ITEM 1. BUSINESS
General
Seitel, Inc. (the "Company") is a leading provider of seismic data and related geophysical services and expertise to the petroleum industry. The Company owns and licenses what it believes to be the largest nonproprietary seismic data library in North America and initiates new seismic data through multi-client shoots with oil and gas companies. In September 2000, the Company announced its intention to create a product that will enable its clients to access and interact, via the Internet, with the one petabyte of seismic data currently owned and marketed by Seitel. The Company, through its wholly-owned subsidiary DDD Energy, Inc., explores, finds, develops, produces and sells oil and natural gas reserves. See Note P to the Company's Consolidated Financial Statements for financial information relating to industry segments.
Seismic Operations
The Company markets seismic information to the oil and natural gas industry in two ways: sales from the largest data library in North America and sales of new multi-client seismic data surveys, including two-dimensional ("2D"), three-dimensional ("3D") and multi-component, in both the onshore and offshore segments. The Company has a strong market position in the United States and Canadian seismic data library markets owing to its 1.1 million linear miles of two-dimensional and 19,200 square miles of three-dimensional seismic data.
The Company initiates data surveys utilizing the multi-client approach. There are two types of data initiation: data acquired with underwriter commitments and data that are initiated via a speculative shoot. The Company has stated that it will not perform high-risk speculative data initiation because the Company believes that would put its shareholders at unnecessary financial risk. The Company prefers the multi-client underwriting approach whereby at least 65%-75% of the cost of the survey is covered before the data initiation takes place.
The Company actively markets data from its library for resale under non-exclusive, non-transferable license agreements to the oil and gas industry. The Company combines an aggressive marketing strategy with geophysical expertise. The Company's marketing philosophy is that seismic data, like most other products, must be sold aggressively as opposed to waiting passively for customer purchases. The Company has 24 dedicated marketing specialists that maximize sales opportunities by monitoring petroleum industry exploration and development activities through close interaction with oil and gas companies on a daily basis. In addition, the Company has 15 experienced geoscientists that design seismic programs with our clients to assure customer satisfaction and quality control. The Company's customers may not transfer a seismic data license; accordingly, if a new company would like to view the data, they must purchase a license generating additional revenue for the Company.
The Company's data library is concentrated in most of the North American major oil and natural gas producing areas. The main areas of focus include the onshore, offshore and transition zone of the U.S. Gulf of Mexico extending from Texas to Florida, onshore East Texas and the Rocky Mountain region. In addition, the Company's international seismic surveys are concentrated in Western Canada and the Continental Shelf offshore the United Kingdom and Ireland.
Three-dimensional seismic data provides a graphic geophysical depiction of the earth's subsurface from two horizontal dimensions and one vertical dimension, rendering a more detailed picture than 2D data, which presents a cross-sectional view from one vertical and one horizontal dimension. The more comprehensive geophysical information provided by 3D surveys significantly enhances an interpreter's ability to evaluate the probability of the existence and location of oil and gas deposits. The proper use of 3D surveys can significantly increase drilling success rates and, correspondingly, significantly lower exploration and development finding costs. However, the cost to create 3D seismic data is significantly more than the cost to create 2D seismic data, particularly for onshore data. As a result, 2D data remains economically more efficient for preliminary, broad-scale exploration evaluation and to determine the location for and to help design 3D surveys. The 3D surveys can then be used for more site-specific analysis to maximize actual drilling potential.
The Company has expanded its seismic activities to include multi-component data, more specifically 3D/4-C data. In a standard 3D seismic survey, the reflections of only pressure waves are measured and recorded. A 3D/4-C survey measures and records not only pressure waves but also shear waves. Whereas pressure waves are affected by the fluids in rock formation, shear waves are not. By measuring and recording both pressure waves and shear waves, a 3D/4-C survey can improve analysis of rock formations.
In September 2000, the Company announced its intention to create a product that will enable its clients to access and interact, via the Internet, with the Company's seismic data. During 2000, the Company made acquisitions of rights to certain software that will aid in the development of this product.
The Company has developed fully-integrated 3D seismic technology and operations, which extend from its expansive 2D seismic library from which to best design the parameters for 3D surveys, its large and growing 3D and multi-component data library, a processing center and proprietary computer technology coupled with extensive geophysical application expertise to effectively interpret 3D seismic data.
Oil and Gas Exploration and Production Operations
In addition to licensing its seismic data to customers, the Company also utilizes its seismic expertise to participate directly in oil and gas projects. The Company participates in these projects as a working interest owner, sharing costs and revenues of oil and gas exploration and production projects with other oil and gas companies. The Company's strategy is to combine its 3D and 2D seismic expertise and related geophysical expertise with the geological, engineering and drilling expertise and land positions of oil and gas companies in exploration and development programs. The Company believes that this combination will result in higher drilling success rates, thereby allowing the Company to participate in oil and gas exploration and development on a relatively low cost and low risk basis, and to build an asset base of oil and gas reserves which complement its seismic data library.
Since its formation in 1993, the Company's wholly-owned exploration and production subsidiary, DDD Energy, Inc. ("DDD Energy"), has entered into and maintained cost and revenue-sharing relationships with more than 100 oil and gas companies and, in doing so, has received the benefit of these oil and gas companies' land, geological, engineering and drilling staffs. DDD Energy has conducted 2,200 square miles of advanced 3D surveys, located primarily in the Gulf Coast areas of onshore Texas, Louisiana, Alabama and Mississippi, as well as California and Arkansas. DDD Energy's working interest in these projects ranges from approximately 10% to 90%, with an average working interest of approximately 31%. The majority of the well locations pinpointed by the surveys that have already been completed and interpreted should be drilled during the next three years. DDD Energy exclusively utilizes the Company's processing and interpretation technology and operations to provide optimum quality control and confidentiality for the exploration and production programs in which DDD Energy participates.
From March 1993 through December 31, 2000, DDD Energy has participated in the drilling of 325 wells, 224 of which were commercially productive for a 69% success rate.
In November 1999, the Company filed a registration statement with the Securities and Exchange Commission ("SEC") to accomplish the spin-off of DDD Energy through an initial public offering. The proposed offering was delayed due to market conditions and management changes. The Company continues to explore opportunities to maximize the value of DDD Energy's properties.
Customers
The Company markets its seismic data to major and independent oil and gas companies. The Company generally sells its oil and gas to numerous customers through the operators of its oil and gas properties. During 2000, one customer accounted for 12% of the Company's revenue. No one customer accounted for as much as 10% of the Company's revenues during the years 1999 or 1998. The Company does not believe that the loss of any customer would have a material adverse impact on its seismic or oil and gas business.
Competition
The creation and resale of seismic data are highly competitive in North America. There are a number of independent oil-service companies that create and market data, and numerous oil and gas companies create seismic data and maintain their own seismic data libraries. The Company's largest competitors, most of whom are engaged in acquiring seismic data as well as a data library, are Baker Hughes, Petroleum Geo-Services, Schlumberger, TGS Nopec, Veritas DGC and Compagnie Generale de Geophysique. In addition, the Company has positioned itself to take advantage of the increased outsourcing trend by exploration and production companies for their seismic data services. The Company believes it can compete favorably because of the expansiveness of its data library base, the expertise of its marketing staff and the technical proficiency and exploration experience of its geoscientists. These resources enable the Company to provide high-quality service and to create and market high-grade data.
In the oil and gas exploration and production business, there are numerous oil and gas companies competing for the acquisition of mineral properties. The Company believes it can participate effectively in the exploration for and development of natural gas and crude oil reserves because of its fully-integrated seismic resources and geophysical expertise combined with the geological and engineering experience and land positions of the Company's oil and gas company partners.
Seasonality and Timing Factors
The Company's results of operations can fluctuate from quarter to quarter. The fluctuations are caused by a number of factors.
With respect to the Company's seismic licensing revenue, the Company's results are influenced by oil and gas industry capital expenditure budgets and spending patterns. These budgets are not necessarily spent in either equal or progressive increments during the year, with spending patterns affected by individual oil and gas company requirements as well as industry-wide conditions. As a result, the Company's seismic data revenue does not necessarily flow evenly or progressively on a sequential quarterly basis during the year. In addition, certain weather-related events may delay the creation of seismic data for the Company's library during any given quarter. Although the majority of the Company's seismic resales are under $500,000 per sale, occasionally a single data resale from the Company's library, including those resulting from the merger and acquisition of the Company's oil and gas company customers, can be as large as $5 million or more. Such large resales can materially impact the Company's results during the quarter in which they occur, creating an impression of a trend of increasing revenue that may not be achieved in subsequent periods.
With respect to revenue from the Company's oil and gas operations, bringing a small number of high-production wells on line in a given quarter can materially impact the results of that quarter since many of the wells in which the Company participates experience high initial flow rates for the first 60 to 90 days of production and then taper off to a lower, steady rate for the remainder of their lives. If several of these wells are brought on line in a quarter, the results for that quarter will appear unusually strong, and then later, when production decreases to its long-term, steady rate, the Company's results may not be able to sustain the trend of increased performance indicated by the strong results of the previous quarter. The Company's oil and gas exploration and production operations also can be impacted by certain weather-related events as well as by mechanical and equipment problems or shortages and other factors, which may delay the hookup of successfully completed wells and delay the resultant production revenue. Also, due to the high percentage of gas reserves in the Company's portfolio and the seasonal variations in gas prices, the Company's results from its oil and gas operations also are subject to significant fluctuations due to variations in commodity prices. In addition, some producing wells may be required to go off line periodically for pipeline and other maintenance. The Company does not believe that these fluctuations in quarterly results are indicative of the Company's long-term prospects and financial performance.
