Seitel Form 10-Q 2Q07

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



FORM 10-Q

[ X ]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

 

OR

 

[    ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 0-14488

 

SEITEL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

76-0025431

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

   

10811 S. Westview Circle Drive

 

Building C, Suite 100

Houston, Texas

77043

(Address of principal executive offices)

(Zip Code)

   

Registrant's telephone number, including area code:

(713) 881-8900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

[  ]

No

[X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer

[  ]

Accelerated filer

[  ]

Non-accelerated filer

[X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

[  ]

No

[X]


Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

Yes

[X]

No

[  ]


As of September 4, 2007, there were 100 shares of the Company's common stock, par value $.0001 per share outstanding.

 

Page 1 of 50

 



 

INDEX
 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.        Financial Statements...........................................................................................................

3

 

Condensed Consolidated Balance Sheets (Unaudited)......................................................

3

 

Condensed Consolidated Statements of Operations (Unaudited)......................................

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)......

6

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited).......................

7

 

Condensed Consolidated Statements of Cash Flows (Unaudited)....................................

8

 

Notes to Condensed Consolidated Interim Financial Statements (Unaudited)...................

10

 

Item 2.        Management's Discussion and Analysis of Financial Condition

                   and Results of Operations...................................................................................................

 

35

 

Item 3.        Controls and Procedures....................................................................................................

47

 

Item 6.        Exhibits................................................................................................................................

47

 

Signatures ..............................................................................................................................................

49

 

Page 2 of 50



(Index)

PART I - FINANCIAL INFORMATION

Item 1.     FINANCIAL STATEMENTS


SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   

(Unaudited)

       

 

SUCCESSOR

PREDECESSOR

 

PERIOD

PERIOD

June 30,

December 31,

2007

2006

             

ASSETS

     Cash and cash equivalents

$

25,261

$

107,390

     Restricted cash

107

105

     Receivables

         Trade, net of allowance for doubtful accounts of

            $710 and $316, respectively

45,864

52,144

         Notes and other, net of allowance for doubtful accounts

            of $275 and $275, respectively

443

895

     Net seismic data library, net of accumulated amortization

         of $56,869 and $961,549, respectively

378,148

123,123

     Net property and equipment, net of accumulated depreciation

         and amortization of $1,048 and $26,439, respectively

7,520

7,628

     Prepaid expenses, deferred charges and other

17,853

9,169

     Deferred income taxes

-

4,981

     Intangible assets, net

53,779

-

     Goodwill

199,324

-

             

     TOTAL ASSETS

$

728,299

$

305,435

    

LIABILITIES AND STOCKHOLDER'S EQUITY

     LIABILITIES

         Accounts payable and accrued liabilities

$

40,944

$

30,837

         Income taxes payable

1,300

659

         Debt

            Senior Notes

402,375

185,788

            Notes payable

317

337

         Obligations under capital leases

3,636

2,913

         Deferred revenue

27,170

47,410

         Deferred income taxes

16,170

-

     TOTAL LIABILITIES

491,912

267,944

    

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDER'S EQUITY

         Preferred stock, par value $.01 per share; authorized

            5,000,000 shares; none issued (Predecessor)

-

-

         Common stock, par value $.01 per share; authorized 400,000,000

            shares; issued and outstanding 155,184,084 shares

            at December 31, 2006 (Predecessor)

-

1,552

         Common stock, par value $.001 per share; 100 shares authorized,

            issued and outstanding at June 30, 2007 (Successor)

-

-

         Additional paid-in capital

259,781

240,431

         Retained deficit

(39,077

)

(209,539

)

         Accumulated other comprehensive income

15,683

5,047

     TOTAL STOCKHOLDER'S EQUITY

236,387

37,491

             

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$

728,299

$

305,435

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 3 of 50





(Index)

SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

Three Months Ended

June 30,

2007

2006

             

REVENUE

$

30,371

$

48,542

             

EXPENSES:

       Depreciation and amortization

37,770

23,034

       Loss on sale of seismic data

-

26

       Cost of sales

32

55

       Selling, general and administrative

9,489

8,906

       Merger

835

-

48,126

32,021

             

INCOME (LOSS) FROM OPERATIONS

(17,755

)

16,521

             

Interest expense, net

(9,938

)

(4,989

)

Foreign currency exchange gains

1,478

1,295

             

Income (loss) from continuing operations before income taxes

(26,215

)

12,827

Provision (benefit) for income taxes

(1,970

)

199

Income (loss) from continuing operations

(24,245

)

12,628

Loss from discontinued operations, net of tax

-

(9

)

             

NET INCOME (LOSS)

$

(24,245

)

$

12,619

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4 of 50





(Index)

SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007 -

January 1, 2007 -

Six Months Ended

June 30, 2007

February 13, 2007

June 30, 2006

                   

REVENUE

$

47,669

$

19,010

$

93,240

                   

EXPENSES:

       Depreciation and amortization

60,003

11,485

46,812

       Gain on sale of seismic data

-

-

(231

)

       Cost of sales

41

8

163

       Selling, general and administrative

13,923

3,577

17,936

       Merger

1,280

17,457

-

75,247

32,527

64,680

                   

INCOME (LOSS) FROM OPERATIONS

(27,578

)

(13,517

)

28,560

                   

Interest expense, net

(19,123

)

(2,284

)

(9,897

)

Foreign currency exchange gains (losses)

1,657

(102

)

1,134

Other income

-

12

-

                   

Income (loss) from continuing operations

       before income taxes

(45,044

)

(15,891

)

19,797

Provision (benefit) for income taxes

(5,967

)

452

383

Income (loss) from continuing operations

(39,077

)

(16,343

)

19,414

Income from discontinued operations, net of tax

-

-

4

                   

NET INCOME (LOSS)

$

(39,077

)

$

(16,343

)

$

19,418

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 5 of 50





(Index)

SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)


SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months

February 14,

January 1,

Six Months

Ended

2007 -

2007 -

Ended

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2006

                               

Net income (loss)

$

(24,245

)

$

12,619

$

(39,077

)

$

(16,343

)

$

19,418

                               

Unrealized gains (losses)

    on securities held

    as available for sale

-

(15

)

-

-

19

                               

Foreign currency translation

    adjustments

13,820

924

15,683

7

975

                               

Comprehensive

    income (loss)

$

(10,425

)

$

13,528

$

(23,394

)

$

(16,336

)

$

20,412

















The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 6 of 50





(Index)

SEITEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (Unaudited)

(In thousands, except share amounts)

 

Accumu-

lated

Other

PREDECESSOR

SUCCESSOR

Additional

Retained

Compre-

Common Stock

Common Stock

Paid-In

Earnings

hensive

Shares

Amount

Shares

Amount

Capital

(Deficit)

Income

                                     

Predecessor Period:

     Balance, December 31, 2006

155,184,084

$

1,552

-

$

-

$

240,431

$

(209,539

)

$

5,047

          Cumulative effect of adoption

              of FIN 48

-

-

-

-

-

(3,082

)

-

          Issuance of restricted stock

1,032,615

10

-

-

(10

)

