SEI-2013.09.30-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________
FORM 10-Q
_______________________________________________
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-10165
_______________________________________________
 SEITEL, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________
Delaware
  
76-0025431
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
 
10811 S. Westview Circle Drive
Building C, Suite 100
Houston, Texas
  
77043
(Address of principal executive offices)
  
(Zip Code)


(713) 881-8900
(Registrant’s telephone number, including area code)
_______________________________________________
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
ý
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  ý
As of November 4, 2013, there were 100 shares of the Company’s common stock outstanding, par value $.001 per share.
 


Table of Contents

INDEX
 
 
 
 
 
 
Page
PART  I.
 
 
 
 
 
 
 
 
 
 
 
PART  II.
 
 
 
Item 1A. Risk Factors
 
Item 6. Exhibits
 

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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)
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Cash and cash equivalents
$
28,040

 
$
61,891

Receivables
 
 
 
Trade, net of allowance for doubtful accounts of $332 and $737, respectively
40,894

 
61,195

Notes and other, net of allowance for doubtful accounts of $988
2,006

 
2,143

Due from Seitel Holdings, Inc.
1,127

 
874

Seismic data library, net of accumulated amortization of $963,427 and $889,804, respectively
194,137

 
180,117

Property and equipment, net of accumulated depreciation and amortization of $14,469 and $13,461, respectively
4,072

 
4,818

Prepaid expenses, deferred charges and other
12,394

 
10,774

Intangible assets, net of accumulated amortization of $37,878 and $34,087, respectively
16,322

 
20,828

Goodwill
204,740

 
208,020

Deferred income taxes
84

 
84

TOTAL ASSETS
$
503,816

 
$
550,744

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
LIABILITIES
 
 
 
Accounts payable and accrued liabilities
$
42,954

 
$
62,783

Income taxes payable
612

 
4,134

Debt
 
 
 
Senior Notes
250,000

 
275,000

Notes payable

 
29

Obligations under capital leases
2,829

 
3,113

Deferred revenue
50,677

 
52,857

Deferred income taxes
2,367

 
2,470

TOTAL LIABILITIES
349,439

 
400,386

COMMITMENTS AND CONTINGENCIES (Note G)

 

STOCKHOLDER’S EQUITY
 
 
 
Common stock, par value $.001 per share; 100 shares authorized, issued and outstanding at September 30, 2013 and December 31, 2012

 

Additional paid-in capital
399,455

 
398,772

Retained deficit
(263,792
)
 
(272,135
)
Accumulated other comprehensive income
18,714

 
23,721

TOTAL STOCKHOLDER’S EQUITY
154,377

 
150,358

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
$
503,816

 
$
550,744


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

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SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
REVENUE
$
44,410

 
$
51,556

 
$
143,305

 
$
170,131

EXPENSES:
 
 
 
 
 
 
 
Depreciation and amortization
32,085

 
37,703

 
89,252

 
106,924

Cost of sales
188

 
104

 
290

 
352

Selling, general and administrative
5,912

 
4,845

 
19,553

 
20,642

 
38,185

 
42,652

 
109,095

 
127,918

INCOME FROM OPERATIONS
6,225

 
8,904

 
34,210

 
42,213

Interest expense, net
(6,202
)
 
(7,266
)
 
(21,655
)
 
(21,738
)
Foreign currency exchange gains (losses)
714

 
1,051

 
(1,104
)
 
1,036

Loss on early extinguishment of debt

 

 
(1,504
)
 

Gain on sale of marketable securities

 

 

 
230

Other income
16

 
227

 
17

 
710

Income before income taxes
753

 
2,916

 
9,964

 
22,451

Provision for income taxes
516

 
1,787

 
1,621

 
5,346

NET INCOME
$
237

 
$
1,129

 
$
8,343

 
$
17,105

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



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SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
 
  
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
237

 
$
1,129

 
$
8,343

 
$
17,105

Unrealized losses on securities held as available for sale, net of tax:
 
 
 
 
 
 
 
Unrealized net holding losses arising during the period

 

 

 
(32
)
Less: Reclassification adjustment for realized gains included in earnings

 

 

 
(230
)
Foreign currency translation adjustments
3,145

 
5,101

 
(5,007
)
 
4,762

Comprehensive income
$
3,382

 
$
6,230

 
$
3,336

 
$
21,605

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


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SEITEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY (Unaudited)
(In thousands, except share amounts)
 
 
 
 
Additional
Paid-In
Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Common Stock
 
 
Shares
 
Amount
 
Balance, December 31, 2012
100

 
$

 
$
398,772

 
$
(272,135
)
 
$
23,721

Amortization of stock-based compensation costs

 

 
683

 

 

Net income

 

 

 
8,343

 

Foreign currency translation adjustments

 

 

 

 
(5,007
)
Balance, September 30, 2013
100

 
$

 
$
399,455

 
$
(263,792
)
 
$
18,714

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


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


  
Nine Months Ended
September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Reconciliation of net income to net cash provided by operating activities:
 
 
 
Net income
$
8,343

 
$
17,105

Depreciation and amortization
89,252

 
106,924

Loss on early extinguishment of debt
1,504

 

Deferred income tax provision
149

 
213

Foreign currency exchange losses (gains)
1,104

 
(1,036
)
Amortization of deferred financing costs
989

 
1,514

Amortization of stock-based compensation
683

 
519

Amortization of favorable facility lease

 
214

Decrease in allowance for doubtful accounts

 
(298
)
Non-cash other income

 
(208
)
Non-cash revenue
(1,710
)
 
(6,175
)
Gain on sale of marketable securities

 
(230
)
Decrease in receivables
20,200

 
7,642

Decrease (increase) in other assets
(1,830
)
 
621

Decrease in deferred revenue
(1,868
)
 
(3,207
)
Decrease in accounts payable and other liabilities
(5,650
)
 
(5,832
)
Net cash provided by operating activities
111,166

 
117,766

Cash flows from investing activities:
 
 
 
Cash invested in seismic data
(111,812
)
 
(148,854
)
Cash paid to acquire property, equipment and other
(695
)
 
(1,276
)
Net proceeds from sale of marketable securities

 
230

Cash from sale of property, equipment and other
59

 
90

Advances to Seitel Holdings, Inc.
(253
)
 