See Note Q to the Company's Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Employees
As of December 31, 2000, the Company and its subsidiaries had 128 full-time employees. None of the Company's employees are covered by collective bargaining agreements. Of these employees, 89 are related to the seismic operations and 22 are related to the oil and gas operations. The balance provides accounting and administrative support for all operations. The Company has employment contracts with three of its senior corporate executives.
Other
The Company is not dependent on any particular raw materials, patents, trademarks or copyrights for its business operations.
The following organization chart gives an overview of the structure of the Company:
ITEM 2.
ITEM 2. PROPERTIES
The Company leases office and warehouse space principally in Houston and Calgary. The size and condition of the space is appropriate for the Company's business.
The Company, through its wholly-owned subsidiary DDD Energy, participates in oil and gas exploration and development efforts. For estimates of the Company's net proved and proved developed oil and gas reserves as of December 31, 2000, see Note S to the Company's Consolidated Financial Statements. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth in Note S to the Company's Consolidated Financial statements represents only estimates. Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and liquids, including crude oil, condensate and natural gas liquids that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the amount and quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers normally vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they were based.
In general, the volume of production from oil and gas properties owned by the Company declines as reserves are depleted. Except to the extent that the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities, or both, the proved reserves of the Company will decline as reserves are produced. Volumes generated from future activities of the Company are therefore highly dependent upon the level of success in finding or acquiring additional reserves and the costs incurred in so doing.
The following table sets forth the number of productive oil and gas wells (including producing wells and wells capable of production) in which the Company owned an interest as of December 31, 2000. Gross oil and gas wells include three with multiple completions. All but one of the wells are operated by the Company's oil and gas company partners. A "gross" well is a well in which the Company owns a working interest. "Net" wells refer to the sum of the fractional working interests owned by the Company in gross wells.
The following table sets forth the number of net wells drilled in the last three fiscal years in which the Company participated.
As of December 31, 2000, the Company was participating in the drilling of 1 gross and .33 net wells.
The following table sets forth certain information regarding the Company's developed and undeveloped lease acreage as of December 31, 2000. "Gross" acres refer to the number of acres in which the Company owns a working interest. "Net" acres refer to the sum of the fractional working interests owned by the Company in gross acres.
The following table describes for each of the last three fiscal years, crude oil (including condensate and natural gas liquids) and natural gas production for the Company, average production costs and average sales prices. All such production comes from the U.S. Gulf Coast region. The Company has not filed any different estimates of its December 31, 2000 reserves with any federal agencies.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in ordinary, routine claims and lawsuits incidental to its business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters should not be material to the Company's financial position or results of operations.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange. The following table sets forth the high and low sales prices for the Common Stock for 2000 and 1999 as reported by the New York Stock Exchange.
On March 28, 2001, the closing price for the Common Stock was $17.40. To the best of the Company's knowledge, there are approximately 1,006 record holders of the Company's Common Stock as of March 28, 2001.
Dividend Policy
The Company did not pay cash dividends during 1999 or 2000, and it intends to retain future earnings in order to provide funds for use in the operation and expansion of its business. Because the payment of dividends is dependent upon earnings, capital requirements, financial conditions, any required consents of lenders and other factors, there is no assurance that dividends, whether in the form of stock or cash, will be paid in the future.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
The following table summarizes certain historical consolidated financial data of the Company and is qualified in its entirety by the more detailed consolidated financial statements and notes thereto included in Item 8 hereof.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following table sets forth selected financial information (in thousands) for the periods indicated, and should be read in conjunction with the discussion of Results of Operations below.
Results of Operations
Overview
Income before special items was $24,730,000, $14,446,000 and $24,484,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Special items for the year ended December 31, 2000, include a pre-tax restructuring charge of $4,394,000 related to reduction of management incentive bonus compensation and a pre-tax charge of $958,000 related to expenses incurred in connection with the delayed DDD Energy, Inc. initial public offering. Special items for the year ended December 31, 1999, include a pre-tax loss of $7,794,000 related to an impairment due to the dividend distribution of affiliate stock. Special items for the year ended December 31, 1998 include a pre-tax loss of $193,000 related to the decrease in the underlying equity of an affiliate.
Seismic
Most oil and gas companies consider seismic data an essential tool to generate and delineate drilling prospects for the oil and gas industry. Oil and gas companies are increasingly using seismic data in oil and gas exploration and development efforts to increase the probability of drilling success. By properly utilizing seismic data, oil and gas companies can significantly increase drilling success rates and reduce the occurrence of dry holes. By participating in multi-client surveys, oil and gas companies can share the cost of expensive surveys that they could not otherwise afford. Further, seismic data can increase recoveries of reserves from existing, mature oil fields by optimizing the drilling location of development wells and by revealing additional, or "step-out," locations that would not otherwise be apparent.
The Company generates seismic revenue by licensing data from its existing data library and creating new data for customers. Revenue from the marketing of seismic data was $139,376,000, $109,671,000 and $125,863,000 during 2000, 1999 and 1998, respectively. The increase in revenue between 1999 and 2000 was due to a 59% increase in licensing of existing data from the Company's data library partially offset by a decrease in revenue from new seismic data creation. The increase in library sales occurred in the third and fourth quarters of 2000 as a result of increased capital expenditures for seismic library data by oil and gas companies. The current industry condition of declining production profiles by many oil and gas companies and a "prospect short" environment has made the demand for seismic library data strong. Additionally, library sales include revenue resulting from the merger and acquisition of some of the Company's oil and gas company customers. In these instances, the data was relicensed due to the nontransferability of the original license. The decrease in seismic data creation revenue between 1999 and 2000 was due to a management decision in May 1999 to focus the Company's marketing team on licensing existing data that would generate cash flow. Management continued this decision to limit data creation throughout 2000 resulting in decreased seismic data creation revenue. The Company's decision to reduce data creation in 1999 caused total seismic revenue to be lower in 1999 as compared to 1998. However, library sales in 1999 increased 36% over library sales in 1998. The Company anticipates that the demand for its seismic library data will remain strong. Additionally, new data creation revenue is expected to increase in 2001 as compared to 2000 based on customer demand.
Data bank amortization amounted to $62,159,000, $49,375,000 and $57,117,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The amount of seismic data amortization fluctuates based on the level of seismic marketing revenue. As a percentage of revenue from licensing seismic data, data bank amortization was 45%, 46% and 46% for 2000, 1999 and 1998, respectively. These changes between years are primarily due to the mix of sales of 2D and 3D data amortized at varying percentages based on each data program's current and expected future revenue. For a discussion of the Company's accounting policy related to seismic data amortization refer to Note A of the Company's Consolidated Financial Statements.
The Company's (and its industry's) seismic revenue trends are evaluated and results are used in estimating future revenue expected to be received on its seismic data. When economic conditions indicate, the Company may reduce its estimates of future revenue, causing the amortization rate to rise and operating results to decline. If the Company perceives an impairment in value due to reduced, or a lack of, estimated future revenue, a write-down of the asset is recognized. In periods of upturn, the opposite may occur, except, however, the prior write-downs are not reversed. Management believes that the economic outlook for the Company's seismic business is stable and the possibility for significant improvement exists.
Oil and Gas
Net volume and price information for the Company's oil and gas production for the years ended December 31, 2000, 1999 and 1998 is summarized in the following table:
Oil and gas revenue was $24,435,000, $19,036,000 and $18,994,000 during 2000, 1999 and 1998, respectively. The increase in oil and gas revenue from 1999 to 2000 was due to higher market prices in 2000 offset by lower production volumes. The decline in oil and gas production was primarily due to the effect of the sale of a group of wells in August 2000 and July 1999, as well as normal production declines on several of the Company's older wells. Production from new wells drilled in 2000 partially offset these declines. The increase in oil and gas revenue from 1998 to 1999 was primarily attributable to higher average oil prices received by the Company, partially offset by lower oil and gas production. The decline in oil and gas production between 1998 and 1999 was primarily due to normal production declines experienced on several of the Company's older wells. Additionally, in July 1999, the Company sold its interest in 11 oil and gas wells, five of which were producing.
Depletion of oil and gas properties was $10,376,000, $9,093,000 and $11,872,000 for the years ended December 31, 2000, 1999 and 1998, respectively, which amounted to $1.67, $1.17 and $1.39, respectively, per mcfe of gas produced during such periods. The rate per mcfe varies with the estimate of proved oil and gas reserves of the Company at each quarter end, as well as evaluated property costs. The increase in the rate from 1999 to 2000 was primarily due to lower proved reserve volumes in 2000 as compared to 1999, primarily resulting from the sale of proved reserves and revisions to estimated reserve volumes. The decrease in the rate between 1998 and 1999, was primarily due to higher estimated reserve volumes in 1999 as a result of new discoveries of reserves.
Oil and gas production costs amounted to $.78, $.61 and $.55, per mcfe of gas produced during 2000, 1999 and 1998, respectively. The increase in the rate between 1999 and 2000 was primarily due to higher workover costs incurred during 2000 and higher production taxes in 2000 due to higher oil and gas prices. The increase in the rate from 1998 to 1999 is primarily attributable to an increase in compression costs for the Company's East Texas Smackover properties.
