winthrop") arising out of an equipment lease signed by the parties
in October 2001. The Company sought to lease a majority of the equipment needed
to establish and operate certain data centers from Winthrop. Based on
representations from Winthrop, the Company expected to receive an operating
lease, the Company determined the lease was, in fact, a capital lease. Winthrop
alleges that the Company's restatement of its financial statements was a
material adverse event and thus prevented further leasing. The Company made all
monthly payments called for under the lease until the July 1, 2002 payment, at
which time the Company suspended payment. The Company filed an application for a
temporary restraining order on July 12, 2002, which was granted on that same
day, seeking to enjoin Winthrop from repossession of certain equipment pending
the hearing on the application for a temporary injunction which hearing was set
for August 9, 2002, but was postponed by the parties. Winthrop filed suit in
Minnesota state court on July 15, 2002 in which it seeks contractual damages and
return of the leased equipment. Winthrop asserts the case in Texas should be
dismissed because the parties agreed in the lease that venue would be in
Minnesota. That motion to dismiss was scheduled to be heard at the August 9
hearing, but now rescheduled to begin August 30, 2002. The Company and Winthrop
recently entered into a standstill agreement in both the Texas and Minnesota
actions so they can explore a settlement. No settlement agreement has been
executed, although discussions continue. The standstill agreement expires at the
resolution of the August 30 hearing.
Items 2., 3., 4. and 5. Not applicable.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
23.1 Letter from Ernst & Young LLP to the Company's Board of
Directors, dated August 16, 2002, relating to the Company's
change in accounting principle regarding the amortization of its
created seismic data library.
Page 36 of 39
(b) Reports on Form 8-K filed during the quarter ended June 30, 2002.
The Company filed a Form 8-K on April 24, 2002 disclosing a
shareholder's derivative action filed in the Chancery Court of the
State of Delaware in New Castle County.
The Company filed a Form 8-K on May 6, 2002 disclosing the Company's
May 3, 2002 press release reporting the filing of an amendment to the
2001 Form 10-K, adding additional explanations regarding the prior
restatement announcement following meetings with SEC staff;
discussions with lenders regarding loan covenant violations; and also
reporting two civil cases filed against the Company. A portion of the
draft of the Form 10-K/A, Amendment No. 3 was filed as an exhibit.
The Company filed a Form 8-K on May 30, 2002 disclosing that the
Company and various of its officers and directors have been named as
defendants in nine shareholders lawsuits filed in the United States
District Court for the Southern District of Texas and a stockholder
derivative action filed by a stockholder of the Company in the 333rd
Judicial District Court for Harris County, Texas.
The Company filed a Form 8-K on June 7, 2002 regarding the June 5,
2002 press release announcing the legal action initiated against the
former chairman of the board. In addition, the press release announces
the appointment of Fred Zeidman as the new chairman of the Company,
the appointment of Robert Knauss as a new director and sole member of
an independent committee that will review the allegations made in the
derivative actions filed against certain officers and directors of the
Company. Two additional shareholders lawsuits filed in the United
States District Court for the Southern District of Texas, Houston
Division were also listed.
The Company filed a Form 8-K on June 13, 2002 disclosing the June
12, 2002 press release regarding the resignation of President and CEO,
Paul Frame, and the termination of Chief Financial Officer, Debra
Valice. Kevin Fiur, former Executive Vice President and Chief
Operating Officer, is the new CEO and President, Kevin Callaghan,
former Senior Vice President of Seitel Data Limited, was named
Executive Vice President and Chief Operating Officer of the Company,
and Robert Simon, former Executive Vice President of Seitel Data
Limited, was named President of Seitel Data Limited.
The Company filed a Form 8-K June 25, 2002 regarding a press
release announcing that an internal investigation has discovered the
former Chairman and CEO and the former CFO may have improperly
converted corporate funds to their personal use. The previously
disclosed offer to enter into promissory notes with these individuals
was withdrawn and immediate repayment of these amounts is demanded.
The Company filed a Form 8-K on July 23, 2002 regarding the July
19, 2002 press release announcing an extended standstill agreement
with the Company's noteholders and attaching the standstill agreement.
Page 37 of 39
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SEITEL, INC.
Dated: August 19, 2002 /s/ Kevin S. Fiur
-------------------------------------
Kevin S. Fiur
President and Chief Executive Officer
Dated: August 19, 2002 /s/ Marcia H. Kendrick
-------------------------------------
Marcia H. Kendrick
Acting Chief Financial Officer
Page 38 of 39
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
NOT FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
In connection with the Quarterly Report of Seitel, Inc. (the "Company") on Form
10-Q for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), we, Keven S. Fiur,
President and Chief Executive Officer, and Marcia H. Kendrick, Acting Chief
Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Kevin S. Fiur
----------------------------------
Dated: August 19, 2002 Name: Kevin S. Fiur
Title: President and Chief Executive Officer
/s/ Marcia H. Kendrick
----------------------------------
Name: Marcia H. Kendrick
Title: Acting Chief Financial Officer
EXHIBIT
INDEX
Page
Exhibit Title Number
23.1 Letter from Ernst & Young LLP to the Company's Board of Directors,
dated August 16, 2002, relating to the Company's change in
accounting principle regarding the amortization of its created
seismic data library.
Page 39 of 39