(11
)
Net cash used in investing activities
(112,701
)
 
(149,821
)
Cash flows from financing activities:
 
 
 
Issuance of 9½% Senior Notes
250,000

 

Repayment of 9.75% Senior Notes
(275,000
)
 

Principal payments on notes payable
(29
)
 
(49
)
Principal payments on capital lease obligations
(186
)
 
(150
)
Costs of debt transactions
(6,915
)
 

Net cash used in financing activities
(32,130
)
 
(199
)
Effect of exchange rate changes
(186
)
 
179

Net decrease in cash and cash equivalents
(33,851
)
 
(32,075
)
Cash and cash equivalents at beginning of period
61,891

 
74,894

Cash and cash equivalents at end of period
$
28,040

 
$
42,819

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
18,409

 
$
27,018

Income taxes, net of refunds received
$
7,251

 
$
2,608

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Additions to seismic data library
$
3,903

 
$
3,115

Capital lease obligations incurred
$

 
$
95

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

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SEITEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)
September 30, 2013

NOTE A-BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Seitel, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with United States generally accepted accounting principles ("GAAP") 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 GAAP 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. Certain reclassifications have been made to the amounts in the prior year's financial statements to conform to the current year's presentation. 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. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The condensed consolidated balance sheet of the Company as of December 31, 2012 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 contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
NOTE B-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 payments for the initial 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. Contracts which are signed up to the time the Company makes a firm commitment to create the new seismic survey are considered underwriting. Any subsequent licensing of the data while it is in progress is considered a resale license (see “Revenue from Non-Exclusive Data Licenses”).
Underwriting revenue 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. On average, the duration of the data creation process is approximately 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 of which has value to the customers. Typical activities, that often occur concurrently, include:

permitting for land access, mineral rights, and regulatory approval;
surveying;
drilling for the placement of energy sources;
recording the data in the field; and
processing the data.
The customers paying for the initial 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.

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Revenue from Non-Exclusive Data Licenses
The Company recognizes a substantial portion of its revenue from licensing of data once it is available for delivery. These are sometimes referred to as resale licensing revenue, late sales or shelf sales.
These sales fall under the following four basic forms of non-exclusive license contracts.
Specific license contract—The customer licenses and selects data from the data library, including data currently in progress, at the time the contract is entered into and holds this license for a long-term period.

Library card license contract—The customer initially receives only access to certain data. The customer may then select specific data, from the collection of data to which it has access, to hold long-term under its license agreement. The length of the selection periods under the library card contracts is limited in time and varies from customer to customer.

Review and possession license contract—The customer obtains the right to review a certain quantity of data for a limited period of time. During the review period, the customer may select specific data from that available for review to hold long-term under its license agreement. Any data not selected for long-term licensing must be returned to the Company at the end of the review period.

Review only license contract—The customer obtains rights to review a certain quantity of data for a limited period of time, but does not obtain the right to select specific data to hold long-term.
The Company’s non-exclusive license contracts specify the following:

that all customers must also execute a master license agreement that governs the use of all data received under the Company’s non-exclusive license contracts;
the specific payment terms, generally ranging from 30 days to 12 months, and that such payments are non-cancelable and non-refundable;
the actual data that is accessible to the customer; and
that the data is licensed in its present form, where is and as is, and the Company is under no obligation to make any enhancements, modifications or additions to the data unless specific terms to the contrary are included.
Revenue from the non-exclusive licensing of seismic data is recognized when the following criteria are met:

the Company has an arrangement with the customer that is validated by a signed contract;
the sales price is fixed and determinable;
collection is reasonably assured;
the customer has selected the specific data or the contract has expired without full selection;
the data is currently available for delivery; and
the license term has begun.
Copies of the data are available to the customer immediately upon request.
For licenses that have been invoiced for which payment is due or has been received, but have not met the aforementioned criteria, the revenue is deferred along with the related direct costs (primarily consisting of sales commissions). This normally occurs under the library card, review and possession 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.

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 and, in some cases, services provided by Seitel Solutions (“Solutions”). In connection with specific data acquisition contracts, the Company may choose to receive both cash and ownership of seismic data from the customer as consideration for the underwriting of new data acquisition. In addition, the Company may receive advanced data processing services on selected existing data in exchange for

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a non-exclusive license to selected data from the Company’s library. These exchanges are referred to as non-monetary exchanges. A non-monetary exchange for data always complies with the following criteria:

the data license delivered is always distinct from the data received;
the customer forfeits ownership of its data; and
the Company retains ownership in its data.
In non-monetary exchange transactions, the Company records a data library asset for the seismic data received or processed at the time the contract is entered into or the data is completed, as applicable, 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, or as services are provided by Solutions. 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:

First, the Company considers the value of the data or services received from the customer. In determining the value of the data received, the Company considers the age, quality, current demand and future marketability of the data and, in the case of 3D seismic data, the cost that would be required to create the data. In addition, the Company applies a limitation on the value it assigns per square mile on the data received. In determining the value of the services received, the Company considers the cost of such similar services that it could obtain from a third party provider.

Second, the Company determines the value of the license granted to the customer. Typically, the range of cash transactions by the Company for licenses of similar data during the prior six months are evaluated. In evaluating the range of cash transactions, the Company does not consider transactions that are disproportionately high or low.
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): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Seismic data library additions
$
926

 
$
726

 
$
3,903

 
$
3,115

Revenue recognized on specific data licenses or selections of data
941

 
1,849

 
1,623

 
2,882

Revenue recognized related to acquisition contracts
3

 
1,645

 
87

 
3,273

Revenue recognized related to Solutions

 

 

 
20

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

NOTE C-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 B – “Revenue Recognition – Revenue from Non-Monetary Exchanges” for discussion of the process used to determine fair value.
For newly 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