Corporate and Other
The Company's selling, general and administrative expenses were $34,790,000 in 2000, $28,587,000 in 1999 and $26,599,000 in 1998. The increase from 1999 to 2000 was primarily due to an increase in fixed costs due to the growth of the Company, as well as an increase in variable expenses related to increased revenue. These increases were partially offset by a decrease in management's incentive compensation resulting from the restructuring that occurred in June 2000. The increase from 1998 to 1999 was primarily due to legal and other non-recurring expenses incurred during 1999 and an increase in costs resulting from the Company's expansion in Canada. These increases were partially offset by a reduction of variable expenses, including commissions on revenue and compensation tied to pre-tax profits. As a percentage of total revenue, selling, general and administrative expenses were 21% in 2000, 22% in 1999 and 18% in 1998.
During the year ended December 31, 2000, the Company charged to expense costs totaling $958,000 that had been incurred in connection with the proposed initial public offering of its wholly-owned subsidiary, DDD Energy. The offering was delayed due to market conditions and management changes.
On June 23, 2000, the Company announced that its management incentive bonus compensation contracts had been restructured to reduce bonuses on pre-tax profits to 8.5% from 17.5%. In connection with the restructuring, the Company issued 375,000 restricted shares of its Common Stock to three members of management and made cash payments totaling $1,771,000. As a result, the Company recorded a restructuring charge in 2000 totaling $4,394,000 ($3,743,000, net of tax) to reflect the cost of the shares issued and the cash payments made. In addition, the Company will, subject to continued employment, make (i) four annual payments of $187,500, net of taxes, to Herbert Pearlman, Chairman of the Board of Directors, beginning January 1, 2001; (ii) four annual payments of $125,000, net of taxes, to Paul Frame, President and Chief Executive Officer, beginning January 1, 2001; and (iii) payments totaling $1.4 million, net of taxes, to David Lawi payable over four years beginning January 1, 2001. The agreements provide that the Company will pay withholding taxes of 35% relating to these payments. The Company will also make annual payments of $850,000 to Horace Calvert beginning July 1, 2000 through May 31, 2004, subject to continued employment. These payments will be charged to expense over the period earned. Selling, general and administrative expenses for 2000 include $1,425,000 related to these payments. The decrease is management's compensation as a result of the restructuring was $4,204,000 before deduction of the $1,425,000 payments.
The Company's interest expense was $13,168,000 in 2000, $11,791,000 in 1999 and $5,963,000 in 1998. The increase from 1999 to 2000 was primarily due to the Series D, E and F Senior Notes totaling $138 million being outstanding for the entire year in 2000, whereas in 1999, they were only outstanding for 101/2 months. The increase between 1998 and 1999 was primarily due to the addition of $138 million of senior notes on February 12, 1999 at an average interest rate of 7.3% partially offset by lower interest expense on the Company's revolving line of credit due to lower amounts being borrowed throughout 1999.
Interest income was $962,000 in 2000, $714,000 in 1999 and $423,000 in 1998. The increase between 1999 and 2000 was primarily due to fluctuation in cash balances available for investment. The increase from 1998 to 1999 was primarily attributable to interest income received on the notes receivable from officers and employees entered into in October 1998.
On April 22, 1999, the Board of Directors of Seitel, Inc. declared a dividend to its common stockholders consisting of the 1,520,000 shares of the common stock of Eagle Geophysical, Inc. ("Eagle") owned by the Company. The fair market value of the common stock of Eagle held by the Company on the date the dividend was declared was lower than the carrying value of the stock on the Company's balance sheet; therefore, a non-cash, non-recurring, pre-tax impairment, net of bonus effect, of $7,794,000 was recorded for the year ended December 31, 1999.
The Company's effective income tax rate was 36.6%, 43.2% and 35.9% for the years ended December 31, 2000, 1999 and 1998, respectively. The decrease in the effective income tax rate from 1999 to 2000 was primarily due to lower taxes on foreign earnings in 2000. The increase in the effective income tax rate from 1998 to 1999 was primarily a result of Canadian operations, which were taxed at a higher rate than the U.S. rate, representing a larger percentage of pre-tax profits than in prior years.
Liquidity and Capital Resources
The Company's cash flow from operations was $93,487,000, $74,494,000 and $97,493,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The increase from 1999 to 2000 was primarily attributable to an increase in cash received from customers resulting from the increase in revenue partially offset by an increase in interest expense and taxes paid. The decrease from 1998 to 1999 was primarily attributable to (i) a decrease in cash received from customers due to the decrease in revenue in 1999, (ii) an increase in payments to suppliers in 1999 and (iii) an increase in interest expense paid due to the issuance of $138 million senior notes in 1999.
The Company has a $75 million unsecured revolving line of credit facility whose maturity was extended to June 15, 2001. Under the terms of the extension, the facility bears interest at a rate of LIBOR plus 1.25%, the bank's prevailing prime rate, or the sum of the Federal Funds effective rate for such day plus 1/2%. The balance outstanding on this revolving line of credit as of March 28, 2001 was $60 million bearing an average interest rate of 6.23%. The Company is currently in negotiations to establish a new line of credit facility upon expiration of the current facility.
On November 9, 1999, the Company's wholly-owned subsidiary, Olympic Seismic Ltd. ("Olympic"), entered into revolving credit facilities which allow it to borrow up to $5 million (Canadian dollars) by way of prime based loans, bankers' acceptances, or letters of credit. Prime based loans and bankers' acceptances bear interest at the rate of the bank's prime rate plus 0.35% per annum and 0.50% per annum, respectively. Letter of credit fees are based on scheduled rates in effect at the time of issuance. The facility is secured by Olympic's assets, but is not guaranteed by Seitel, Inc. or any of its other subsidiaries. Borrowings under the facility are limited to 75% of trade receivables less than 90 days old. The facility is subject to repayment upon demand and is available from time to time at the Bank's sole discretion. As of March 28, 2001, no amounts were outstanding on this revolving line of credit. Olympic is not a party to any of the debt issued by Seitel, Inc.
On February 12, 1999, the Company completed a private placement of three series of unsecured Senior Notes totaling $138 million. The Series D Notes total $20 million, bear interest at a fixed rate of 7.03% and mature on February 15, 2004, with no principal payments due until maturity. The Series E Notes total $75 million, bear interest at a fixed rate of 7.28% and mature on February 15, 2009, with annual principal payments of $12.5 million beginning February 15, 2004. The Series F Notes total $43 million, bear interest at a fixed rate of 7.43% and mature on February 15, 2009, with no principal payments due until maturity. Interest on the Series D, E and F Notes is payable semi-annually on February 15 and August 15. As of March 28, 2001, the balance outstanding on the Series D, E and F Notes was $138 million.
On December 28, 1995, the Company completed a private placement of three series of unsecured Senior Notes totaling $75 million. The Company contemporaneously issued its Series A Notes and Series B Notes, which total $52.5 million and bear interest at a fixed rate of 7.17%. On April 9, 1996, the Company issued its Series C Notes, which total $22.5 million and bear interest at a fixed rate of 7.48%. The Series A Notes mature on December 30, 2001, and require annual principal payments of $8.3 million which began on December 30, 1999. The Series B and Series C Notes mature on December 30, 2002, and require combined annual principal payments of $10 million which began on December 30, 1998. Interest on the Series A, B and C Notes is payable semi-annually on June 30 and December 30. As of March 28, 2001, the balance outstanding on the Series A, B, and C Notes was $28,333,000.
The Company may offer from time to time in one or more series (i) unsecured debt securities, which may be senior or subordinated, (ii) preferred stock and (iii) common stock, or any combination of the foregoing, up to an aggregate of $41,041,600 pursuant to an effective "shelf" registration statement filed with the SEC. In addition, under another effective "shelf" registration statement filed with the SEC, the Company may offer up to an aggregate of $200,000,000 of the following securities, in any combination, from time to time in one or more series: (i) unsecured debt securities, which may be senior or unsubordinated; (ii) preferred stock; (iii) common stock, and (iv) trust preferred securities.
From January 1, 2000, through March 28, 2001, the Company received $14,386,000 from the exercise of common stock purchase warrants and options. In connection with these exercises, the Company will also receive approximately $2,257,000 in tax savings.
In August 2000, the Company's wholly-owned subsidiary, DDD Energy, Inc., sold its working interest in eight producing oil and gas wells and associated leasehold for proceeds of $16.9 million or approximately $12.8 million, net of revenues and costs. Additionally, the Company received $100,000 related to other oil and gas property sales during 2000. The Company used these funds to reduce its borrowings under its line of credit.
In November 1999, the Company filed a registration statement with the SEC to accomplish the spin-off of DDD Energy through an initial public offering. The offering was delayed due to market conditions and management changes. The Company is continuing to evaluate how to best maximize the value of DDD Energy's properties, including (i) proceeding with the deferred spin-off through an initial public offering, (ii) sale or other disposition of some or all of DDD Energy's properties, (iii) continuing to operate the properties to realize value through additional exploration and production, or (iv) some combination of these alternatives.
During 2000, the Company repurchased 330,400 shares of its common stock in the open market at a cost of $4,849,000, pursuant to a stock repurchase program authorized by the Board of Directors in 1997. The Board has authorized expenditures of up to $25 million towards the repurchase of its common stock. As of March 28, 2001, the Company has repurchased a total of 1,010,100 shares of its common stock at a cost of $11,124,000 since 1997 under this plan.