-

-

          Issuance of common stock to

              employees

25,504

-

-

-

-

-

-

          Amortization of stock-based

              compensation costs

-

-

-

-

379

-

-

          Accrual for restricted stock issuance

              for performance equity awards

-

-

-

-

32

-

-

          Retirement of stock to satisfy

              employee tax withholding

(109,149

)

(1

)

-

-

(287

)

(112

)

-

          Vesting of restricted stock due to

              change in control

-

-

-

-

6,294

-

-

          Net loss

-

-

-

-

-

(16,343

)

-

          Foreign currency translation

              adjustments

-

-

-

-

-

-

7

     Balance, February 13, 2007

156,133,054

$

1,561

-

$

-

$

246,839

$

(229,076

)

$

5,054

                                     

Successor Period:

          Investment by Parent

-

$

-

100

$

-

$

256,234

$

-

$

-

          Amortization of stock-based

              compensation costs

-

-

-

-

3,547

-

-

          Net loss

-

-

-

-

-

(39,077

)

-

          Foreign currency translation

              adjustments

-

-

-

-

-

-

15,683

     Balance, June 30, 2007

-

$

-

100

$

-

$

259,781

$

(39,077

)

$

15,683

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 7 of 50





(Index)

SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands)

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007 -

January 1, 2007 -

Six Months Ended

June 30, 2007

February 13, 2007

June 30, 2006

                   

Cash flows from operating activities:

Reconciliation of net income (loss) to net cash provided

     by operating activities of continuing operations:

     Net income (loss)

$

(39,077

)

$

(16,343

)

$

19,418

     Income from discontinued operations, net of tax

-

-

(4

)

     Depreciation and amortization

60,003

11,485

46,812

     Deferred income tax provision (benefit)

(7,451

)

204

509

     Amortization of deferred financing costs

4,532

99

593

     Amortization of debt discount (premium)

(30

)

70

250

     Amortization of stock-based compensation

3,547

6,673

848

     Amortization of favorable facility lease

97

-

-

     Allowance for collection of trade receivables

391

-

160

     Reversal of allowance for notes receivable

-

(274

)

-

     Non-cash compensation expense

-

32

550

     Non-cash revenue

(1,109

)

(88

)

(7,627

)

     Gain on sale of property and equipment

-

-

(4

)

     Gain on sale of seismic data

-

   

-

(231

)

     Decrease (increase) in receivables

(3,798

)

9,074

(16,332

)

     Decrease (increase) in other assets

495

(472

)

(44

)

     Increase (decrease) in deferred revenue

14,154

(7,767

)

5,692

     Increase (decrease) in accounts payable

         and other liabilities

49

2,917

(371

)

         Net cash provided by operating activities

           of continuing operations

31,803

5,610

50,219

                   

Cash flows from investing activities:

     Cash invested in seismic data

(25,780

)

(8,369

)

(37,987

)

     Cash paid to acquire property and equipment

(134

)

(60

)

(485

)

     Cash from disposal of property and equipment

-

-

3

     Increase in restricted cash

(2

)

-

(17

)

         Net cash used in investing activities of continuing

             operations

(25,916

)

(8,429

)

(38,486

)

                   

Cash flows from financing activities:

     Issuance of 9.75% Senior Notes

400,000

-

-

     Repayment of 11.75% Senior Notes

(233,352

)

-

-

     Purchase of Seitel stock

(386,556

)

-

-

     Principal payments on notes payable

(17

)

(3

)

(17

)

     Principal payments on capital lease obligations

(32

)

(6

)

(19

)

     Borrowings on line of credit

88

119

25

     Payments on line of credit

(88

)

(119

)

(25

)

     Payment of financing fees

(16,982

)

-

-

     Contributed capital

153,473

-

-

     Purchase of common stock subsequently retired

-

(400

)

(422

)

     Payments on notes receivable from officers

         and employees

274

-

13

         Net cash used in financing activities

             of continuing operations

$

(83,192

)

$

(409

)

$

(445

)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 8 of 50





(Index)

SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) - continued

(In thousands)

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007 -

January 1, 2007 -

Six Months Ended

June 30, 2007

February 13, 2007

June 30, 2006

                   

Effect of exchange rate changes

$

(1,642

)

$

46

$

(1,005

)

Net cash used in discontinued operations:

     Cash used in operating activities

-

-

(6

)

     Cash used in investing activities

-

-

(46

)

Net increase (decrease) in cash and equivalents

(78,947

)

(3,182

)

10,231

Cash and cash equivalents at beginning of period

104,208

107,390

78,097

Cash and cash equivalents at end of period

$

25,261

$

104,208

$

88,328

                   

Supplemental disclosure of cash flow information:

     Cash paid during the period for:

         Interest

$

1,913

$

11,207

$

11,250

         Income taxes

$

547

$

1

$

279

     Income tax refunds received

$

-

$

-

$

137

Supplemental schedule of non-cash investing activities:

     Additions to seismic data library

$

2,162

$

(7

)

$

6,812

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 9 of 50





(Index)

SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
June 30, 2007


NOTE A-BUSINESS COMBINATION

 

On February 14, 2007, Seitel Acquisition Corp. ("Acquisition Corp.") was merged with and into Seitel, Inc. (the "Company") (the "Merger"), pursuant to a merger agreement between the Company, Acquisition Corp. and Seitel Holdings, Inc. ("Holdings") dated October 31, 2006.  Pursuant to the merger agreement, the Company continued as the surviving corporation and became a privately owned corporation and wholly-owned subsidiary of Holdings.  Holdings is an investment entity controlled by ValueAct Capital Master Fund, L.P. ("ValueAct Capital").

In connection with the Merger, Acquisition Corp. commenced a cash tender offer and consent solicitation related to all of the $189.0 million aggregate principal amount of the Company's 11.75% senior notes due 2011 (the "11.75% Senior Notes").  On February 14, 2007, the Company paid $187.0 million aggregate principal amount of such notes representing all of the notes tendered.  In connection with the tender offer and consent solicitation, the Company entered into a supplemental indenture for the 11.75% Senior Notes. The supplemental indenture effected certain amendments to the original indenture, primarily to eliminate substantially all of the restrictive covenants and certain events of default triggered or implicated by the Merger.

In addition, on February 14, 2007, the Company issued $400.0 million aggregate principal amount of 9.75% senior notes due 2014 (the "9.75% Senior Notes") pursuant to an indenture by and among the Company, certain subsidiary guarantors and LaSalle Bank National Association, as trustee. 

The Company also entered into an Amended and Restated Loan and Security Agreement for a new senior secured credit facility with Wells Fargo Foothill, Inc. with a maximum credit amount of $25.0 million, subject to certain borrowing base limitations. All obligations are unconditionally guaranteed by the Company's domestic subsidiaries that are not borrowers under the new facility, subject to customary exceptions, exclusions and release mechanisms. The new facility is secured by a lien on substantially all of the Company's domestic assets.