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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 $0.9 million and $0.8 million for the three months ended September 30, 2013 and 2012, respectively, and $2.7 million and $2.1 million for the nine months ended September 30, 2013 and 2012, respectively.
Data Library Amortization
The Company amortizes its seismic data library investment 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 straight-line policy is applied from the time such survey is available for licensing to customers on a non-exclusive basis.
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 investment, and if required, records an impairment charge with respect to such investment. See discussion on “Seismic Data Library Impairment” below.
The actual aggregate rate of amortization depends on the specific seismic surveys licensed and selected by the Company’s customers during the period and the amount of straight-line amortization recorded. The income forecast amortization rates can vary by component and, as of October 1, 2013, is 70% for all components. For those seismic surveys which have been fully amortized, no amortization expense is required on revenue recorded.
The greater of the income forecast or straight-line amortization policy is applied quarterly on a cumulative basis at the individual survey level. 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) North America 3D onshore comprised of the following components: (a) Texas Gulf Coast, (b) Eastern Texas, (c) West Texas, (d) Panhandle Plays in North Texas/Oklahoma, (e) Southern Louisiana/Mississippi, (f) Northern Louisiana, (g) Rocky Mountains, (h) Utica/Marcellus in Pennsylvania, Ohio and West Virginia, (i) other United States, (j) Montney in British Columbia and Alberta, (k) Horn River in British Columbia, (l) Cardium in Alberta and (m) other Canada; (II) United States 2D; (III) Canada 2D; (IV) Gulf of Mexico offshore; and (V) international data outside North America. The Company believes that these library components constitute the lowest levels of independently identifiable cash flows.
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.
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.

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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 impairment losses relative to its seismic data library investment, which could be material to any particular reporting period.
The Company did not have any impairment charges during the nine months ended September 30, 2013 or 2012.

NOTE D-DEBT
The following is a summary of the Company’s debt (in thousands):

 
September 30,
2013
 
December 31,
2012
9½% Senior Notes
$
250,000

 
$

9.75% Senior Notes

 
275,000

Credit Facility

 

Notes payable

 
29

 
$
250,000

 
$
275,029

9½% Senior Unsecured Notes: On March 20, 2013, the Company issued, in a private placement, $250.0 million aggregate principal amount of 9½% senior notes (the “9½% Senior Notes”). The proceeds from the issuance of the 9½% Senior Notes, together with $29.8 million cash on hand, were used to satisfy and discharge the 9.75% senior notes due 2014 (the “9.75% Senior Notes”), including accrued interest of $4.8 million. As required by their terms, the 9½% Senior Notes were exchanged for senior notes of like amounts and terms in a publicly registered exchange offer in August 2013. The 9½% Senior Notes mature on April 15, 2019. Interest is payable in cash, semi-annually on April 15 and October 15 of each year, commencing on October 15, 2013. The 9½% Senior Notes are unsecured and are jointly and severally guaranteed by substantially all of the Company's significant domestic subsidiaries on a senior basis. The 9½% Senior Notes contain restrictive covenants which limit the Company's ability to, among other things, incur additional indebtedness, incur liens, pay dividends and make other restricted payments, engage in transactions with affiliates, and complete mergers, acquisitions and sales of assets.
From time to time on or before April 15, 2016, the Company may redeem up to 35% of the aggregate principal amount of the 9½% Senior Notes with the net proceeds of equity offerings at a redemption price equal to 109.50% of the principal amount, plus accrued and unpaid interest. Upon a change of control (as defined in the indenture), each holder of the 9½% 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.
9.75% Senior Unsecured Notes: The Company had $275.0 million aggregate principal amount of its 9.75% Senior Notes outstanding until these notes were satisfied and discharged in connection with the issuance of the 9½% Senior Notes. On March 20, 2013, the noteholders were issued a notice of redemption and the 9.75% Senior Notes were redeemed at a redemption price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest through April 18, 2013. In accordance with the terms and conditions of the indenture governing the 9.75% Senior Notes, this payment satisfied and discharged the entire indebtedness under the 9.75% Senior Notes. Accordingly, the Company recorded a loss on early extinguishment of debt of $1.5 million, which included the write-off of unamortized issue expenses, for the nine months ended September 30, 2013.
Credit Facility: On May 25, 2011, the Company entered into a credit agreement (the “Credit Facility”) with Wells Fargo Capital Finance, LLC (the “U.S. Lender”) and Wells Fargo Capital Finance Corporation Canada (the “Canadian Lender,” and collectively with the U.S. Lender, the “Lenders”). The Credit Facility provides a $30.0 million revolving credit facility with a Canadian sublimit of $5.0 million, subject to borrowing base limitations based on the Company's seismic data assets and eligible accounts receivable, each as defined in the Credit Facility, calculated on a monthly basis. The Credit Facility expires on May 25, 2016. Each existing and future direct and indirect wholly-owned domestic subsidiary of the Company (collectively, the “U.S. Guarantors”) is a guarantor of payment of the U.S. obligations under the Credit Facility, and Olympic Seismic Ltd. (“Olympic”), a wholly-owned subsidiary of the Company, and each future direct and indirect wholly-owned Canadian

12

Table of Contents

subsidiary of the Company (such subsidiaries together with Olympic, the “Canadian Guarantors”) are guarantors of payment of the Canadian obligations under the Credit Facility.
The borrowings under the Credit Facility are secured by a perfected first priority lien and security interest (subject to certain exceptions) in favor of the U.S. Lender in all present and future assets and equity of the Company and each U.S. Guarantor and 65% of the equity in Olympic, and borrowings by Olympic are secured by a perfected first priority lien and security interest (subject to certain exceptions) in favor of the Canadian Lender in all present and future assets of each Canadian Guarantor. U.S. borrowings under the Credit Facility bear interest at a rate per annum equal to, at the Company's option, either (a) the London Interbank Offered Rate ("LIBOR") rate plus 3.50% or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus ½ of 1%, (ii) the three-month LIBOR rate plus 1% and (iii) the prime rate of Wells Fargo Bank, National Association, plus 2.50%. Canadian borrowings under the Credit Facility bear interest based on a Canadian base rate, as defined in the Credit Facility.
The Credit Facility contains certain affirmative and negative covenants and requires that the Company maintain minimum excess availability (as defined in the Credit Facility) of $10.0 million or, if such excess availability is not maintained, then the Company's fixed charge coverage ratio (as defined in the Credit Facility) may not be less than 1.00 to 1.00. In addition, the Credit Facility contains affirmative and negative covenants, representations and warranties, borrowing conditions, events of default and remedies for the Lenders. The aggregate loan or any individual loan made under the Credit Facility may be prepaid at any time subject to certain restrictions. The Credit Facility is also subject to the payment of upfront, letter of credit, administrative and certain other fees. As of September 30, 2013, no amounts were outstanding under the Credit Facility and there was $30.0 million of availability.