During 2000, gross seismic data bank additions and capitalized oil and gas exploration and development costs amounted to $77,288,000 and $14,767,000 respectively. These capital expenditures, as well as taxes, interest expenses, cost of sales and general and administrative expenses, were funded by operations, proceeds from the sale of oil and gas properties, and proceeds from the exercise of common stock purchase warrants and options.
Currently, the Company anticipates capital expenditures for 2001 to total approximately $133 million, of which approximately $109 million will be for seismic data bank additions, approximately $3 million will be for computer equipment purchases and approximately $21 million will be for oil and gas exploration and development efforts. The Company believes its current cash balances, revenues from operating sources, and proceeds from the exercise of common stock purchase warrants and options, combined with its available revolving line of credit, should be sufficient to fund the currently anticipated 2001 capital expenditures, along with expenditures for operating and general and administrative expenses and debt repayments. If these sources are not sufficient to cover the Company's anticipated expenditures or if the Company were to increase its planned capital expenditures for 2001, the Company could arrange for additional debt or equity financing during 2001; however, there can be no assurance that the Company would be able to accomplish any such debt or equity financing on satisfactory terms. If such debt or equity financing is not available on satisfactory terms, the Company could reduce its current capital budget or any proposed increases to its capital budget, and fund expenditures with cash flow generated from operating sources.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137, is required to be adopted on January 1, 2001. The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. The Company adopted SFAS No. 133 on January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company's financial position or results of operations.
Risk Factors
Any investment in our securities involves risk. Investors should carefully consider, in addition to the other information contained in this report, the risks described below before making any investment decision.
Our business could be adversely affected by low exploration, development and production spending by oil and gas companies and by low oil and gas prices.
Our seismic business depends upon exploration, development and production spending by oil and gas companies. Low oil and gas prices could result in decreased exploration, development and production spending by oil and gas companies, which could affect our seismic data business. Although oil and gas prices have been strong, any future decline could result in decreased revenues from our oil and gas exploration and production business.
We invest significant amounts of money in acquiring and processing seismic data for our data library with only partial underwriting of the costs by customers.
We invest significant amounts of money in acquiring and processing new seismic data to add to our data library, which is generally funded by current and future data licensing fees. The amounts of these future data licensing fees are uncertain and depend on a variety of factors, including the market prices of oil and gas, customer demand for seismic data in our library, availability of similar data from competitors and governmental regulations affecting oil and gas exploration. Many of these factors are beyond our control. In addition, the timing of these sales can vary greatly from period to period. Technological or regulatory changes or other developments could adversely affect the value of the data.
Because our business is concentrated in the U.S. Gulf Coast and Canada, it could be adversely affected by developments in the oil and gas business that affect these areas.
Most of the seismic data in our seismic data library covers areas along the U.S. Gulf Coast, offshore in the U.S. Gulf of Mexico or in Canada. Also, most of our existing interests in oil and gas properties are located along the coast of the U.S. Gulf of Mexico. Because of this geographic concentration, our results of operations could be adversely affected by events relating primarily to one of these regions even if conditions in the oil and gas industry worldwide were favorable. Some examples of possible events that would adversely affect the U.S. Gulf Coast region would be changes in governmental regulations adversely affecting offshore drilling in the U.S. Gulf of Mexico, shortages of drilling or other necessary equipment in this region, or increases in gas transportation costs from this region to the Northeastern U.S., where much of the gas produced in this region is consumed.
The amounts we amortize from our data library each period may fluctuate, and these fluctuations can affect our reported results of operations.
We amortize the cost of our seismic data library based in part on our estimates of future sales of data. These estimates may vary from period to period depending upon market developments and our expectations. Substantial changes in amortization rates can have a significant effect on our reported results of operations.
Drilling hazards and dry holes could affect our oil and gas activities.
We may not discover commercial quantities of oil and gas when we participate in drilling wells. Our oil and gas operations could be adversely affected by the occurrence of drilling hazards. These include :
●
cratering;
●
explosions;
●
uncontrollable flows of oil, gas or well fluids;
●
fires;
●
pollution; and
●
other environmental risks.
Some of these hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, environmental damage and suspension of operations. We usually do not act as operator in our oil and gas drilling business and depend on our partners to minimize these operating risks.
We have recorded write-downs because of low oil and gas prices and may be required to do so again in the future. Future write-downs would result in a charge to our earnings and possible losses.
Under SEC oil and gas accounting rules, we may have to write-down our assets if oil and gas prices decline significantly or if we have significant downward adjustments to our oil and gas reserves. We recorded a $9.6 million pre-tax, $6.2 million after tax, non-cash write-down of the carrying value of our proved oil and gas properties as of December 31, 1997 due to low oil and gas prices. If oil and gas prices fall significantly, or if we have significant downward reserve adjustments in the future, it is possible that additional write-downs will occur again. These write-downs would result in a charge to our earnings and possible losses, but would not impact cash flows from operating activities.
Our debt agreements may limit our flexibility in responding to changing market conditions or in pursuing business opportunities.
Our debt agreements contain restrictions and requirements relating to, among other things:
●
additional borrowing;
●
maintaining financial ratios;
●
granting liens on our assets;
●
selling assets;
●
paying dividends; and
●
merging.
These restrictions and requirements may limit our flexibility in responding to market conditions or in pursuing business opportunities that we believe would have a positive effect on our business.
Extensive governmental regulation of our business affects our daily operations.
Our seismic data customers are subject to extensive governmental regulation. In addition, our oil and gas exploration and production operations are subject to regulations. These regulations, among other things:
●
govern environmental quality and pollution control; and
●
limit rates of production.
New laws or regulations or changes to existing laws or regulations affecting the oil and gas industry could reduce customer demand for our seismic data or increase the operating costs of our oil and gas business.
Loss of key personnel could adversely affect our business.
We depend on a relatively small group of management and technical personnel. The loss of one or more of these individuals could have a material adverse effect on our business.
Information Regarding Forward Looking Statements
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. These statements represent Seitel's reasonable belief and are based on Seitel's current expectations and assumptions with respect to future events. 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 business 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 extent of the Company's success in acquiring oil and gas properties and in discovering, developing and producing reserves, the timing and extent of changes in commodity prices for natural gas, crude oil and condensate and natural gas liquids and conditions in the capital markets and equity markets during the periods covered by the forward looking statements. The forward-looking statements contained in this Report speak only as of the date hereof, and Seitel disclaims any duty to update these statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including adverse changes in commodity prices, interest rates and foreign currency exchange rates as discussed below.
Commodity Price Risk
The Company produces and sells natural gas, crude oil, condensate and natural gas liquids. The Company currently sells most of its oil and gas production under price sensitive or market contracts. As a result, the Company's financial results can be significantly affected as oil and gas prices fluctuate. The Company has a price risk management program that utilizes derivative financial instruments, principally natural gas swaps, to reduce the price risks associated with fluctuations in natural gas prices. However, these contracts also limit the benefits the Company would realize if prices increase. These financial instruments are designated as hedges and accounted for on the accrual basis, recognizing gains and losses in oil and gas production revenues when the associated production occurs. These contracts usually are placed with major derivative dealers that the Company believes are minimal credit risks. The Company defers and recognizes in income the net gains and losses on natural gas swaps designated as hedges of anticipated transactions, including accrued gains or losses upon maturity or termination of the contract, when the associated hedged gas is produced.
During 1999, the Company entered into natural gas swaps in order to hedge a portion of anticipated natural gas production. During 1999, the Company recognized net hedging losses of $308,000. As of December 31, 1999, the Company had open commodity price hedges totaling 2,285,000 MMBtu at an average price of 2.51 per MMBtu. The estimated fair value of these open commodity price hedges as of December 31, 1999 was $(377,000). During 2000, the Company recognized net hedging losses of $1,692,000. As of December 31, 2000, the Company did not have any open commodity price hedges. The Company continually reviews and may alter its hedged positions. The Company's strategy is to seek arrangements with guaranteed minimum prices and flexibility to participate in improving commodity prices.
Interest Rate Risk
The Company may enter into various financial instruments, such as interest rate swaps, to manage the impact of changes in interest rates. Currently, the Company has no open interest rate swap or interest rate lock agreements. Therefore, the Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with both fixed and floating interest rates. The following table presents principal or notional amounts (stated in thousands) and related average interest rates by year of maturity for the Company's debt obligations and their indicated fair market value at December 31, 2000:
The following table presents principal or notional amounts (stated in thousands) and related average interest rates by year of maturity for the Company's debt obligations and their indicated fair market value at December 31, 1999:
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. During 2000, the Company entered into forward exchange contracts to hedge a portion of its foreign currency exchange risk related to its Canadian activities. As of December 31, 2000, the Company had open forward exchange contracts totaling $4 million (Canadian dollars) at an exchange rate into U.S. dollars of .6925 maturing in equal amounts of $1 million (Canadian dollars) each month from January 2001 to April 2001. Exposure from market rate fluctuations related to activities in the Cayman Islands, where the Company's functional currency is pounds sterling, is not material at this time.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules required by this Item are set forth at the pages indicated in ITEM 14(a) (1) and (2) below.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be set forth in this Item is incorporated by reference to a similarly titled heading in the Company's definitive proxy statement relating to the 2001 annual meeting of its stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K (hereinafter the "Proxy Statement").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be set forth in this Item is incorporated by reference to a similarly titled heading in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The information required to be set forth in this Item is incorporated by reference to a similarly titled heading in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be set forth in this Item is incorporated by reference to a similarly titled heading in the Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly
caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SEITEL, INC.