Pursuant to the Merger, all of the Company's outstanding common stock (other than shares owned by ValueAct Capital and management investors, which were contributed for ownership in Holdings) was exchanged for $3.70 per share.  The aggregate purchase price in connection with the Merger was approximately $387.9 million, comprised of $386.6 million for the acquisition of the outstanding shares and $1.3 million for rollover shares by the management investors.  In connection with the Merger, the warrants held by ValueAct totaling 15,037,568 were cancelled.  In addition, prior to the Merger, ValueAct Capital had invested $127.2 million in acquiring stock of the Company.

The Merger has been accounted for in accordance with the provisions of Statement of Financial Standards ("SFAS") No. 141, "Business Combinations."  The total purchase price was allocated to the Company's net tangible and identifiable intangible assets based on their estimated fair values established, in part, by an independent appraisal firm as of March 1, 2006 and February 14, 2007 as set forth below.  The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill.  The preliminary allocation of the purchase price for seismic data library, property and equipment, intangible assets and deferred income taxes was based upon valuation data at the date of the Merger and the estimates and assumptions are subject to change.  The initial purchase price allocation may be adjusted within one year of the effective date of the Merger (February 14, 2007) for changes in estimates of the fair value of assets acquired and liabilities assumed based on the results of the purchase price allocation process.

During the second quarter ended June 30, 2007, the Company recorded an additional step-up to its seismic data library of $0.7 million with an offsetting adjustment to goodwill of approximately $0.5 million and deferred income tax liability of $0.2 million resulting from the finalization of adjusting the seismic data library to fair value.  The Company also recorded additional expense of approximately $64,000 representing the additional amortization of the additional seismic data library step-up for the period February 14, 2007 through June 30, 2007.  During the second quarter ended June 30, 2007, the Company also recorded adjustments of approximately $0.2 million to increase goodwill and deferred income tax liability, resulting from a recalculation of deferred tax liabilities in connection with the Merger. 

Page 10 of 50





(Index)

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed (in thousands):

Cash and receivables

$

145,106

Property and equipment

8,159

Seismic data library

395,560

Identifiable intangibles

54,101

Goodwill

191,421

Prepaids and other assets

7,410

Accounts payable and accrued liabilities

(37,642

)

Debt

(231,253

)

Deferred revenue

(13,031

)

Deferred income tax

(22,305

)

     Net assets acquired

$

497,526

A summary of the preliminary allocation of purchase price to identifiable intangible assets, other than goodwill is as follows (in thousands):

Intangible assets:

     Trade name

$

900

     Customer relationships

42,848

     Internally developed software

7,989

     Favorable facility leases

2,184

     Covenants not to compete

180

         Total

$

54,101

The valuations are based on information that is available as of the date of the Merger and the expectations and assumptions that have been deemed reasonable by management.  No assurance can be given, however, that the underlying assumptions of events associated with such assets will occur as projected.  For these reasons, among others, the actual results may vary from the projected results.

The following unaudited pro forma consolidated financial information has been prepared as if the Merger had taken place at the beginning of each year presented.  The following unaudited pro forma information is not necessarily indicative of the results of operations in future periods or results that would have been achieved had the Merger taken place at the beginning of the years presented (in thousands):

 

Three Months

Six Months

Ended

Ended

June 30,

June 30,

June 30,

2006

2007

2006

                   

Revenue

$

41,138

$

58,109

$

77,455

Operating loss

(9,442

)

(40,105

)

(24,382

)

Net loss

(15,530

)

(56,174

)

(37,977

)

The pro forma financial information reflects the decreased revenue from selections of previously deferred revenue, additional amortization and depreciation expense and increased interest expense.  The pro forma financial information also reflects the elimination of merger expenses.

 

Page 11 of 50





(Index)

NOTE B-BASIS OF PRESENTATION

The accompanying condensed financial statements of Seitel, Inc. and its subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Regulation S-X.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  In preparing the Company's financial statements, a number of estimates and assumptions are made by management that affect the accounting for and recognition of assets, liabilities, revenues and expenses.  The condensed consolidated balance sheet of the Company as of December 31, 2006, has been derived from the audited balance sheet of the Company as of that date.  These financial statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2006 contained in the Company's Annual Report.

Although the Company continues as the same legal entity after the Merger, the consolidated financial statements for the first six months of 2007 are presented for two periods:  January 1, 2007 through February 13, 2007 (the "Predecessor Period" or "Predecessor," as context requires) and February 14, 2007 through June 30, 2007 (the "Successor Period" or "Successor," as context requires), which relate to the period preceding the Merger and the period succeeding the Merger, respectively.  The consolidated financial statements for the Successor Period (including for the three months ended June 30, 2007) reflect the acquisition of the Company under the purchase method of accounting in accordance with SFAS No. 141.  The results between these periods are not comparable to the Predecessor due to the difference in the basis of presentation of purchase accounting as compared to historical cost.  The consolidated financial statements as of December 31, 2006 and for the three and six months ended June 30, 2006 are also presented as Predecessor.

NOTE C-REVENUE RECOGNITION

Revenue from Data Acquisition

The Company generates revenue when it creates a new seismic survey that is initially licensed by one or more of its customers to use the resulting data.  The initial licenses usually provide the customer with a limited exclusivity period, which will normally last for six months after final delivery of the processed data.  The payments for the initial exclusive licenses are sometimes referred to as underwriting or prefunding.  Customers make periodic payments throughout the creation period, which generally correspond to costs incurred and work performed.  These payments are non-refundable.

Revenue from the creation of new seismic data is recognized throughout the creation period using the proportional performance method based upon costs incurred and work performed to date as a percentage of total estimated costs and work required.  Management believes that this method is the most reliable and representative measure of progress for its data creation projects.  The duration of most data creation projects is generally less than one year.  Under these contracts, the Company creates new seismic data designed in conjunction with its customers and specifically suited to the geology of the area using the most appropriate technology available.

The Company outsources the substantial majority of the work required to complete data acquisition projects to third party contractors.  The Company's payments to these third party contractors comprise the substantial majority of the total estimated costs of the project and are paid throughout the creation period.  A typical survey includes specific activities required to complete the survey; each activity has value to the customers.  Typical activities, that often occur concurrently, include:

The customers paying for the initial exclusive licenses receive legally enforceable rights to any resulting product of each activity described above.  The customers also receive access to and use of the newly acquired, processed data. 

The customers' access to and use of the results of the work performed and of the newly acquired, processed data is governed by a license agreement, which is a separate agreement from the acquisition contract. The Company's acquisition contracts require the customer either to have a license agreement in place or to execute one at the time the acquisition contract is signed. The Company maintains sole ownership of the newly acquired data, which is added to its library, and is free to license the data to other customers when the original customers' exclusivity period ends. 

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Revenue from Non-Exclusive Data Licenses

 

The Company recognizes a substantial portion of its revenue from data licenses sold after any exclusive license period.  These are sometimes referred to as resale licensing revenue, post acquisition license sales or shelf sales.

These sales fall under the following four basic forms of non-exclusive license contracts.

The Company's non-exclusive license contracts specify the following:

Revenue from the non-exclusive licensing of seismic data is recognized when the following criteria are met:

Copies of the data are available to the customer immediately upon request.