NOTE E-FAIR VALUE MEASUREMENTS

Authoritative guidance on fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. In measuring the fair value of the Company’s assets and liabilities, market data or assumptions are used that the Company believes market participants would use in pricing an asset or liability, including assumptions about risk when appropriate. The Company’s assets that are measured at fair value on a recurring basis include the following (in thousands):

 
 
 
Fair Value Measurements Using
 
Total
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant  Other
Observable
Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
At September 30, 2013:
 
 
 
 
 
 
 
Cash equivalents
$
27,496

 
$
27,496

 
$

 
$

At December 31, 2012:
 
 
 
 
 
 
 
Cash equivalents
$
61,272

 
$
61,272

 
$

 
$

The Company had no transfers of assets between any of the above levels during the nine months ended September 30, 2013 or 2012.
Cash equivalents include money market funds that invest in United States government obligations and a Canadian dollar investment account, all with original maturities of three months or less. The original costs of these assets approximate fair value due to their short-term maturity.
Other Financial Instruments:
Debt – At September 30, 2013 and December 31, 2012, the carrying value of the Company's debt was approximately $250.0 million and $275.0 million, respectively. The estimated fair value of the debt was approximately $260.3 million at September 30, 2013 and $274.6 million at December 31, 2012. The fair value of the Company's senior notes is based on quoted market prices (Level 1 inputs).

13

Table of Contents


NOTE F-STATEMENT OF CASH FLOW INFORMATION
Cash and cash equivalents at September 30, 2013 and December 31, 2012 include $651,000 of restricted cash related to collateral on seismic operations bonds. The balances at September 30, 2013 and December 31, 2012 also include $125,000 (Canadian) of restricted cash posted as security against Company issued credit cards for Olympic.
The Company had non-cash additions to its seismic data library comprised of the following for the periods indicated (in thousands): 
 
Nine Months Ended
September 30,
 
2013
 
2012
Non-monetary exchanges related to resale licensing revenue
$
1,511

 
$
1,293

Non-monetary exchanges from underwriting of new data acquisition

 
4,122

Completion of data in progress from prior non-monetary exchanges
2,392

 
142

Less: Non-monetary exchanges for data in progress

 
(2,442
)
Total non-cash additions to seismic data library
$
3,903

 
$
3,115


Non-cash revenue consisted of the following for the periods indicated (in thousands):
 
Nine Months Ended
September 30,
 
2013
 
2012
Acquisition revenue on underwriting from non-monetary exchange contracts
$
87

 
$
3,273

Licensing revenue from specific data licenses and selections on non-monetary exchange contracts
1,623

 
2,882

Solutions revenue recognized from non-monetary exchange contracts

 
20

Total non-cash revenue
$
1,710

 
$
6,175


NOTE G-COMMITMENTS AND CONTINGENCIES
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, results of operations or cash flows. 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 September 30, 2013, the Company did not have any amounts accrued related to litigation and claims, as the Company believes it is not probable that any amounts will be paid relative to such litigation and claims.

NOTE H-RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The ASU was issued to eliminate diversity in practice in the presentation of unrecognized tax benefits when a net operating loss ("NOL") carryforward, a similar tax loss or a tax credit carryforward exists. Under the new guidance, an entity should present an unrecognized tax benefit as a reduction of the deferred tax asset for an NOL or similar tax loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce the NOL or other carryforward under the tax law. The new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. The amendments in this ASU should be applied prospectively to all unrecognized tax benefits that exist at the effective date, but retrospective application is permitted. The Company is currently evaluating the impact of adopting the provisions of ASU 2013-11, but does not expect the standard to have a significant impact on its financial statements.

NOTE I-SUPPLEMENTAL GUARANTORS CONSOLIDATING CONDENSED FINANCIAL INFORMATION
On March 20, 2013, the Company completed a private placement of 9½% Senior Notes in the aggregate principal amount of $250.0 million. The Company’s payment obligations under the 9½% Senior Notes are jointly and severally guaranteed by substantially all of the Company's significant 100% owned U.S. subsidiaries (“Guarantor Subsidiaries”). All subsidiaries of the Company that do not guarantee the 9½% Senior Notes are referred to as Non-Guarantor Subsidiaries.

14

Table of Contents

The indenture governing the 9½% Senior Notes provides that the guarantees by the Guarantor Subsidiaries will be released in the following customary circumstances: (i) upon a sale or other disposition, whether by merger, consolidation or otherwise, of the equity interests of that guarantor to a person that is not the Company or a restricted subsidiary of the Company; (ii) the guarantor sells all or substantially all of its assets to a person that is not the Company or a restricted subsidiary of the Company; (iii) the guarantor is properly designated as an unrestricted subsidiary or ceases to be a restricted subsidiary; (iv) upon legal defeasance of the 9½% Senior Notes or satisfaction and discharge of the indenture governing the 9½% Senior Notes; (v) the guarantor becomes an immaterial subsidiary or (vi) the guarantor is released from its guarantee obligations under the Credit Facility.
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 Guarantor Subsidiaries are not presented because (i) the Guarantor Subsidiaries are wholly-owned and have fully and unconditionally guaranteed the 9½% 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 September 30, 2013 and December 31, 2012, and the consolidating condensed statements of income, statements of comprehensive income (loss) and statements of cash flows for the nine months ended September 30, 2013 and September 30, 2012 of (a) the Company; (b) the Guarantor Subsidiaries; (c) the Non-Guarantor Subsidiaries; (d) elimination entries; and (e) the Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis.
Investments in subsidiaries are accounted for under the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and intercompany sales.

15

Table of Contents


CONSOLIDATING CONDENSED BALANCE SHEET
As of September 30, 2013
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
21,381

 
$
6,659

 
$

 
$
28,040

Receivables
 
 
 
 
 
 
 
 
 
Trade, net

 
33,006

 
7,888

 

 
40,894

Notes and other, net

 
8

 
1,998

 

 
2,006

Due from Seitel Holdings, Inc.