By:
/s/
Paul A. Frame
----------------------------------------------------------------------
Paul A. Frame
President
Date:
March
30,
Pursuant to the requirements of the Securities Act of 1934, this Report on Form 10-K has been signed
below by the following persons in the capacities and on the date indicated.
Signature
Title
Date
/s/
Herbert M. Pearlman
Chairman of the Board of Directors
March
30,
------------------------------------------------
Herbert M. Pearlman
/s/
Paul A. Frame
President and Chief Executive Officer,
March
30,
------------------------------------------------
Director
Paul A. Frame
/s/
Debra D. Valice
Executive Vice President-Finance,
March
30,
------------------------------------------------
Chief Financial Officer, Secretary
Debra D. Valice
and Treasurer, Director
/s/
Walter M. Craig, Jr.
Director
March
30,
------------------------------------------------
Walter M. Craig, Jr.
/s/
William Lerner
Director
March
30,
------------------------------------------------
William Lerner
/s/
John Stieglitz
Director
March
30,
------------------------------------------------
John Stieglitz
/s/
Fred S. Zeidman
Director
March
30,
------------------------------------------------
Fred S. Zeidman
/s/
Marcia H. Kendrick
Chief Accounting Officer
March
30,
------------------------------------------------
Marcia H. Kendrick
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Management of Seitel, Inc.:
We have audited the accompanying consolidated balance sheet of Seitel, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Seitel, Inc. and subsidiaries at December 31, 2000, and the consolidated results of their operations and their cash flows for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Houston, Texas
March 16, 2001
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Seitel, Inc.:
We have audited the accompanying consolidated balance sheet of Seitel, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Seitel, Inc. and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the years ended December 31, 1999 and 1998, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 2000
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- continued
(In thousands, except share and per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
SEITEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-continued
The accompanying notes are an integral part of these consolidated financial statements.
SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Seitel, Inc. (the "Company") is a leading diversified energy company providing seismic data and related geophysical services to the oil and gas industry and directly participating in exploration, development and ownership of natural gas and crude oil reserves. The majority of the Company's seismic surveys cover onshore and offshore U.S. Gulf Coast region, the Rocky Mountain region and Canada. The Company's oil and gas exploration, development and production activities are on properties located primarily in the onshore Gulf Coast areas of Texas, Louisiana, Alabama and Mississippi, as well as California and Arkansas.
In the course of its operations, the Company is subject to certain risk factors, including, but not limited to, the following: competition, industry conditions, volatility of oil and gas prices, operating risks, dependence of key personnel, geographic concentration of operations and compliance with governmental regulations.
Use of Estimates: The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of certain estimates by management in determining the Company's assets, liabilities, revenues and expenses. Actual results could differ from estimates. Seismic data library amortization is determined using estimates of ultimate revenues from licensing of the seismic data. Refer to the seismic data library discussion below for additional information on seismic data library amortization. Depreciation, depletion and amortization of oil and gas properties and the impairment of oil and gas properties are determined using estimates of proved oil and gas reserves and the present value of estimated cash flows therefrom. There are numerous uncertainties in estimating the quantity of proved reserves and in projecting the future rates of production and timing of development expenditures. Refer to Note S, "Supplemental Oil and Gas Information" for additional information regarding the process of estimating proved oil and gas reserve quantities and related values.
Basis of Presentation: The accompanying consolidated financial statements include the accounts of Seitel, Inc., the accounts of its wholly-owned subsidiaries and the Company's pro rata share of its investments in joint ventures. Investments in less than majority owned companies over which the Company has the ability to exercise significant influence are accounted for using the equity method. All material intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the amounts in the prior years' financial statements to conform to the current year's presentation.
The Company presents its consolidated balance sheets on an unclassified basis. The portion of seismic data library costs to be amortized during the next year cannot be classified as a current asset due to Securities and Exchange Commission ("SEC") guidance. Classification of all of these costs as noncurrent would be misleading to the reader because it would not indicate the level of assets expected to be converted into cash in the next year. As a result, the Company believes that the use of an unclassified balance sheet results in improved financial reporting.
Seismic Data Library: Costs incurred in the creation of proprietary seismic data, including the direct and incremental costs of Company personnel engaged in project management and design, are capitalized. Substantially all (greater than 87%) of the costs incurred to develop the Company's seismic data library have been for programs created by the Company. The Company uses the income forecast method to amortize the costs of seismic data programs it creates. Under the income forecast method, seismic data costs are amortized in the proportion that revenue for a period relates to management's estimate of ultimate revenues. If anticipated sales fall below expectations, amortization is accelerated. As of December 31, 2000, 91% of the Company's two-dimensional seismic data created by the Company has been amortized; the residual is being amortized on a straight-line basis. The Company also purchases existing seismic data programs from other companies. The costs of purchased seismic data programs are generally amortized on a straight-line basis over ten years; however, the costs of a significant purchase (greater than 5% of the net book value of the seismic data library), are amortized using the greater of the income forecast method or ten-year straight-line method.
As of December 31, 2000, almost all (95%) of the net costs of the Company's seismic data library are expected to be fully amortized within 10 years from when such data becomes available for resale. On a periodic basis, the carrying value of seismic data is reviewed to assess whether there has been a permanent impairment of value. Any indicated losses are recorded when it is determined that estimated future revenues would not be sufficient to cover the carrying value of the asset.
Net seismic data library at December 31, 2000 and 1999 was comprised of the following (in thousands):
Oil and Gas Properties: The Company accounts for its oil and gas exploration and production activities using the full-cost method of accounting. Under this method, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized, including salaries, benefits and other internal costs, directly attributable to these activities. Costs associated with production and general corporate activities are expensed in the period incurred. For the years ended December 31, 2000, 1999 and 1998, exploration and development related overhead costs of $1,809,000, $1,938,000 and $1,795,000, respectively, have been capitalized to oil and gas properties. Interest costs related to unproved properties and certain properties under development are also capitalized to oil and gas properties. For the years ended December 31, 2000, 1999 and 1998, interest costs of $2,837,000, $3,101,000 and $2,486,000, respectively, have been capitalized to oil and gas properties.
No gains or losses are recognized upon the sale of oil and gas properties unless a significant portion of the Company's proved oil and gas reserves are sold (generally greater than 25 percent). Instead, proceeds from the sale of oil and gas properties are accounted for as a reduction of capitalized costs. In August 2000, the Company sold its working interest in eight producing oil and gas wells and associated leasehold for approximately $12.8 million, net of revenues and costs. In July 1999, the Company sold its 18.75% working interest in 11 oil and gas wells, one salt water disposal well and approximately 16,000 acres of leasehold and options to lease for approximately $11.7 million, net of revenues and costs.
Depreciation, depletion and amortization ("DD&A") expense is calculated quarterly using the units-of-production method based upon production and estimates of proved reserves. Estimated future development costs and site restoration, dismantlement and abandonment costs, net of salvage values, are included in the amortization base. Capitalized costs associated with the acquisition and evaluation of unproved properties and certain properties under development are not included in the amortization base until these costs are evaluated.
Capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, are limited to the present value, discounted at 10 percent, of future net cash flows from estimated proved oil and gas reserves, based on current economic and operating conditions, plus the lower of cost or fair value of unproved properties, adjusted for the effects of related income taxes. If capitalized costs exceed this limit, the excess is charged to impairment of oil and gas properties.
Substantially all of the Company's exploration and development activities are conducted jointly with others and, accordingly, the Company's oil and gas property balance reflects only its proportionate interest in such activities.
Other Property and Equipment: Depreciation of other property and equipment is calculated using the straight-line method over the estimated useful lives of the assets of three to five years.
Marketable Equity Securities: The Company accounts for its marketable equity securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date.
The Company's marketable securities are categorized as available-for-sale and are carried at fair value, with unrealized holding gains and losses, net of taxes, reflected in accumulated other comprehensive income (loss) included in stockholders' equity until realized. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis.
At December 31, 2000 and 1999, unrealized gains (losses) on marketable securities were $996,000 and $(1,571,000), respectively. The deferred tax expense (benefit) was $333,000 and $(526,000) at December 31, 2000 and 1999, respectively, resulting in a net increase (charge) of $663,000 and $(1,045,000), respectively, to other comprehensive income.
Debt Issue Costs: Debt issue costs related to the Company's Senior Notes and line of credit are included in prepaid expenses, deferred charges and other assets in the consolidated balance sheet. Such costs are amortized over the scheduled maturities of the debt. As of December 31, 2000 and 1999, unamortized debt issue costs were $1,457,000 and $1,762,000, respectively.
Income Taxes: The Company and all of its U.S. subsidiaries file a consolidated federal income tax return. The Company does not provide U.S. taxes on the undistributed earnings of its foreign subsidiaries whose earnings are intended to be permanently reinvested in foreign operations. At December 31, 2000, accumulated net earnings of non-U.S. subsidiaries for which no U.S. federal taxes have been provided were $11,761,000.
Revenue Recognition: Revenue from the creation of new seismic data is recognized in accordance with the percentage-of-completion method of accounting based upon survey costs incurred to date as a percentage of total estimated survey costs. Revenue from seismic data licensing agreements is recognized when each seismic data program is available for use by the licensees, and is presented net of revenue shared with other entities. Revenue received in advance of being earned is deferred until earned.