For licenses that have been invoiced but have not met the aforementioned criteria, the revenue is deferred along with the related direct costs (primarily sales commissions).  This normally occurs under the library card license contracts, review and possession license contracts or review only license contracts because the data selection may occur over time.  Additionally, if the contract allows licensing of data that is not currently available or enhancements, modifications or additions to the data are required per the contract, revenue is deferred until such time that the data is available.

 
 

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Revenue from Non-Monetary Exchanges

In certain cases, the Company will take ownership of a customer's seismic data or revenue interest (collectively referred to as "data") in exchange for a non-exclusive license to selected seismic data from the Company's library.  Occasionally, in connection with specific data acquisition contracts, the Company receives both cash and ownership of seismic data from the customer as consideration for the underwriting of new data acquisition.  These exchanges are referred to as non-monetary exchanges.  A non-monetary exchange always complies with the following criteria:

In non-monetary exchange transactions, the Company records a data library asset for the seismic data received at the time the contract is entered into and recognizes revenue on the transaction in equal value in accordance with its policy on revenue from data licenses, which is, when the data is selected by the customer, or revenue from data acquisition, as applicable.  The data license to the customer is in the form of one of the four basic forms of contracts discussed above.  These transactions are valued at the fair value of the data received or delivered, whichever is more readily determinable.

Fair value of the data exchanged is determined using a multi-step process as follows.

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Due to the Company's revenue recognition policies, revenue recognized on non-monetary exchange transactions may not occur at the same time the seismic data acquired is recorded as an asset.  The activity related to non-monetary exchanges was as follows (in thousands):

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months

February 14,

January 1,

Six Months

Ended

2007 -

2007 -

Ended

June 30,

June 30,

February 13,

June 30,

2007

2006

2007

2007

2006

                               

Seismic data library additions

$

600

$

4,753

$

2,162

$

(7

)

$

6,812

                               

Revenue recognized on

    specific data licenses

    and selections of data

461

3,011

1,082

71

5,084

                               

Revenue recognized related

    to acquisition contracts

12

701

27

11

2,536

                               

Revenue recognized

    related to data

    management services

-

7

-

6

7

Revenue from Seitel Solutions

Revenue from Seitel Solutions ("Solutions") is recognized as the services for reproduction and delivery of seismic data are provided to customers.

NOTE D-SEISMIC DATA LIBRARY

The Company's seismic data library consists of seismic surveys that are offered for license to customers on a non-exclusive basis. Costs associated with creating, acquiring or purchasing the seismic data library are capitalized and amortized principally on the income forecast method subject to a straight-line amortization period of four years, applied on a quarterly basis at the individual survey level.   

 

Costs of Seismic Data Library 


For purchased seismic data, the Company capitalizes the purchase price of the acquired data. 


For data received through a non-monetary exchange, the Company capitalizes an amount equal to the fair value of the data received by the Company or the fair value of the license granted to the customer, whichever is more readily determinable.  See Note C for discussion of the process used to determine fair value.


For internally created data, the capitalized costs include costs paid to third parties for the acquisition of data and related permitting, surveying and other activities associated with the data creation activity.  In addition, the Company capitalizes certain internal costs related to processing the created data.  Such costs include salaries and benefits of the Company's processing personnel and certain other costs incurred for the benefit of the processing activity.  The Company believes that the internal processing costs capitalized are not greater than, and generally are less than, those that would be incurred and capitalized if such activity were performed by a third party.  Capitalized costs for internal data processing were $476,000 and $473,000 for the three months ended June 30, 2007 and 2006, respectively and $712,000, $265,000 and $905,000 for the period February 14, 2007 to June 30, 2007 (Successor Period), for the period January 1, 2007 to February 13, 2007 (Predecessor Period) and for the six months ended June 30, 2006 (Predecessor Period), respectively. 



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Data Library Amortization


The Company amortizes its seismic data library using the greater of the amortization that would result from the application of the income forecast method subject to a minimum amortization rate or a straight-line basis over the useful life of the data.  With respect to each survey in the data library, the useful life policy is applied from the time such survey is available for licensing to customers on a non-exclusive basis, since some data in the library may not be licensed until an exclusivity period (usually six months) has lapsed.


The Company applies the income forecast method by forecasting the ultimate revenue expected to be derived from a particular data library component over the estimated useful life of each survey comprising part of such component.  This forecast is made by the Company annually and reviewed quarterly.  If, during any such review, the Company determines that the ultimate revenue for a library component is expected to be significantly different than the original estimate of total revenue for such library component, the Company revises the amortization rate attributable to future revenue from each survey in such component.  The lowest amortization rate the Company applies using the income forecast method is 70%.  In addition, in connection with the forecast reviews and updates, the Company evaluates the recoverability of its seismic data library, and if required under SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets," records an impairment charge with respect to such data.  See discussion on "Seismic Data Library Impairment" below.


The actual rate of amortization depends on the specific seismic surveys licensed and selected by the Company's customers during the period.  As of July 1, 2007, the amortization rate utilized under the income forecast method for all components is 70%. 


The greater of the income forecast or straight-line amortization policy is applied quarterly on a cumulative basis at the individual survey level. In connection with the Merger, the greater of the income forecast or straight-line amortization policy was applied at February 13, 2007 (for the Predecessor Period), March 31, 2007 and June 30, 2007 (for the Successor Period).  Under this policy, the Company first records amortization using the income forecast method.  The cumulative amortization recorded for each survey is then compared with the cumulative straight-line amortization. If the cumulative straight-line amortization is higher for any specific survey, additional amortization expense is recorded, resulting in accumulated amortization being equal to the cumulative straight-line amortization for such survey.  This requirement is applied regardless of future-year revenue estimates for the library component of which the survey is a part and does not consider the existence of deferred revenue with respect to the library component or to any survey. 

 

Seismic Data Library Impairment


The Company evaluates its seismic data library investment by grouping individual surveys into components based on its operations and geological and geographical trends, resulting in the following data library segments for purposes of evaluating impairments:  (I) Gulf of Mexico offshore comprised of the following components:  (a) multi-component data, (b) ocean bottom cable data, (c) shelf data, (d) deep water data, and (e) value-added products; (II) North America onshore comprised of the following components: (a) Texas Gulf Coast, (b) Northern, Eastern and Western Texas, (c) Southern Louisiana/Mississippi, (d) Northern Louisiana, (e) Rocky Mountains, (f) North Dakota, (g) other United States, (h) Canada and (i) value-added products, and (III) international data outside North America.  The Company believes that these library components constitute the lowest levels of independently identifiable cash flows.

 

As events or conditions require, the Company evaluates the recoverability of its seismic data library investment in accordance with SFAS No. 144.  The Company evaluates its seismic data library investment for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.  The Company considers the level of sales performance in each component compared to projected sales, as well as industry conditions, among others, to be key factors in determining when its seismic data investment should be evaluated for impairment.  In evaluating sales performance of each component, the Company generally considers five consecutive quarters of actual performance below forecasted sales to be an indicator of potential impairment.