 
1,127

 

 

 
1,127

Intercompany receivables (payables)
28,201

 
295

 
(28,496
)
 

 

Investment in subsidiaries
362,124

 
432,614

 
1,591

 
(796,329
)
 

Net seismic data library

 
118,231

 
75,906

 

 
194,137

Net property and equipment

 
1,627

 
2,445

 

 
4,072

Prepaid expenses, deferred charges and other
7,143

 
2,315

 
2,936

 

 
12,394

Intangible assets, net
900

 
10,841

 
4,581

 

 
16,322

Goodwill

 
107,688

 
97,052

 

 
204,740

Deferred income taxes

 
84

 

 

 
84

TOTAL ASSETS
$
398,368

 
$
729,217

 
$
172,560

 
$
(796,329
)
 
$
503,816

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
12,595

 
$
23,606

 
$
6,753

 
$

 
$
42,954

Income taxes payable
110

 
502

 

 

 
612

Senior Notes
250,000

 

 

 

 
250,000

Obligations under capital leases

 
58

 
2,771

 

 
2,829

Deferred revenue

 
44,010

 
6,667

 

 
50,677

Deferred income taxes

 

 
2,367

 

 
2,367

TOTAL LIABILITIES
262,705

 
68,176

 
18,558

 

 
349,439

STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
Common stock

 

 

 

 

Additional paid-in capital
399,455

 

 

 

 
399,455

Parent investment

 
764,752

 
156,924

 
(921,676
)
 

Retained deficit
(263,792
)
 
(103,711
)
 
(21,636
)
 
125,347

 
(263,792
)
Accumulated other comprehensive income

 

 
18,714

 

 
18,714

TOTAL STOCKHOLDER’S EQUITY
135,663

 
661,041

 
154,002

 
(796,329
)
 
154,377

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
$
398,368

 
$
729,217

 
$
172,560

 
$
(796,329
)
 
$
503,816













16

Table of Contents


CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2012
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
60,533

 
$
1,358

 
$

 
$
61,891

Receivables
 
 
 
 
 
 
 
 
 
Trade, net

 
43,806

 
17,389

 

 
61,195

Notes and other, net

 
9

 
2,134

 

 
2,143

Due from Seitel Holdings, Inc.

 
874

 

 

 
874

Intercompany receivables (payables)
75,688

 
(49,827
)
 
(25,861
)
 

 

Investment in subsidiaries
332,819

 
432,870

 
1,590

 
(767,279
)
 

Net seismic data library

 
100,087

 
80,030

 

 
180,117

Net property and equipment

 
2,125

 
2,693

 

 
4,818

Prepaid expenses, deferred charges and other
2,644

 
5,122

 
3,008

 

 
10,774

Intangible assets, net
900

 
13,250

 
6,678

 

 
20,828

Goodwill

 
107,688

 
100,332

 

 
208,020

Deferred income taxes

 
84

 

 

 
84

TOTAL ASSETS
$
412,051

 
$
716,621

 
$
189,351

 
$
(767,279
)
 
$
550,744

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
10,049

 
$
38,179

 
$
14,555

 
$

 
$
62,783

Income taxes payable
336

 
900

 
2,898

 

 
4,134

Senior Notes
275,000

 

 

 

 
275,000

Notes payable
29

 

 

 

 
29

Obligations under capital leases

 
81

 
3,032

 

 
3,113

Deferred revenue

 
45,320

 
7,537

 

 
52,857

Deferred income taxes

 

 
2,470

 

 
2,470

TOTAL LIABILITIES
285,414

 
84,480

 
30,492

 

 
400,386

STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
Common stock

 

 

 

 

Additional paid-in capital
398,772

 

 

 

 
398,772

Parent investment

 
764,752

 
156,918

 
(921,670
)
 

Retained deficit
(272,135
)
 
(132,611
)
 
(21,780
)
 
154,391

 
(272,135
)
Accumulated other comprehensive income

 

 
23,721

 

 
23,721

TOTAL STOCKHOLDER’S EQUITY
126,637

 
632,141

 
158,859

 
(767,279
)
 
150,358

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
$
412,051

 
$
716,621

 
$
189,351

 
$
(767,279
)
 
$
550,744








17

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF INCOME
For the Nine Months Ended September 30, 2013
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
REVENUE
$

 
$
112,387

 
$
31,893

 
$
(975
)
 
$
143,305

EXPENSES:
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
66,904

 
22,348

 

 
89,252

Cost of sales

 
287

 
3

 

 
290

Selling, general and administrative
1,086

 
12,584

 
6,858

 
(975
)
 
19,553

 
1,086

 
79,775

 
29,209

 
(975
)
 
109,095

INCOME (LOSS) FROM OPERATIONS
(1,086
)
 
32,612

 
2,684

 

 
34,210

Interest expense, net
(17,967
)
 
(2,401
)
 
(1,287
)
 

 
(21,655
)
Foreign currency exchange losses

 

 
(1,104
)
 

 
(1,104
)
Loss on early extinguishment of debt
(1,504
)
 

 

 

 
(1,504
)
Other income

 
17

 

 

 
17

Income (loss) before income taxes and equity in income of subsidiaries
(20,557
)
 
30,228

 
293

 

 
9,964

Provision for income taxes

 
1,472

 
149

 

 
1,621

Equity in income of subsidiaries
28,900

 
144

 

 
(29,044
)
 

NET INCOME
$
8,343

 
$
28,900

 
$
144

 
$
(29,044
)
 
$
8,343



18

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2013
(In thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Net income
$
8,343

 
$
28,900

 
$
144

 
$
(29,044
)
 
$
8,343

Foreign currency translation adjustments

 

 
(5,007
)
 

 
(5,007
)
Comprehensive income (loss)
$
8,343

 
$
28,900

 
$
(4,863
)
 
$
(29,044
)
 
$
3,336


19

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF INCOME
For the Nine Months Ended September 30, 2012
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
REVENUE
$

 
$
106,372

 
$
64,730

 
$
(971
)
 
$
170,131

EXPENSES:
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
64,927

 
41,997

 

 
106,924

Cost of sales

 
335

 
17

 

 
352

Selling, general and administrative
1,601

 
12,313

 
7,699

 
(971
)
 
20,642

 
1,601

 
77,575

 
49,713

 
(971
)
 
127,918

INCOME (LOSS) FROM OPERATIONS
(1,601
)
 
28,797

 
15,017

 

 
42,213

Interest expense, net
(9,690
)
 
(10,995
)
 
(1,053
)
 

 
(21,738
)
Foreign currency exchange gains (losses)