In certain cases, the Company grants seismic licenses to third parties for data to be used in their operations (not for resale) in exchange for exclusive ownership of seismic data from the third party. The Company recognizes revenue for the licenses granted and records a data library asset for the seismic data acquired. These transactions are accounted for as non-monetary exchanges and are valued at the fair market value of such licenses based on values realized in cash transactions with other parties for similar seismic data.
The Company uses the sales method of accounting for its natural gas revenues. Under this method, revenues are recognized based on actual volumes of gas sold to purchasers. The volumes of gas sold may differ from the volumes to which the Company is entitled based on its interests in the properties, which historically, has not been significant.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101 outlines the basic criteria that must be met to recognize revenue, and provides guidelines for disclosure related to revenue recognition policies. This guidance was required to be implemented in 2000. The Company implemented SAB 101 as of October 1, 2000 without a material impact on the quarterly or annual results of operations.
Foreign Currency Translation: For subsidiaries whose functional currency is deemed to be other than the U.S. dollar, asset and liability accounts are translated at period-end exchange rates and revenue and expenses are translated at the current exchange rates as of the dates on which they are recognized. Resulting translation adjustments are included in accumulated other comprehensive income (loss) in stockholders' equity. Any gains or losses realized on transactions or monetary assets or liabilities in currencies other than the functional currency are included in net income in the current period. Transaction gains (losses) totaling $(233,000), $455,000 and $108,000 for the years ended December 31, 2000, 1999 and 1998, respectively, are included in selling general and administrative expenses in the consolidated statements of operations.
Use of Derivatives: The Company enters into various derivative instruments to manage commodity price fluctuations and foreign exchange risks. Derivatives are limited in use and are not entered into for speculative purposes.
The Company enters into foreign exchange contracts to hedge certain foreign currency denominated assets or liabilities and currency commitments.
The Company has a price risk management program that utilizes derivative financial instruments, principally natural gas swaps, to reduce the price risks associated with fluctuations in natural gas prices. Such contracts usually are placed with major derivative dealers that the Company believes are minimal credit risks. The Company accounts for these derivative financial instruments using the hedge (or deferral) method of accounting. Under this method, realized gains and losses from the Company's price risk management activities are recognized in oil and gas production revenues when the associated production occurs and the resulting cash flows are reported as cash flows from operating activities. Recognition of gains and losses on derivative financial instruments that are closed before the hedged production occurs are deferred until the production month originally hedged.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137, is required to be adopted on January 1, 2001. The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. The Company adopted SFAS No. 133 on January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company's financial position or results of operations.
Earnings per Share: In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share is computed based on the weighted average shares of common stock outstanding during the periods. Diluted earnings per share is computed based on the weighted average shares of common stock plus the assumed issuance of common stock for all potentially dilutive securities. The computations for basic and diluted net income per share for the years 2000, 1999 and 1998 consist of the following (in thousands except per share amounts):
Stock-Based Compensation
: The Company accounts for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Reference is made to Note I, "Stock Options and Warrants," for a summary of the pro forma effect of SFAS No. 123, "Accounting for Stock-Based Compensation" on the Company's results of operations in 2000, 1999 and 1998.
Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. The estimated fair value amounts have been determined by the Company using available market data and valuation methodologies. The book values of cash and equivalents, receivables and accounts payable approximate their fair value as of December 31, 2000 and 1999, because of the short-term maturity of these instruments. Based upon the rates available to the Company, the fair value of the Senior Notes and the term loans approximates $173,828,000 and $182,656,000 as of December 31, 2000 and 1999, respectively. The book value of the Company's revolving line of credit approximates fair value due to the variable interest rates under the line.
Impairment of Long-Lived Assets: In accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if an impairment of such asset is necessary. The effect of any impairment would be to expense the difference between the fair value of such asset and its carrying value. There were no such impairments recorded under SFAS No. 121 in 2000, 1999 or 1998.
Accounting For Sales of Stock By Subsidiary Companies: The Company recognizes gains or losses on sales of stock by its subsidiary companies when such sales are not made as part of a larger plan of corporate reorganization. Such gains or losses are based upon the difference between the book value of the Company's investment in the subsidiary immediately after the sale and the historical book value of the Company's investment immediately prior to the sale.
Comprehensive Income: In accordance with SFAS No. 130, "Reporting Comprehensive Income," the Company has reported comprehensive income in the consolidated statements of stockholders' equity for the three years ended December 31, 2000. Accumulated other comprehensive income for the Company consists of foreign currency translation adjustments and unrealized gains (losses) on marketable securities. Cumulative translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
Allowance for Doubtful Accounts: Activity in the Company's allowance for doubtful accounts receivable consists of the following (in thousands):
NOTE B--INCOME TAXES
Income before provision for income taxes for each of the three years ended December 31, 2000 is comprised of the following (in thousands):
-----------------
-----------------
-----------------
U.S.
$
23,885
$
6,894
$
35,405
Foreign
8,321
9,624
2,578
-----------------
-----------------
-----------------
$
32,206
$
16,518
$
37,983
==========
==========
==========
The provision (benefit) for income taxes for each of the three years ended December 31, 2000, is comprised of the following (in thousands):
-----------------
-----------------
-----------------
Current:
Federal
$
13,839
$
1,456
$
3,018
State
Foreign
-----------------
-----------------
-----------------
14,072
1,637
3,634
-----------------
-----------------
-----------------
Deferred:
Federal
(4,197
)
1,678
9,463
Foreign
1,914
3,823
-----------------
-----------------
-----------------
(2,283
)
5,501
9,989
-----------------
-----------------
-----------------
Tax provision:
Federal
9,642
3,134
12,481
State
Foreign
1,917
3,848
-----------------
-----------------
-----------------
$
11,789
$
7,138
$
13,623
==========
==========
==========
The differences between the U.S. Federal income taxes computed at the statutory rate (35%) and the Company's income taxes for financial reporting purposes are as follows (in thousands):
----------
----------
----------
Statutory Federal income tax
$
11,272
$
5,781
$
13,294
State income tax, less Federal benefit
Tax difference on foreign earnings
(995
)
Restructuring charge not fully benefited
-
-
Other, net
----------
----------
----------
Income tax expense
$
11,789
$
7,138
$
13,623
======
======
======
The components of the net deferred income tax liability reflected in the Company's consolidated balance sheets at December 31, 2000 and 1999 were as follows (in thousands):
As of December 31, 2000, the Company has an alternative minimum tax (AMT) credit carryforward of approximately $549,000 which can be used to offset regular Federal income taxes payable in future years. The AMT credit has an indefinite carryforward period.
In connection with the exercise of non-qualified stock options and common stock purchase warrants by employees during 2000, 1999 and 1998, the Company received $1,814,000, $597,000 and $344,000, respectively, in Federal income tax savings which has been reflected as a credit to additional paid-in capital.
NOTE C--DEBT
The following is a summary of the Company's debt at December 31, 2000 and 1999 (in thousands):
Senior Notes: The Company has issued six series of unsecured Senior Notes totaling $213 million through private placement. Interest on the Series A, B and C Senior Notes is payable semi-annually on June 30 and December 30 and interest on the Series D, E and F Senior Notes is payable semi-annually on February 15 and August 15. Accrued interest of $3,689,000 and $3,735,000 is included in accrued liabilities at December 31, 2000 and 1999, respectively.
Lines of Credit: The Company has a $75 million unsecured revolving line of credit facility whose maturity was extended to June 15, 2001. Under the terms of the extension, the facility bears interest at a rate of LIBOR plus 1.25%, the bank's prevailing prime rate, or the sum of the Federal Funds effective rate for such day plus 1/2%.
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 subsidiaries. Borrowings under the facility are limited to 75% of trade receivables less than 90 days old. The facility is subject to repayment upon demand and is available from time to time at the Bank's sole discretion. Olympic did not have any amounts outstanding under this line of credit at December 31, 2000 or 1999.
The financial covenant restrictions for the Senior Notes and parent revolving credit agreement include, among others, interest coverage, maintenance of minimum net worth and limitations on liens, total debt, debt issuance and disposition of assets. The Company was in compliance with the financial convenants at December 31, 2000.
Aggregate maturities of the Company's debt over the next five years and thereafter are as follows: $58,333,000 in 2001; $10,000,000 in 2002, $0 in 2003, $32,500,000 in 2004, $12,500,000 in 2005 and $93,000,000 thereafter.
NOTE D--LEASE OBLIGATIONS
Assets recorded under capital leases obligations of $239,000 and $30,000 at December 31, 2000 and 1999, respectively, are included in property and equipment.
The Company leases office space under operating leases. Rental expense for 2000, 1999 and 1998 was approximately $1,148,000, $1,112,000 and $757,000, respectively.
Future minimum lease payments for the five years subsequent to December 31, 2000 and in the aggregate are as follows (in thousands):
NOTE E--CONTINGENCIES AND COMMITMENTS
The Company has an agreement with IBM Canada Ltd. to purchase a minimum of $2 million (Canadian) of computers and related equipment.
The Company has employment agreements with certain of its key employees and other incentive compensation arrangements that commit it to commissions based on revenue, bonuses based on pre-tax profits, and other amounts based on seismic data program and oil and gas project profitability. Part III of the Company's Form 10-K contains a more complete discussion of these contractual obligations.