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In accordance with SFAS No. 144, the impairment evaluation is based first on a comparison of the undiscounted future cash flows over each component's remaining estimated useful life with the carrying value of each library component.  If the undiscounted cash flows are equal to or greater than the carrying value of such component, no impairment is recorded.  If undiscounted cash flows are less than the carrying value of any component, the forecast of future cash flows related to such component is discounted to fair value and compared with such component's carrying amount. The difference between the library component's carrying amount and the discounted future value of the expected revenue stream is recorded as an impairment charge.


For purposes of evaluating potential impairment losses, the Company estimates the future cash flows attributable to a library component by evaluating, among other factors, historical and recent revenue trends, oil and gas prospectivity in particular regions, general economic conditions affecting its customer base and expected changes in technology and other factors that the Company deems relevant. The cash flow estimates exclude expected future revenues attributable to non-monetary data exchanges and future data creation projects.


The estimation of future cash flows and fair value is highly subjective and inherently imprecise.  Estimates can change materially from period to period based on many factors, including those described in the preceding paragraph. Accordingly, if conditions change in the future, the Company may record further impairment losses relative to its seismic data library, which could be material to any particular reporting period.

 

The Company did not have any impairment charges during the period February 14, 2007 to June 30, 2007 (Successor Period), for the period January 1, 2007 to February 13, 2007 (Predecessor Period) or during the six months ended June 30, 2006 (Predecessor Period).

 

NOTE E-INTANGIBLES

 

In connection with the Merger, the Company recorded intangible assets both in the U.S. and Canada.  The recorded gross carrying amount of intangible assets changed since the Merger due to the impact of foreign currency fluctuations.  The following is a summary of the Company's intangible assets other than goodwill as of June 30, 2007 (in thousands):

 

SUCCESSOR PERIOD

JUNE 30, 2007

Weighted

Average

Gross

Amortization

Carrying

Accumulated

Net Book

Period

Amount

Amortization

Value

                       

Intangible assets with determinable

     useful lives:

          Favorable facility leases

9 years

$

2,391

$

(116

)

$

2,275

          Customer relationships

10 years

43,861

(1,645

)

42,216

          Covenants not to compete

1 year

180

(68

)

112

          Internally developed software

7 years

8,744

(468

)

8,276

$

55,176

$

(2,297

)

$

52,879

Trade names with indefinite lives

900

-

900

Total identifiable intangible assets

$

56,076

$

(2,297

)

$

53,779

 

Amortization expense for the Company's intangible assets was $1.5 million for the three months ended June 30, 2007 and $2.2 million during the period from February 14, 2007 to June 30, 2007.  Estimated future amortization expense is as follows:  remainder of fiscal year end 2007 - $3.1 million, fiscal year ended 2008 - $6.0 million, fiscal year ended 2009 - $6.0 million, fiscal year ended 2010 - $6.0 million, fiscal year ended 2011 - $6.0 million, and thereafter - $25.9 million.

NOTE F-INCOME TAXES

FASB Interpretation No. 48

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. 

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As of January 1, 2007, the Company recorded the cumulative effect of adopting FIN 48 of $3.1 million as an increase to the balance of retained deficit.  The Company has unrecognized tax benefits of approximately $8.8 million, of which $1.5 million would impact the effective income tax rate if recognized.

In conjunction with the adoption of FIN 48, uncertain tax positions are reflected as income tax assets and liabilities. Income tax-related interest and penalty expenses are recorded as a component of income tax expense. As of June 30, 2007 and January 1, 2007, the total amount of accrued income tax-related interest and penalties included in the Consolidated Balance Sheets was $2.0 million and $1.6 million, respectively.  Income tax expense for the three months ended June 30, 2007, for the period from January 1, 2007 to February 13, 2007 and for the period from February 14, 2007 to June 30, 2007 included $0.2 million, $0.1 million and $0.3 million, respectively, related to interest on unrecognized tax benefits.

The Company believes it is reasonably possible that, within the next 12 months, the amount of previously unrecognized tax benefits could decrease by approximately $3.0 million primarily as a result of the resolution of tax audits.

With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2003, 2002 and 1999, respectively. 

Income Tax Expense (Benefit)

The following is the detail of income tax expense (benefit) recorded in 2007 for the periods indicated (in thousands):

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007 -

January 1, 2007 -

June 30, 2007

February 13, 2007

U.S.

Canada

Total

U.S.

Canada

Total

                                     

Tax expense (benefit) resulting from:

                                     

     Current operations

$

(13,088

)

$

(2,005

)

$

(15,093

)

$

(5,051

)

$

354

$

(4,697

)

     Change in Valuation Allowance

9,126

-

9,126

5,149

-

5,149

                                     

     Total tax expense (benefit)

$

(3,962

)

$

(2,005

)

$

(5,967

)

$

98

$

354

$

452

In the Predecessor Period, the Company provided a full valuation allowance against the Federal tax benefit generated from its U.S. operations as it was more likely than not that such benefit would not be realized.  At the Merger date, the Company recorded a step-up in deferred tax liabilities of $26.7 million due to the step-up in its U.S. and Canadian net asset values as a result of the Merger.  Consequently, in the Successor Period, a portion of the Federal tax benefit generated from the Company's U.S. operations was recognized as a tax benefit up to the amount of the U.S. deferred tax liability recorded.  The remaining U.S. Federal tax benefit of $9.1 million was offset by a valuation allowance because it was more likely than not that such benefit would not be realized. 

Deferred Tax Liability

As of June 30, 2007, the Company had a net deferred tax liability of $16.2 million, all of which was attributable to its Canadian operations.  In the U.S., the Company had a net deferred tax asset of $9.1 million, all of which was offset by a valuation allowance, except for $2,000 related to state deferred tax liabilities.  The recognition of the U.S. tax asset will not occur until such time that it is more likely than not that some portion or all of the deferred tax asset will be realized.

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NOTE G-DEBT


The following is a summary of the Company's debt (in thousands):

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

June 30,

December 31,

2007

2006

             

9.75% Senior Notes

$

400,000

$

-

11.75% Senior Notes

2,000

189,000

Revolving Credit Facility

-

-

Subsidiary revolving line of credit

-

-

Note payable to former executive

317

337

402,317

189,337

Plus:  Premium on debt

375

-

Less:  Debt discount

-

(3,212

)

$

402,692

$

186,125

 

9.75% Senior Unsecured Notes 

 

On February 14, 2007, the Company issued, in a private placement, $400.0 million aggregate principal amount of 9.75% Senior Notes.  The proceeds from the 9.75% Senior Notes were used to partially fund the transactions in connection with the Merger. These notes mature on February 15, 2014.  Interest is payable in cash, semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2007.  The 9.75% Senior Notes are unsecured and are guaranteed by substantially all of the Company's domestic subsidiaries on a senior basis. The 9.75% Senior Notes contain restrictive covenants which limit the Company's ability to, among other things, incur additional indebtedness, pay dividends and complete mergers, acquisitions and sales of assets.