 
(4
)
 
1,040

 

 
1,036

Gain on sale of marketable securities

 
230

 

 

 
230

Other income
20

 
690

 

 

 
710

Income (loss) before income taxes and equity in income of subsidiaries
(11,271
)
 
18,718

 
15,004

 

 
22,451

Provision for income taxes

 
1,420

 
3,926

 

 
5,346

Equity in income of subsidiaries
28,376

 
11,078

 

 
(39,454
)
 

NET INCOME
$
17,105

 
$
28,376

 
$
11,078

 
$
(39,454
)
 
$
17,105


20

Table of Contents

CONSOLIDATING CONDENSED STATEMENT OF COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2012
(In thousands)

 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Net income
$
17,105

 
$
28,376

 
$
11,078

 
$
(39,454
)
 
$
17,105

Unrealized losses on securities held as available for sale, net of tax:
 
 
 
 
 
 
 
 

Unrealized net holding losses arising during the period

 
(32
)
 

 

 
(32
)
Less: Reclassification adjustment for realized gains included in earnings

 
(230
)
 

 

 
(230
)
Foreign currency translation adjustments

 

 
4,762

 

 
4,762

Comprehensive income
$
17,105

 
$
28,114

 
$
15,840

 
$
(39,454
)
 
$
21,605


21

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2013
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(18,542
)
 
$
102,136

 
$
27,572

 
$

 
$
111,166

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Cash invested in seismic data

 
(89,278
)
 
(22,534
)
 

 
(111,812
)
Cash paid to acquire property, equipment and other

 
(457
)
 
(238
)
 

 
(695
)
Cash from sale of property, equipment and other

 
59

 

 

 
59

Advances to Seitel Holdings, Inc.

 
(253
)
 

 

 
(253
)
Net cash used in investing activities

 
(89,929
)
 
(22,772
)
 

 
(112,701
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Issuance of 9½% Senior Notes
250,000

 

 

 

 
250,000

Repayment of 9.75% Senior Notes
(275,000
)
 

 

 

 
(275,000
)
Principal payments on notes payable
(29
)
 

 

 

 
(29
)
Principal payments on capital lease obligations

 
(23
)
 
(163
)
 

 
(186
)
Costs of debt transactions
(6,915
)
 

 

 

 
(6,915
)
Intercompany transfers
50,486

 
(51,336
)
 
850

 

 

Net cash provided by (used in) financing activities
18,542

 
(51,359
)
 
687

 

 
(32,130
)
Effect of exchange rate changes

 

 
(186
)
 

 
(186
)
Net increase (decrease) in cash and cash equivalents

 
(39,152
)
 
5,301

 

 
(33,851
)
Cash and cash equivalents at beginning of period

 
60,533

 
1,358

 

 
61,891

Cash and cash equivalents at end of period
$

 
$
21,381

 
$
6,659

 
$

 
$
28,040
















22

Table of Contents


CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2012
(In thousands)
 
 
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(26,451
)
 
$
88,019

 
$
56,198

 
$

 
$
117,766

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Cash invested in seismic data

 
(75,100
)
 
(73,754
)
 

 
(148,854
)
Cash paid to acquire property, equipment and other

 
(1,194
)
 
(82
)
 

 
(1,276
)
Net proceeds from sale of marketable securities

 
230

 

 

 
230

Cash from sale of property, equipment and other

 
90

 

 

 
90

Advances to Seitel Holdings, Inc.

 
(11
)
 

 

 
(11
)
Net cash used in investing activities

 
(75,985
)
 
(73,836
)
 

 
(149,821
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Principal payments on notes payable
(49
)
 

 

 

 
(49
)
Principal payments on capital lease obligations

 
(6
)
 
(144
)
 

 
(150
)
Intercompany transfers
26,500

 
(32,650
)
 
6,150

 

 

Net cash provided by (used in) financing activities
26,451

 
(32,656
)
 
6,006

 

 
(199
)
Effect of exchange rate changes

 
(4
)
 
183

 

 
179

Net decrease in cash and cash equivalents

 
(20,626
)
 
(11,449
)
 

 
(32,075
)
Cash and cash equivalents at beginning of period

 
61,612

 
13,282

 

 
74,894

Cash and cash equivalents at end of period
$

 
$
40,986

 
$
1,833

 
$

 
$
42,819


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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes to the condensed consolidated financial statements included elsewhere in this document.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in this report about our future outlook, prospects, strategies and plans, and about industry conditions, demand for seismic services and the future economic life of our seismic data are forward-looking, among others. All statements that express belief, expectation, estimates or intentions, as well as those that are not statements of historical fact, are forward-looking. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,” “target,” “foresee,” “should,” “intend,” “may,” “will,” “would,” “could,” “potential” and similar expressions are intended to identify forward-looking statements. Forward-looking statements represent our present belief and are based on our current expectations and assumptions with respect to future events and their potential effect on us. While we believe our expectations and assumptions are reasonable, they involve risks and uncertainties beyond our control that could cause the actual results or outcome to differ materially from the expected results or outcome reflected in our forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report may not occur. Such risks and uncertainties include, without limitation, actual customer demand for our seismic data and related services, the timing and extent of changes in commodity prices for natural gas, crude oil and condensate and natural gas liquids, conditions in the capital markets during the periods covered by the forward-looking statements, the effect of economic conditions, our ability to obtain financing on satisfactory terms if internally generated funds and our current credit facility are insufficient to fund our capital needs, the impact on our financial condition as a result of our debt and our debt service, our ability to obtain and maintain normal terms with our vendors and service providers, our ability to maintain contracts that are critical to our operations, changes in the oil and gas industry or the economy generally and changes in the exploration budgets of our customers, as well as the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and in our Registration Statement on Form S-4 (File No. 333-189447) filed with the Securities and Exchange Commission (“SEC”).
The forward-looking statements contained in this report speak only as of the date hereof and readers are cautioned not to place undue reliance on such forward-looking statements. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason. All forward-looking statements attributable to Seitel, Inc. or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to herein, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC and in our future periodic reports filed with the SEC.
Overview
General
We are a leading provider of onshore seismic data to the oil and gas industry in North America. We own an extensive library of onshore and offshore seismic data that we have accumulated since our inception in 1982 that we offer for license to exploration and production (“E&P”) companies. We believe our data library is the largest onshore three-dimensional (“3D”) database available for licensing in North America and includes leading positions in oil and liquids-rich unconventional plays.
Our products and services are used by E&P companies to assist in oil and gas exploration and development of hydrocarbon reserves. Historically, seismic data was tied to exploration capital expenditures as E&P companies used seismic data to increase the success rate of discovering hydrocarbon deposits. With the shift to unconventional plays, E&P companies now use seismic data as a development tool to better identify efficient drilling plans and maximize production by identifying and understanding a series of critical characteristics of the targeted resource. We generate revenue primarily by licensing data from our data library and from new data creation products, which are substantially underwritten or paid for by our clients. By participating in underwritten, nonexclusive surveys or purchasing licenses to existing data, E&P companies can obtain access to surveys at reduced costs as compared to acquiring seismic data on a proprietary basis.
Our primary areas of focus are onshore United States and Canada and, to a lesser extent, offshore U.S. Gulf of Mexico. These markets continue to experience major changes. Major integrated oil and gas companies and national oil companies have become more active in the North American market, primarily in the unconventional plays, through joint ventures, asset