The Company guarantees borrowings up to $750,000 made by its president under a line of credit. The Company is only obligated to make payment in the event of default by its president. The Company has a contractual right of offset against any salary, bonus, commission or other amounts due from the Company to its president for any amounts paid by the Company pursuant to this guaranty. At December 31, 2000, $690,000 was outstanding on this line of credit. The maximum amount outstanding on this line of credit during 2000 was $700,000. The Company did not make any payments under this guaranty during 2000 or 1999.
The Company is involved from time to time in or threatened with litigation and is subject to governmental and regulatory controls arising in the ordinary course of business. It is the opinion of the Company's management that all claims and litigation involving the Company are not likely to have a material adverse effect on its financial position or results of operations.
The Company, as an owner of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. The Company maintains insurance coverage, which it believes is customary in the industry, although it is not fully insured against all environmental risks. The Company is not aware of any environmental claims existing as of December 31, 2000, which would have a material impact on its financial position or results of operations.
NOTE F--FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISK
The Company has a price risk management program that utilizes derivative financial instruments, principally natural gas swaps, to reduce the price risk associated with fluctuations in natural gas prices. The derivative financial instruments called for the Company to receive or make payments based upon the differential between a fixed and a variable commodity price as specified in the contract.
As a result of these activities, the Company recognized net hedging gains (losses) of $(1,692,000), $(308,000) and $653,000 for the years ended December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000 and 1998, the Company did not have any open commodity price hedges. The estimated fair value of open commodity price hedges as of December 31, 1999 was $(377,000).
The Company enters into foreign exchange contracts to hedge a portion of its foreign currency exchange risk related to its Canadian activities. As of December 31, 2000, the Company had forward exchange contracts totaling $4 million (Canadian dollars) at an exchange rate into U.S. dollars of .6925 maturing in equal amounts of $1 million (Canadian dollars) each month from January 2001 to April 2001. The estimated fair market value of open foreign exchange contracts as of December 31, 2000 was $100,000. As of December 31, 1999 and 1998, the Company did not have any open foreign exchange contracts.
NOTE G--COMMON STOCK
In December 1997, the Company's Board of Directors approved the expenditure of up to $25 million to repurchase the Company's common stock. As of December 31, 2000, the Company has repurchased 1,010,100 shares of common stock at a cost of $11,124,000 under this plan.
The Company may offer from time to time in one or more series (i) unsecured debt securities, which may be senior or subordinated, (ii) preferred stock and (iii) common stock or any combination of the foregoing, up to an aggregate of $41,041,600 pursuant to an effective "shelf" registration statement filed with the SEC. In addition, under another effective "shelf" registration statement filed with the SEC, the Company may offer up to an aggregate of $200,000,000 of the following securities, in any combination, from time to time in one or more series: (1) unsecured debt securities, which may be senior or subordinated; (2) preferred stock; (3) common stock, and (4) trust preferred securities.
On July 21, 1992, the Company granted ten-year loans at an interest rate of 4% to most of its employees for the purchase of 800,000 shares of the Company's common stock at the then market price of $2.69 per share. Payment of 5% of the original principal balance plus accrued interest are due annually August 1, with a balloon payment of the remaining principal and interest due August 1, 2002. On October 2, 1998, the Company granted five-year loans at an interest rate of 4% to most of its employees for the purchase of 794,300 shares of the Company's common stock at the then market price of $10.31 per share. Payment of 60% of the loan amount plus accrued interest is being made in equal monthly, quarterly or annual payments, as applicable, and a balloon payment of the remaining 40% is due on October 2, 2003. The Company recorded related compensation expense due to the below market interest rate on these loans of $98,000, $114,000 and $54,000 for the years ended December 31, 2000, 1999, and 1998, respectively. During 2000, 1999 and 1998 , the Company received $1,950,000, $1,736,000 and $649,000, respectively, as principal payments on these notes. The stock certificates are held by the Company as collateral until payment is received.
NOTE H--PREFERRED STOCK
The Company is authorized by its Amended Certificate of Incorporation to issue 5,000,000 shares of preferred stock, the terms and conditions to be determined by the Board of Directors in creating any particular series. As of December 31, 2000, no preferred stock had been issued.
NOTE I--STOCK OPTIONS AND WARRANTS
The Company maintains various stock option plans under which the Company's officers, directors and employees may be granted options or warrants to purchase the Company's common stock. The exercise price, term and other conditions applicable to each option or warrant granted under the Company's plans are generally determined by the Compensation Committee at the time of grant and may vary with each option or warrant granted. All options and warrants issued under the Company's plans are issued at or above the market price of the Company's common stock as of the date of issuance, have a term of no more than ten years and vest under varying schedules in accordance with the terms of the respective option or warrant agreements.
The following summarizes information with regard to the stock option and warrant plans for the years ended December 31, 2000, 1999 and 1998 (shares in thousands):
The following table summarizes information for the options and warrants outstanding at December 31, 2000 (shares in thousands):
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. APB Opinion No. 25 generally does not require compensation costs to be recorded on options which have exercise prices at least equal to the market price of the stock on the date of grant. Accordingly, no compensation cost has been recognized for the Company's stock-based plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the optional accounting method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):
------------
------------
------------
Net income
As reported
$
20,417
$
9,380
$
24,360
Pro forma
$
11,135
$
5,331
$
15,159
Basic earnings per share
As reported
$
.85
$
.39
$
1.07
Pro forma
$
.47
$
.22
$
.67
Diluted earnings per share
As reported
$
.85
$
.39
$
1.05
Pro forma
$
.46
$
.22
$
.66
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 2000, 1999 and 1998, respectively: (1) risk-free interest rates ranging from 5.02% to 6.06%, 5.56% to 6.73% and 4.44% to 5.03%; (2) dividend yield of 0%, 0% and 0%; (3) stock price volatility ranging from 248.45% to 401.22%, 47.84% to 482.90% and 44.34% to 57.10%, and (4) expected option lives ranging from 2.78 to 10 years, .67 to 10 years and .42 to 10 years. The weighted-average fair value of options granted during 2000, 1999 and 1998 was $13.78, $12.57 and $11.94 per option, respectively, for options granted at fair market value and $7.13 and $13.75 per option for options granted above fair market value in 1999 and 1998, respectively. The pro forma amounts shown above may not be representative of future results because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995.
NOTE J--NON-EMPLOYEE DIRECTORS' PLANS
The Company has a Non-Employee Directors' Deferred Compensation Plan which permits each non-employee director to elect to receive annual director fees in the form of stock options and to defer receipt of any director fees in a deferred cash account or as deferred shares. As of December 31, 2000, 60,000 shares have been reserved for issuance under this plan and directors have accumulated 12,009 deferred shares in their accounts of which 984 shares have been distributed and 11,025 will be distributed in future years.
In 1999, the Company's Board of Directors adopted the Non-Employee Directors' Retirement Plan which provides that each non-employee director with 10 or more years of continuous service is eligible to receive a retirement benefit based on a formula defined in the plan. The Company expensed $82,000 and $18,000 related to this plan in 2000 and 1999, respectively.
NOTE K-RESTRUCTURING
On June 23, 2000, the Company announced that its management incentive bonus compensation contracts had been restructured to reduce bonuses on pre-tax profits to 8.5% from 17.5%. In connection with the restructuring, the Company issued 375,000 restricted shares of its Common Stock to three members of management and made cash payments totaling $1,771,000. As a result, the Company recorded a restructuring charge in 2000 totaling $4,394,000 ($3,743,000 net of tax) to reflect the cost of the shares issued and the cash payments made. In addition, the Company will, subject to continued employment, make (i) four annual payments of $187,500, net of taxes, to Herbert Pearlman, Chairman of the Board of Directors, beginning January 1, 2001; (ii) four annual payments of $125,000, net of taxes, to Paul Frame, President and Chief Executive Officer, beginning January 1, 2001; and (iii) payments totaling $1.4 million, net of taxes, to David Lawi payable over four years beginning January 1, 2001. The withholding taxes on these payments will total 35%. The Company will also make annual payments of $850,000 to Horace Calvert beginning July 1, 2000 through May 31, 2004, subject to continued employment. These payments will be charged to expense over the period earned. For the year ended December 31, 2000, $1,425,000 was included in selling, general and administrative expense related to these payments.
NOTE L--INVESTMENT IN EAGLE GEOPHYSICAL, INC.
On August 11, 1997, the Company's wholly-owned seismic data acquisition crew subsidiary, Eagle Geophysical, Inc. ("Eagle"), completed an initial public offering ("Offering") in which the Company sold 1,880,000 of its 3,400,000 shares of Eagle common stock as a selling stockholder. After the offering, the Company owned 17.9% of Eagle.
In 1998, Eagle issued stock in connection with two acquisitions which caused the Company to record a pre-tax loss of $193,000 for the year ended December 31, 1998.
On April 22, 1999, the Board of Directors of Seitel, Inc. declared to its common stockholders a dividend consisting of the remaining 1,520,000 shares of the common stock of Eagle owned by the Company. The dividend was declared at the rate of approximately 0.064 shares of Eagle common stock for each share of Seitel, Inc. common stock owned as of the close of business on the record date of May 18, 1999. The fair market value of the common stock of Eagle held by the Company on the date this dividend was declared was lower than the carrying value of the stock on the Company's balance sheet; therefore, a non-cash, non-recurring, pre-tax impairment, net of bonus effect, of $7,794,000 was recorded for the year ended December 31, 1999.