 

From time to time on or before February 15, 2010, the Company may redeem up to 35% of the aggregate principal amount of the 9.75% Senior Notes with the net proceeds of equity offerings at a redemption price equal to 109.75% of the principal amount, plus accrued and unpaid interest.  Upon a change of control (as defined in the indenture), each holder of the 9.75% Senior Notes will have the right to require the Company to offer to purchase all of such holder's notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest.

 

11.75% Senior Unsecured Notes

 

On July 2, 2004, the Company issued, in a private placement, $193.0 million aggregate principal amount of 11.75% Senior Notes.  As required by their terms, the 11.75% Senior Notes were exchanged for senior notes of like amounts and terms in a publicly registered exchange offer in February 2005.  In connection with the 2004 excess cash flow offer in March 2005, $4.0 million aggregate principal amount of these notes was tendered and accepted.  In connection with the Merger and related transactions, $187.0 million aggregate principal amount of these notes was tendered and accepted on February 14, 2007.  The fair value of these notes was higher than the face value on the date of the Merger; consequently, a premium has been reflected in the Successor financial statements related to these notes.  Interest on the remaining notes is payable semi-annually in arrears on January 15 and July 15 of each year.  The remaining notes mature on July 15, 2011.  The 11.75% Senior Notes are unsecured and are guaranteed by substantially all of the Company's U.S. subsidiaries on a senior basis.

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As a result of the tender and consent offer, effective February 14, 2007, the 11.75% Senior Notes no longer contain any restrictive covenants, other than the requirement to make excess cash flow offers.  Subject to certain conditions, if at the end of each fiscal year the Company has excess cash flow (as defined in the indenture) in excess of $5.0 million, the Company is required to use 50% of the excess cash flow to fund an offer to repurchase the 11.75% Senior Notes on a pro rata basis at 100% of its principal amount, plus accrued and unpaid interest.  If the Company has less than $5.0 million in excess cash flow at the end of any fiscal year, such excess cash flow will be carried forward to succeeding years, and such repurchase offer is required to be made in the first year in which the cumulative excess cash flow for all years in which there has not been an offer is at least $5.0 million.  Such repurchase offer is required only if there is no event of default under the Company's revolving credit facilities prior to and after giving effect to the repurchase payment.  Because of excess cash flow generated for the year ended December 31, 2006, in the first quarter of 2007, the Company made a repurchase offer for the remaining notes.  No 11.75% Senior Notes were tendered in the 2006 excess cash flow offer.  Upon a change of control (as defined in the indenture), each holder of the 11.75% Senior Notes will have the right to require the Company to offer to purchase all of such holder's notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest.

Revolving Credit Facility 

On February 14, 2007, the Company entered into an amended and restated U.S. revolving credit facility with Wells Fargo Foothill, Inc., as lender, which provides for up to $25.0 million, subject to borrowing base limitations.  Interest is payable at an applicable margin above either LIBOR or the prime rate.  The facility is secured by a first priority, perfected security interest in and lien on substantially all of the Company's U.S. assets and a pledge of all of the issued and outstanding capital stock of the Company's U.S. subsidiaries.  The facility expires on February 14, 2010.  The revolving credit facility contains covenants requiring the Company to achieve and maintain certain financial results, and restricts, among other things, the amount of capital expenditures, the ability to incur additional indebtedness, pay dividends, and complete mergers, acquisitions and sales of assets.  The revolving credit facility requires the payment of an unused line fee of .25% per annum payable in arrears.

Subsidiary Revolving Line of Credit  

The Company's wholly owned subsidiary, Olympic Seismic Ltd. ("Olympic"), has a revolving credit facility, which allows it to borrow up to $5.0 million (Canadian) subject to an availability formula by way of prime-based loans, bankers' acceptances or letters of credit. The interest rate applicable to borrowings is the bank's prime rate plus 0.35% per annum and 1.50% per annum for bankers' acceptances.  Letter of credit fees are based on scheduled rates in effect at the time of issuance. The facility is secured by the assets of Olympic, SEIC Trust Administration Ltd. (as sole trustee of, and for and on behalf of, SEIC Business Trust) and SEIC Holdings, Ltd., but is not guaranteed by the Company or any of its other U.S. subsidiaries.  However, all intercompany debt owing by Olympic, SEIC Trust Administration Ltd., SEIC Business Trust or SEIC Holdings, Ltd. to the Company, SEIC Partners' Limited Partnership or to any other U.S. subsidiary of the Company (approximately $29.8 million (Canadian) at June 30, 2007) has been subordinated to the repayment of Olympic's obligations under the revolving credit facility.  Available borrowings under the facility are equivalent to a maximum of $5.0 million (Canadian), subject to a requirement that such borrowings may not exceed 75% of good accounts receivable (as defined in the agreement) of SEIC Trust Administration, less prior-ranking claims, if any, relating to inventory or accounts. The facility is subject to repayment upon demand and is available from time to time at the bank's sole discretion.

Note Payable to Former Executive

In connection with the settlement of certain litigation, the Company entered into a note payable to a former executive with remaining payments of $6,000 per month until May 2013.  The note is non-interest bearing.  The note is guaranteed by Olympic. 

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NOTE H-CONTRACTUAL OBLIGATIONS

 

As of June 30, 2007, the Company had approximately $688.3 million of outstanding debt and lease obligations, with aggregate contractual cash obligations summarized as follows (in thousands):

 

Payments due by period

Remainder

of

2013 and

Contractual cash obligations

Total

2007

2008-2010

2011-2012

thereafter

                     

Debt obligations (1)(2)

$

676,478

$

19,648

$

117,921

$

80,379

$

458,530

Capital lease obligations (2)

5,738

174

1,047

722

3,795

Operating lease obligations

6,038

578

3,416

1,782

262

Total contractual cash obligations

$

688,254

$

20,400

$

122,384

$

82,883

$

462,587

 

(1)    Debt obligations include the face amount of the 9.75% Senior Notes totaling $400.0 million and the 11.75% Senior Notes totaling $2.0 million.

(2)    Amounts include interest related to debt and capital lease obligations.

NOTE I-STOCK-BASED COMPENSATION

Prior to the closing of the Merger, the Company had a stock option plan (the "2004 Stock Option Plan") which provided for the grant of stock-based awards, including stock options, restricted stock or other stock-based awards to eligible employees and directors.  In connection with the Merger, Holdings, the Company's parent, adopted a stock-based compensation plan (the "2007 Non-Qualified Stock Option Plan") for the benefit of the Company's key employees and non-employee directors.

The amounts of stock-based compensation expense recognized in the periods presented are as follows (in thousands):

 

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months

February 14,

January 1,

Six Months

Ended

2007 -

2007 -

Ended

June 30,

June 30,

February 13,

June 30,

2007

2006

 2007

2007

2006

                               

Included in reported

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       selling, general and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                               

Restricted stock

$

-

$

794

$

-

$

412

$

1,398

Stock options

2,369

-

3,547

-

-

       Total

$

2,369

$

794

$

3,547

$

412

$

1,398

                               

Included in merger expenses

                               

Restricted stock

$

-

$

-

$

-

$

6,294

$

-

       Total

$

-

$

-

$

-

$

6,294

$

-

                               

Stock-based compensation

       expense

$

2,369

$

794

$

3,547

$

6,706

$

1,398

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Stock and Equity-Based Compensation Plans

 

Successor

 

Non-qualified Options

 

The 2007 Non-Qualified Stock Option Plan ("the Plan") was adopted effective February 14, 2007, and authorizes stock options to be granted to the Company's key employees and non-employee directors for up to 92,898 shares of Holdings' common stock. On June 15, 2007, the Board of Directors of Holdings approved an increase of 1,347 shares for issuance under the Plan.  Since adoption of the Plan, 92,059 total non-qualified stock options ("Options"), with an exercise price of $389.42 per share have been issued.  The Options vest 25 percent on each of the first, second, third and fourth anniversaries of each grant date.

 

The fair value of the Options was estimated on each grant date using the Black-Scholes option pricing method. The assumptions used in the model are outlined in the following table:

SUCCESSOR

PERIOD

February 14, 2007-

June 30, 2007

       

Weighted average grant date fair value per share

$

           197.95

Weighted average assumptions used:

     Expected volatility

                  45 %

     Expected life (in years)

               6.25

     Risk free interest rate

               4.69 %

     Expected dividend yield

                 0.0 %

 

The computation of the expected volatility assumptions used in the Black-Scholes calculations for grants was based on historical volatilities and implied volatilities of peer companies. The Company utilized the volatilities of peer companies due to its lack of extensive history. When establishing its expected life assumptions, the Company used the "simplified" method prescribed in Staff Accounting Bulletin No. 107, "Shared-Based Payment," for companies that do not have adequate historical data.

The following table summarizes stock option activity during the Successor Period:

SUCCESSOR

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Options

Price

Life in Years

               

Outstanding at February 14, 2007

-

-

       Granted

92,059

$389.42

       Exercised

-

-

       Cancelled

-

-

Outstanding at June 30, 2007

92,059

$389.42

Options exercisable at June 30, 2007

-

-

-

Options vested or expected to vest at

       June 30, 2007

-

-

-

 

As of July 1, 2007, the total future compensation cost related to non-vested options, not yet recognized in the Statement of Operations, was $14.7 million and will be recognized using graded vesting over a weighted average period of 3.6 years.

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(Index)

Predecessor

 

Restricted Stock and Common Stock

 

In accordance with the 2004 Stock Option Plan, 7,500,000 shares of its common stock were initially reserved and available for stock-based awards, including options, restricted stock or other stock-based awards. The exercise price, term and other conditions applicable to each award granted under the 2004 Stock Option Plan were generally determined by the Compensation Committee at the time of grant and varied with each award granted.

 

As a result of the Merger, any and all unvested restricted stock outstanding at February 13, 2007 immediately vested.  The Company recorded in merger expenses a non-cash charge for stock compensation expense of approximately $6.3 million in the Predecessor Period as a result of this accelerated vesting. 

The following table summarizes the activity of non-vested restricted stock during the Predecessor Period (shares in thousands):

Weighted

Average Grant

Date Fair

Shares

Value

         

Non-vested at January 1, 2007

3,692

$2.14

       Granted

1,033

$3.56

       Vested

(4,725

)

$2.45

       Forfeited

-

-

Non-vested at February 13, 2007

-

-

The following table summarizes the activity of non-vested restricted stock during the six months ended June 30, 2006 (shares in thousands):

Weighted

Average Grant

Date Fair

Shares

Value

         

Non-vested at January 1, 2006

2,965

$1.36

       Granted

1,841

$2.92

       Vested

(259

)

$1.39

       Forfeited

(17

)

$1.86

Non-vested at June 30, 2006

4,530

$1.99

During the Predecessor Period and the six months ended June 30, 2006, 25,504 and 108,327 shares, respectively, of common stock were awarded to employees at an average fair value of $3.56 and $2.99, respectively.

Stock Options

 

On July 2, 2004, the Company granted its then chairman options to purchase 100,000 shares of its common stock at an exercise price of $1.30, the market price of the common stock on such date. Such options became exercisable on July 2, 2005. Such options were not granted under the 2004 Stock Option Plan.  As a result of the Merger, the outstanding stock options were purchased at the Merger consideration price of $3.70 per share, less the exercise price of $1.30 per share. 

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The following table summarizes stock option activity during the Predecessor Period (shares in thousands):

PREDECESSOR

Weighted

Weighted

Average

Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Options

Price

Life in Years

(000's)

                     

Outstanding at January 1, 2007

100

$1.30

       Granted

-

-

       Exercised

-

-

       Cancelled

-

-

       Paid out at Merger closing

(100)

$1.30

-

-

Outstanding at February 13, 2007

-

-

-

-

The following table summarizes stock option activity during the six months ended June 30, 2006 (shares in thousands):

Weighted

Weighted

Average

Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Options

Price

Life in Years

(000's)

                     

Outstanding at January 1, 2006

100

$1.30

       Granted

-

-

       Exercised

-

-

       Cancelled

-

-

Outstanding at June 30, 2006

100

$1.30

8.0

$226

Options exercisable at June 30, 2006

100

$1.30

8.0

$226

Options vested or expected to vest at

       June 30, 2006

100

$1.30

8.0

$226

 

NOTE J-STATEMENT OF CASH FLOW INFORMATION

 

The Company had restricted cash at June 30, 2007 and December 31, 2006 of $107,000 and $105,000, respectively, related to collateral on a seismic operations bond.


 

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(Index)

 

The Company had non-cash additions to its seismic data library comprised of the following for the periods indicated (in thousands): 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007-

January 1, 2007-

Six Months Ended

June 30, 2007

February 13, 2007

June 30, 2006

                   

Non-monetary exchanges related to resale

       licensing revenue

$

2,738

$

(7

)

$

4,279

Non-monetary exchanges from underwriting

       of new data acquisition

-

-

1,430

Non-monetary exchanges related to data

       management services

-

-

52

Completion of data in progress from prior

       non-monetary exchanges

600

-

1,238

Less:  Non-monetary exchanges

       for data in progress

(1,176

)

-

(187

)

Total non-cash additions to seismic data library

$

2,162

$

(7

)

$

6,812

Non-cash revenue consisted of the following for the periods indicated (in thousands):

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007-

January 1, 2007-

Six Months Ended

June 30, 2007

February 13, 2007

June 30, 2006

                   

Acquisition revenue on underwriting from

       non-monetary exchange contracts

$

27

$

11

$

2,536

Licensing revenue from specific data

       licenses and selections on

       non-monetary exchange contracts

1,082

71

5,084

Data management revenue

-

6

7

Total non-cash revenue

$

1,109

$

88

$

7,627

 

NOTE K-COMMITMENTS AND CONTINGENCIES


Litigation

 

On July 18, 2002, Paul Frame, the Company's former chief executive officer, sued the Company in the 113th Judicial District Court of Harris County, No. 2002-35891. Mr. Frame alleged a breach of his employment contract and defamation. He also sought a declaratory judgment that certain funds he received from the Company were proper and do not have to be repaid.  Mr. Frame filed claims totaling $20.2 million in the Company's Chapter 11 Cases, which have been disallowed by order of the Bankruptcy Court.  On April 1, 2005, the Company filed a motion for summary judgment seeking dismissal of Mr. Frame's complaint in the District Court.  In late April 2005, Mr. Frame filed a motion for leave to file an amended complaint in the District Court.  Hearing dates have not been set for these April 2005 motions.  In 2002, the Company filed a counter suit to recover approximately $4.2 million in corporate funds that the Company believes Mr. Frame inappropriately caused the Company to pay him or for his benefit plus over $800,000 due on two notes that were accelerated pursuant to their respective terms. The Company also holds a judgment against Mr. Frame in the amount of at least $590,000 relating to a loan made to Mr. Frame by Bank One N.A. and guaranteed by the Company.  The Company has requested and is investigating information with respect to Mr. Frame and the nature and extent of his assets for purposes of analyzing whether to continue pursuit of the civil litigation described above and potential debt collection.  The parties filed a joint motion to abate the above proceedings.  The case continues to remain in abatement.

On November 6, 2006, a purported class action complaint was filed in the District Court of Harris County, Texas, 189th Judicial District (No. 2006-71302) by Todd Augenbaum, an alleged stockholder of the Company. The plaintiff filed an amended complaint on January 22, 2007. The amended complaint names as defendants the Company and each member of its Board of Directors as well as ValueAct Capital Master Fund, L.P. ("ValueAct Capital"), Seitel Holdings, Inc. ("Holdings") and Seitel Acquisition Corp. ("Acquisition Corp.") The amended complaint is a purported class action that alleges, among other things, that (i) the defendants have breached fiduciary duties they assertedly owed to the Company's stockholders in connection with the Company entering into the Agreement and Plan of Merger, dated as of October 31, 2006, with Holdings and Acquisition Corp. (see Note R to Notes to Consolidated Financial Statements for discussion on subsequent events), or aided and abetted in the breach thereof, (ii) the defendants have breached their duty of candor to the Company's stockholders by failing to disclose material information, or aided and abetted in the breach thereof, and (iii) the merger consideration is unfair and inadequate. The plaintiff seeks, among other things, certification of a class, an injunction against the consummation of the merger, and the costs and disbursements of the action. On February 1, 2007, the court denied the plaintiff's motion for a temporary restraining order and/or preliminary injunction of the shareholder vote, which then occurred as scheduled on February 9, 2007. The Company believes that the lawsuit is without merit and intends to defend against it vigorously.

Page 25 of 50





(Index)

In addition to the lawsuits described above, 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 resolutions of these matters should not be material to the Company's financial position or results of operation.  However, it is not possible to predict or determine the outcomes of the legal actions brought against it or by it, or to provide an estimate of all additional losses, if any, that may arise. At June 30, 2007, the Company did not have any amounts accrued related to the claims set forth above, as the Company believes it is not probable that any amounts will be paid relative to such litigation and claims.  If one or more of the parties were to prevail against the Company in one or more of the cases described above that have not been settled, the amounts of any judgments against the Company or settlements that the Company may enter into, could be material to the Company's financial statements for any particular reporting period.

NOTE L-SUPPLEMENTAL GUARANTORS CONSOLIDATING CONDENSED FINANCIAL INFORMATION

On February 14, 2007, the Company completed a private placement of 9.75% Senior Notes in the aggregate principal amount of $400.0 million. Seitel, Inc.'s (the "Parent") payment obligations under the 9.75% Senior Notes are jointly and severally guaranteed by certain of its 100% owned U.S. subsidiaries ("Guarantor Subsidiaries"). All subsidiaries of Seitel, Inc. that do not guaranty the 9.75% Senior Notes are referred to as Non-Guarantor Subsidiaries.

The consolidating condensed financial statements are presented below and should be read in connection with the Condensed Consolidated Financial Statements of the Company. Separate financial statements of the Guarantors are not presented because (i) the Guarantors are wholly-owned and have fully and unconditionally guaranteed the 9.75% Senior Notes on a joint and several basis, and (ii) the Company's management has determined such separate financial statements are not material to investors.

The following consolidating condensed financial information presents the consolidating condensed balance sheets as of June 30, 2007 (Successor Period) and December 31, 2006 (Predecessor Period), and the consolidating condensed statements of operations and statements of cash flows for the period from February 14, 2007 to June 30, 2007 (Successor Period), from January 1, 2007 to February 13, 2007 (Predecessor Period) and for the six months ended June 30, 2006 (Predecessor Period) of (a) the Parent; (b) the Guarantor Subsidiaries; (c) the Non-Guarantor Subsidiaries; (d) elimination entries; and (e) the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis.

Investments in subsidiaries are accounted for on the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and intercompany sales.

Page 26 of 50





(Index)

  

CONSOLIDATING CONDENSED BALANCE SHEET

SUCCESSOR PERIOD

As of June 30, 2007

(In thousands)

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

Consolidated

 
 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Eliminations

 

 

Total

 
 

ASSETS

    Cash and cash equivalents

$

-

$

24,120

$

1,141

$

-

$

25,261

    Restricted cash

-

107

-

-

107

    Receivables

      Trade, net

-

36,863

9,001

-

45,864

      Notes and other, net

46

35

362

-

443

    Intercompany receivables (payables)

181,373

(168,771

)

(12,602

)

-

-

    Investment in subsidiaries

443,586

464,626

252,177

(1,160,389

)

-

    Net seismic data library

-

276,059

102,089

378,148

    Net property and equipment

-

4,537

2,983

-

7,520

    Prepaid expenses, deferred charges

      and other

13,649

3,730

474

-

17,853

    Intangible assets, net

1,012

30,917

21,850

53,779

    Goodwill

-

107,108

92,216

-

199,324

                               

    TOTAL ASSETS

$

639,666

$

779,331

$

469,691

$

(1,160,389

)

$

728,299

                               

LIABILITIES AND STOCKHOLDER'S

    EQUITY

    Accounts payable and accrued liabilities

$

15,803

$

15,727

$

9,414

$

-

$

40,944

    Income taxes payable

465

-

835

-

1,300

    Senior Notes

402,375

-

-

-

402,375

    Notes payable

317

-

-

-

317

    Obligations under capital leases

-

-

3,636

-

3,636

    Deferred revenue

-

22,428

4,742

-

27,170

    Deferred income taxes

2

-

16,168

-

16,170

TOTAL LIABILITIES

418,962

38,155

34,795

-

491,912

                               

STOCKHOLDER'S EQUITY

    Common stock

-

-

-

-

-

    Additional paid-in capital

259,781

-

-

-

259,781

    Parent investment

-

764,762

424,082

(1,188,844

)

-

    Retained deficit

(39,077

)

(23,586

)

(4,869

)

28,455

(39,077

)

    Accumulated other comprehensive income

-

-

15,683

-

15,683

TOTAL STOCKHOLDER'S