24

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purchases and corporate transactions. The larger independent oil and gas companies continue to be responsible for a significant portion of current U.S. drilling activity. Our offshore seismic data is primarily located in the shallow waters of the U.S. Gulf of Mexico and generates a small percentage of our revenue.

Principal Factors Affecting Our Business
Our business is dependent upon a variety of factors, many of which are beyond our control. The following are those that we consider to be principal factors affecting our business.
Demand for Seismic Data: Demand for our products and services is cyclical due to the nature of the oil and gas industry. In particular, demand for our seismic data services depends upon exploration, production, development and field management spending by E&P companies and, in the case of new data creation, the willingness of these companies to forgo ownership in the seismic data. Capital expenditures by E&P companies depend upon several factors, including actual and forecasted oil and natural gas commodity prices, prospect availability and the companies’ own short-term and strategic plans. These capital expenditures may also be affected by worldwide economic or industry-wide conditions. With the shift to unconventional plays, seismic data is increasingly tied to relatively stable development capital expenditures.
Merger and Acquisition/Joint Venture Activity: Merger and acquisition activity continues to occur within our client base, although there has been an overall decline in activity in the U.S. since 2010. This activity could have a negative impact on seismic companies that operate in markets with a limited number of participating clients. However, we believe that, over time, this activity could have a positive impact on our business, as it should generate re-licensing fees, result in increased vitality in the trading of mineral interests and result in the creation of new independent customers through the rationalization of staff within those companies affected by this activity.
Exploiting unconventional plays is a capital intensive endeavor and many technically proficient E&P companies remain capital constrained. They find themselves needing to sell their positions to, or create partnerships with, large well-capitalized companies in order to develop their recoverable resource base. These joint venture partners or new owners will often need to purchase licenses to our seismic data for their own use.
North America Drilling Activity: Many companies have shifted their capital expenditure focus to drilling in 2013; however, the rig count has remained relatively flat due to operational efficiencies. Drilling activity remains focused on areas with oil and liquids-rich hydrocarbons, while activity in dry gas areas continues to be depressed.
Availability of Capital for Our Customers: Some of our customers are independent E&P companies and private prospect-generating companies that rely primarily on private capital markets to fund their exploration, production, development and field management activities. Reductions in cash flows resulting from lower commodity prices, along with the reduced availability of credit and increased costs of borrowing, could have a material impact on the ability of such companies to obtain funding necessary to purchase our seismic data.
Government Regulation: Our operations are subject to a variety of federal, provincial, state, foreign and local laws and regulations, including environmental and health and safety laws. We invest financial and managerial resources to comply with these laws and related permit requirements. Modification of existing laws or regulations and the adoption of new laws or regulations limiting or increasing exploration or production activities by oil and gas companies may have a material effect on our business operations.
Key Performance Measures

Management considers certain performance measures in evaluating and managing our financial condition and operating performance at various times and from time to time. Some of these performance measures are non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. These non-GAAP measures are not in accordance with, nor are they a substitute for, GAAP measures. These non-GAAP measures are intended to supplement our presentation of our financial results that are prepared in accordance with GAAP.

The following are the key performance measures considered by management.

Cash Resales: Cash resales represent new contracts for data licenses from our library, including data currently in progress, payable in cash. We believe this measure is important in assessing overall industry and client activity. Cash resales are likely to fluctuate quarter to quarter as they do not require the longer planning and lead times necessary for new data creation.


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The following is a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure, total revenue (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Cash resales
$
18,527

 
$
15,512

 
$
63,602

 
$
77,810

Other revenue components:
 
 
 
 
 
 
 
Acquisition underwriting revenue
22,440

 
25,103

 
62,926

 
78,566

Non-monetary exchanges
926

 
584

 
1,511

 
1,293

Revenue recognition adjustments
1,305

 
8,665

 
11,680

 
7,859

Solutions and other
1,212

 
1,692

 
3,586

 
4,603

Total revenue
$
44,410

 
$
51,556

 
$
143,305

 
$
170,131


Cash EBITDA: Cash EBITDA represents cash generated from licensing data from our seismic library net of recurring cash operating expenses. We believe this measure is helpful in determining the level of cash from operations we have available for debt service and funding of capital expenditures (net of the portion funded or underwritten by our customers). Cash EBITDA includes cash resales plus all other cash revenues other than from data acquisitions, plus gains on sales of marketable securities and cash distributions from investments obtained as part of licensing our seismic data, less cost of goods sold and cash selling, general and administrative expenses (excluding non-recurring corporate expenses such as severance and legal, financial and other expenses related to corporate and strategic transactions).