NOTE M--RELATED PARTY TRANSACTIONS
The Company periodically uses the seismic data acquisition services of Eagle. The Company incurred charges of $27,385,000 and $79,900,000 for these services for the four months ended April 30, 1999, and for the year ended December 31, 1998, respectively.
The Company owed Helm Capital Group, Inc. and its subsidiaries ("Helm"), a company that has an executive officer who is a director of the Company, $16,000 and $2,000 as of December 31, 2000 and 1999, respectively, for sales of seismic data they jointly own and for general and administrative expenses paid by Helm on behalf of the Company. The Company incurred charges of $117,000, $115,000 and $99,000, for these general and administrative expenses during 2000, 1999 and 1998, respectively. Management believes that these expenses, which were specifically related to the Company's business, represented costs which would have been incurred in similar amounts by the Company if such services that were performed by Helm were performed by an unaffiliated entity.
Certain employees and directors of the Company contributed cash to partnerships in 1994 through 1997 which invested in the exploration and development of oil and gas properties on a working interest basis along with DDD Energy, Inc. ("DDD Energy"). Each partnership's working interest amounted to 2.5% of the total investment made by such partnership and DDD Energy for the partnership formed in 1997, 3% for the partnership formed in 1996 and 5% for the partnerships formed in 1995 and 1994. On October 1, 1998, DDD Energy purchased the oil and gas interests owned by each of the partnerships in exchange for 355,733 shares of the Company's common stock, payment of $824,000 and assumption of each partnership's liabilities totaling $1,555,000.
NOTE N--MAJOR CUSTOMERS
During 2000, one seismic customer accounted for 12% of the Company's revenue. No customers accounted for 10% or more of revenues during the years 1999 and 1998.
The Company extends credit to various companies in the oil and gas industry for the purchase of their seismic data, which results in a concentration of credit risk. This concentration of credit risk may be affected by changes in economic or other conditions and may accordingly impact the Company's overall credit risk. However, management believes that the risk is mitigated by the number, size, reputation and diversified nature of the companies to which they extend credit. Historical credit losses incurred on receivables by the Company have not been significant relative to sales.
NOTE O--STATEMENT OF CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers all highly liquid investments or debt instruments with original maturity of three months or less to be cash equivalents.
Operating cash flows reported in the consolidated statements of cash flows do not reflect effects of changes in inventory levels because the Company reports no inventories and classifies cash expenditures for its seismic data library as an investing, rather than an operating, activity.
Significant non-cash investing and financing activities are as follows:
1.
During 2000 and 1999, capital lease obligations totaling $283,000 and $33,000, respectively, were incurred when the Company entered into leases for property and equipment
2.
During 1999, the Company declared to its common stockholders a dividend consisting of the remaining 1,520,000 shares of common stock of Eagle owned by the Company with a fair market value of $6,365,000.
3.
During 1998, the Company issued 355,733 shares of its common stock valued at $3,914,000 to acquire interests in certain oil and gas properties and assumed liabilities totaling $1,555,000.
4.
During 1998, the Company issued 794,300 shares of its common stock to its officers and employees in exchange for notes receivable of $8,191,000.
NOTE P--INDUSTRY SEGMENTS
Segment information has been prepared in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company operates in two reportable segments - seismic and exploration and production. The long-term financial performance of each of the reportable segments is affected by similar economic conditions. The accounting policies of the segments are the same as those described in Footnote A to these consolidated financial statements. The Company evaluates performance of each reportable segment based on operating income before selling, general and administrative expenses, interest income and expense, income taxes, non-recurring items and accounting changes.
Financial information by reportable segment for the three years ended December 31, 2000, was as follows (in thousands):
-----------------------------------------------
(a)
Includes other ancillary equipment.
The following geographic information for the three years ended December 31, 2000 pertains to the Company's seismic segment (in thousands):
Other
United
Foreign
States
Canada
Countries
Total
---------------
---------------
---------------
---------------
Revenue from external customers
$
108,149
$
31,182
$
$
139,376
Assets
369,902
51,548
1,429
422,879
Revenue from external customers
$
83,532
$
26,139
$
-
$
109,671
Assets
347,672
42,654
1,523
391,849
Revenue from external customers
$
117,623
$
7,370
$
$
125,863
Assets
301,704
13,797
1,791
317,292
All exploration and production activities are conducted in the United States.
The following table reconciles segment information to consolidated totals: (in thousands)
NOTE Q--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2000 and 1999.
------------------------------------------
(1)
Gross profit represents revenue less data bank amortization, depletion of oil and gas properties and cost of sales.
(2)
The sum of the individual quarterly earnings per share may not agree with the year to date earnings per share as each period's computation is based on the weighted average number of common shares outstanding during the period.
NOTE R--PROPOSED SALE OF OIL AND GAS SUBSIDIARY
In November 1999, the Company filed a registration statement with the SEC to accomplish the spin-off of DDD Energy, a wholly-owned subsidiary of the Company, through an initial public offering. The proposed offering was delayed due to market conditions and management changes. The Company incurred costs totaling $958,000 in connection with the proposed initial public offering. The costs were charged to expense during 2000 as a result of the delay.
NOTE S--SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The following information concerning the Company's oil and gas operations is presented in accordance with SFAS No. 69, "Disclosures about Oil and Gas Producing Activities."
Oil and Gas Reserves: Proved oil and gas reserves represent estimated quantities of natural gas, crude oil, condensate and natural gas liquids that geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. Proved developed reserves are proved reserves expected to be recovered through wells and equipment in place and under operating methods being utilized at the time the estimates were made.
The following table sets forth estimates of proved reserves and proved developed reserves of natural gas and crude oil (including condensate and natural gas liquids) attributable to the Company's interest in oil and gas properties. The reserve estimates presented herein were prepared by the independent petroleum engineering firm of Garb Grubbs Harris & Associates, Inc. (formerly Forrest A. Garb & Associates, Inc.) in accordance with guidelines established by the SEC. It should be noted that these reserve quantities are estimates and may be subject to substantial upward or downward revisions. The estimates are based on the most current and reliable information available; however, additional information obtained through future production and experience and additional development of existing reservoirs may significantly alter previous estimates of proved reserves.
The proved reserves disclosed above exclude proved sulfur reserves of 164,000 long tons, 260,000 long tons and 420,000 long tons at December 31, 2000, 1999 and 1998, respectively.
Capitalized Costs of Oil and Gas Properties: As of December 31, 2000 and 1999, the Company's capitalized costs of oil and gas properties were as follows (in thousands):
Of the total costs excluded from the amortization calculation as of December 31, 2000, $7,436,000 was incurred during 2000, $15,224,000 was incurred during 1999, $12,896,000 was incurred during 1998, and $10,352,000 was incurred during 1997 and prior years. The Company cannot accurately predict when these costs will be included in the amortization base, but it is expected that these costs will be evaluated in the next three to five years.
Costs Incurred in Oil and Gas Activities:
The following table sets forth the Company's costs incurred for oil and gas activities for the years ended December 31, 2000, 1999 and 1998 (in thousands):
Results of Operations for Oil and Gas Producing Activities: The following table sets forth the results of operations for oil and gas producing activities for the years ended December 31, 2000, 1999 and 1998 (in thousands):
---------------
---------------
------------
Revenue
$
24,226
$
18,637
$
18,663
Production costs
(4,821
)
(4,706
)
(4,673
)
Depreciation, depletion and amortization
(10,376
)
(9,093
)
(11,872
)
---------------
---------------
------------
Income before income taxes
9,029
4,838
2,118
Income tax expense
(3,160
)
(1,693
)
(741
)
---------------
---------------
------------
Results of operations
$
5,869
$
3,145
$
1,377
=========
=========
=======
In addition to the revenues and production costs disclosed above, the Company had revenues from sulfur sales and related production costs of $209,000 and $11,000, respectively, for the year ended December 31, 2000, $399,000 and $14,000, respectively, for the year ended December 31, 1999 and $331,000 and $10,000, respectively, for the year ended December 31, 1998.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves: The following table sets forth the standardized measure of the discounted future net cash flows attributable to the Company's proved oil and gas reserves as prescribed by SFAS No. 69. Future cash inflows were computed by applying year-end prices of oil and gas to the estimated future production of proved oil and gas reserves. Future prices actually received may differ from the estimates in the standardized measure.
Future production and development costs represent the estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves, assuming continuation of existing economic conditions. Future income tax expenses were computed by applying statutory income tax rates to the difference between pre-tax net cash flows relating to the Company's proved oil and gas reserves and the tax basis of proved oil and gas properties, adjusted for tax credits and allowances. The resulting annual net cash flows were then discounted to present value amounts by applying a 10 percent annual discount factor.
Although the information presented is based on the Company's best estimates of the required data, the methods and assumptions used in preparing the data were those prescribed by the FASB. Although not market sensitive, they were specified in order to achieve uniformity in assumptions and to provide for the use of reasonably objective data. It is important to note here that this information is neither fair market value nor the present value of future cash flows and it does not reflect changes in oil and gas prices experienced since the respective year-end. It is primarily a tool designed by the FASB to allow for a reasonable comparison of oil and gas reserves and changes therein through the use of a standardized method. Accordingly, the Company cautions that this data should not be used for other than its intended purpose.
Management does not rely upon the following information in making investment and operating decisions. The Company, along with its partners, bases such decisions upon a wide range of factors, including estimates of probable as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may occur in the future.
The following are the principal sources of changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2000, 1999 and 1998 (in thousands):