The following is a quantitative reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure, net income (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Cash EBITDA
$
13,927

 
$
12,651

 
$
48,284

 
$
63,756

Add (subtract) other revenue components not included in cash EBITDA:
 
 
 
 
 
 
 
Acquisition underwriting revenue
22,440

 
25,103

 
62,926

 
78,566

Non-monetary exchanges
926

 
584

 
1,511

 
1,293

Revenue recognition adjustments
1,305

 
8,665

 
11,680

 
7,859

Solutions non-cash revenue

 

 

 
20

Add (subtract) other items included in net income:
 
 
 
 
 
 
 
Depreciation and amortization
(32,085
)
 
(37,703
)
 
(89,252
)
 
(106,924
)
Non-cash operating expenses
(185
)
 
(273
)
 
(683
)
 
(733
)
Non-recurring corporate expenses
(103
)
 
(123
)
 
(256
)
 
(994
)
Interest expense, net
(6,202
)
 
(7,266
)
 
(21,655
)
 
(21,738
)
Foreign currency gains (losses)
714

 
1,051

 
(1,104
)
 
1,036

Loss on early extinguishment of debt

 

 
(1,504
)
 

Other income
16

 
227

 
17

 
310

Provision for income taxes
(516
)
 
(1,787
)
 
(1,621
)
 
(5,346
)
Net income
$
237

 
$
1,129

 
$
8,343

 
$
17,105


Growth of Our Seismic Data Library: We regularly add to our seismic data library through four different methods: (1) recording new data; (2) buying ownership of existing data for cash; (3) obtaining ownership of existing data sets through non-monetary exchanges; and (4) creating new value-added products from existing data within our library. For the period from January 1, 2013 to November 4, 2013, we completed the addition of approximately 2,500 square miles of seismic data to our library. As of November 4, 2013, we had approximately 1,000 square miles of seismic data in progress.

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Critical Accounting Policies
We operate in one business segment, which is made up of seismic data acquisition, seismic data licensing, seismic data processing and seismic reproduction services. There have not been any changes in our critical accounting policies since December 31, 2012.
Results of Operations
Revenue
The following table summarizes the components of our revenue for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Acquisition underwriting revenue:
 
 
 
 
 
 
 
Cash underwriting
$
22,437

 
$
23,458

 
$
62,839

 
$
75,293

Underwriting from non-monetary exchanges
3

 
1,645

 
87

 
3,273

Total acquisition underwriting revenue
22,440

 
25,103

 
62,926

 
78,566

Resale licensing revenue:
 
 
 
 
 
 
 
Cash resales
18,527

 
15,512

 
63,602

 
77,810

Non-monetary exchanges
926

 
584

 
1,511

 
1,293

Revenue recognition adjustments
1,305

 
8,665

 
11,680

 
7,859

Total resale licensing revenue
20,758

 
24,761

 
76,793

 
86,962

Total seismic revenue
43,198

 
49,864

 
139,719

 
165,528

Solutions and other
1,212

 
1,692

 
3,586

 
4,603

Total revenue
$
44,410

 
$
51,556

 
$
143,305

 
$
170,131

Total revenue was $44.4 million in the third quarter of 2013 compared to $51.6 million in the third quarter of 2012. Acquisition underwriting revenue was $22.4 million in the third quarter of 2013 compared to $25.1 million in the third quarter of 2012. The majority of our new data acquisition activity in the third quarter of 2013 occurred in the Eagle Ford/Woodbine, Utica/Marcellus and Permian unconventional plays. Total resale licensing revenue was $20.8 million in the third quarter of 2013 compared to $24.8 million in the third quarter of 2012. Although total resale licensing revenue decreased, cash resales increased $3.0 million, or 19%, in the third quarter of 2013 compared to cash resales in the third quarter of 2012. While the third quarter is typically a slower quarter in our segment of the industry, we had expected activity levels for cash resales to increase compared to the first half of 2013. However, activity levels remained fairly consistent with the first half of the year. Revenue recognition adjustments are non-cash adjustments to revenue and reflect the net amount of (i) revenue deferred as a result of all of the revenue recognition criteria not being met and (ii) the subsequent revenue recognition once the criteria are met. The change in revenue recognition adjustments between 2012 and 2013 was primarily due to a decrease in the recognition of revenue previously deferred coupled with an increase in the deferral of cash resales in the third quarter of 2013. Solutions and other revenue was $1.2 million in the third quarter of 2013 compared to $1.7 million in the third quarter of 2012. The $0.5 million decrease was primarily due to the variation in the types of products delivered.
Total revenue for the first nine months of 2013 was $143.3 million compared to $170.1 million in the first nine months of 2012. For the first nine months of 2013, acquisition underwriting revenue was $62.9 million, reflecting 67% underwriting on new data acquisition projects, compared to the first nine months of 2012 of $78.6 million, reflecting 60% underwriting on new data acquisition projects. The decrease in acquisition underwriting revenue was primarily due to a reduction in data acquisition activity in the first nine months of 2013 as the Company made a strategic decision to reduce its level of investment in new data creation for 2013 as compared to 2012. The majority of our new data acquisition activity in 2013 has been in the Eagle Ford/Woodbine, Utica/Marcellus, Granite Wash (Panhandle Plays) and Cardium unconventional plays in North America. In addition, we recently began acquiring surveys in the Permian Basin. Total resale licensing revenue was $76.8 million in the first nine months of 2013 compared to $87.0 million in the first nine months of 2012. For the first nine months of 2013, cash resales were $63.6 million compared to $77.8 million in the same period last year. Cash resale activity is tied closely to our clients' annual budget cycles and therefore is better viewed on an annual basis. As a result, cash resale activity can fluctuate significantly in interim periods within the year. The increase of $3.8 million in revenue recognition adjustments from the first nine months of 2012 to the first nine months of 2013 was primarily due to a decrease in the deferral of new licensing contracts and a slight increase in selection of data from open library card contracts, partially offset by a decrease in the recognition of revenue

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previously deferred as a result of new data acquisition projects being completed and delivered. Solutions and other revenue decreased approximately $1.0 million in 2013 compared to 2012 mainly due to the variation in the types of products delivered and fewer third party data processing projects in 2013.
At September 30, 2013, we had a deferred revenue balance of $50.7 million, compared to the December 31, 2012 balance of $52.9 million. The deferred revenue balance related to (i) data licensing contracts on which selection of specific data had not yet occurred, (ii) deferred revenue on data acquisition projects and (iii) contracts in which the data products are not yet available or the revenue recognition criteria has not yet been met. The deferred revenue will be recognized when selection of specific data is made by the customer, upon expiration of the data selection period specified in the data licensing contracts, as work progresses on the data acquisition contracts, as the data products become available or as all of the revenue recognition criteria are met.
Depreciation and Amortization
Depreciation and amortization was composed of the following for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Amortization of seismic data: