----

** UNITED STATESSECURITIES 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 September 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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes

[X]

No

[  ]

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of "accelerated filer and largeaccelerated 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 (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes

[  ]

No

[X]

Indicate by check mark whether theregistrant has filed all documents and reports required to be filed by Section12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.

 

Yes

[X]

No

[  ]

 

As of November 9,2007, there were 100 shares of the Company's common stock, par value $.001 pershare outstanding.

Page 1 of 51

 
 **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.        Quantitative and Qualitative Disclosures about Market Risk.......................................................	

48

 

Item 4T.      Controls and Procedures.............................................................................................................	

48

 

PART II.

OTHER  INFORMATION

 

Item 1.        Legal Proceedings........................................................................................................................

48

 

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

48

 

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

50
 
Page 2 of 51

 

*(Index)*
**PART I - FINANCIAL INFORMATION****Item 1.     FINANCIAL STATEMENTS**
**SEITEL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS**

*(In thousands, except share and per share amounts)*

 

* *

(Unaudited)

* *

SUCCESSOR

PREDECESSOR

* *

PERIOD

PERIOD

September 30,

December 31,

2007

2006

 
 
 
 
 
 
 
ASSETS

     Cash and cash equivalents

$

33,194

$

107,390

     Restricted cash

108

105

     Receivables

         Trade, net of allowance for doubtful  accounts of

            $719 and $316, respectively

36,443

52,144

         Notes and other, net of allowance for doubtful accounts

            of $263 and $275, respectively

793

895

     Net seismic data library, net of  accumulated amortization

         of $92,604 and $961,549, respectively

362,807

123,123

     Net property and equipment, net of  accumulated depreciation

         and amortization of $1,727 and $26,439,  respectively

7,352

7,628

     Prepaid expenses, deferred charges and  other 

19,074

9,169

     Deferred income taxes

22

4,981

     Intangible assets, net

53,671

-

     Goodwill

208,566

-

     TOTAL ASSETS

$

722,030

$

305,435

     

LIABILITIES AND STOCKHOLDER'S EQUITY

     LIABILITIES

         Accounts payable and accrued  liabilities

$

30,843

$

30,837

         Income taxes payable

713

659

         Debt

            Senior Notes

402,354

185,788

            Notes payable

307

337

         Obligations under capital leases

3,849

2,913

         Deferred revenue

38,440

47,410

         Deferred income taxes

18,232

-

     TOTAL LIABILITIES

494,738

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 September 30,  2007 (Successor)

-

-

         Additional paid-in capital

262,188

240,431

         Retained deficit

(62,302

)

(209,539

)

         Accumulated other comprehensive income

27,406

5,047

     TOTAL STOCKHOLDER'S EQUITY

227,292

37,491

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$

722,030

$

305,435

 

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

Page 3 of 51

 

*(Index)*

**SEITEL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**(Unaudited)*(In thousands)*

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

Three Months Ended

September 30,

2007

2006
                     
REVENUE

$

28,356

$

45,877
                     
EXPENSES:

       Depreciation and  amortization

36,005

21,027

       Cost of sales

72

40

       Selling, general  and administrative

9,902

8,373

       Merger

807

-

46,786

29,440
                     
INCOME (LOSS) FROM  OPERATIONS

(18,430

)

16,437
                     
Interest expense, net

(9,895

)

(4,873

)

Foreign currency  exchange gains (losses)

1,360

(9

)

Other income (loss)

39

(1

)
                     
Income (loss) from  continuing operations before income taxes

(26,926

)

11,554

Benefit for income  taxes

(3,701

)

(2,462

)

Income (loss) from  continuing operations

(23,225

)

14,016

Loss from discontinued  operations, net of tax

-

(146

)
                     
NET INCOME (LOSS)

$

(23,225

)

$

13,870

 

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

Page 4 of 51

 

*(Index)*

**SEITEL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited)*(In thousands)*

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007 -

January 1, 2007 -

Nine Months Ended

September 30, 2007

February 13, 2007

September 30, 2006
                              
REVENUE

$

76,025

$

19,010

$

139,117
                              
EXPENSES:

       Depreciation and  amortization

96,008

11,485

67,839

       Gain on sale of  seismic data

-

-

(231

)

       Cost of sales

113

8

203

       Selling, general  and administrative 

23,825

3,577

26,309

       Merger

2,087

17,457

-

122,033

32,527

94,120
                              
INCOME (LOSS) FROM  OPERATIONS

(46,008

)

(13,517

)

44,997
                              
Interest expense, net

(29,018

)

(2,284

)

(14,770

)

Foreign currency  exchange gains (losses)

3,017

(102

)

1,125

Other income (loss)

39

12

(1

)
                              
Income (loss) from  continuing operations

       before income  taxes

(71,970

)

(15,891

)

31,351

Provision (benefit) for  income taxes

(9,668

)

452

(2,079

)

Income (loss) from  continuing operations 

(62,302

)

(16,343

)

33,430

Loss from discontinued  operations, net of tax

-

-

(142

)
                              
NET INCOME (LOSS)

$

(62,302

)

$

(16,343

)

$

33,288

 

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

Page 5 of 51

 

*(Index)*

**SEITEL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**(Unaudited)*(In thousands)*

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months 

February 14, 

January 1, 

Nine Months 

Ended

2007 -

2007 -

Ended 

September 30,

September 30,

February 13,

September 30,

2007

2006

2007

2007

2006
                                                
Net income (loss)

$

(23,225

)

$

13,870

$

(62,302

)

$

(16,343

)

$

33,288
                                                
Unrealized gains (losses)

    on securities held

    as available for sale:

    Unrealized net holding 

       gains arising during	

       period

-

-

-

-

19

    Less:  Reclassification	

       adjustment for losses

       included in income

-

1

-

-

1
                                                
Foreign currency translation

    adjustments

11,723

7

27,406

7

982
                                                
Comprehensive 

    income (loss)

$

(11,502

)

$

13,878

$

(34,896

)

$

(16,336

)

$

34,290

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

Page 6 of 51

 

*(Index)*

**SEITEL, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'SEQUITY**(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

-

-

-

-

5,954

-

-

          Net loss

-

-

-

-

-

(62,302

)

-

          Foreign currency translation

              adjustments

-

-

-

-

-

-

27,406

     Balance, September 30, 2007	

-

$

-

100

$

-

$

262,188

$

(62,302

)

$

27,406

 

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

Page 7 of 51

*(Index)*

**SEITEL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)

*(In thousands)*

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007 -

January 1, 2007 -

Nine Months Ended

September 30, 2007

February 13, 2007

September 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)

$

(62,302

)

$

(16,343

)

$

33,288

     Loss from discontinued operations, net of tax

-

-

142

     Depreciation and amortization

96,008

11,485

67,839

     Deferred income tax provision (benefit)

(10,119

)

204

24

     Amortization of deferred financing costs

4,952

99

889

     Amortization of debt discount (premium)

(51

)

70

381

     Amortization of stock-based compensation

5,954

6,673

1,349

     Amortization of favorable facility lease

166

-

-

     Allowance for collection of trade receivables

391

-

160

     Reversal of allowance for notes receivable

-

(274

)

-

     Non-cash compensation expense

-

32

666

     Non-cash revenue

(1,881

)

(88

)

(11,029

)

     Gain on sale of property and equipment

-

-

(5

)

     Gain on sale of seismic data

-

    

-

(231

)

     Loss on sale of security

-

-

1

     Decrease (increase) in receivables

7,124

9,074

(4,533

)

     Decrease (increase) in other assets

(927

)

(472

)

184

     Increase (decrease) in deferred revenue

24,993

(7,767

)

(859

)

     Increase (decrease) in accounts payable

         and other liabilities

(8,636

)

2,917

(8,491

)

         Net cash provided by operating activities

           of continuing operations

55,672

5,610

79,775
                              
Cash flows from investing activities:

     Cash invested in seismic data	

(40,619

)

(8,369

)

(58,624

)

     Cash from sale of seismic data

-

-

231

     Cash paid to acquire property and equipment

(409

)

(60

)

(912

)

     Cash from disposal of property and equipment

-

-

3

     Cash from sale of security

-

-

12

     Decrease (increase) in restricted cash

(3

)

-

(18

)

         Net cash used in investing activities of continuing

             operations

$

(41,031

)

$

(8,429

)

$

(59,308

)

 

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

Page 8 of 51

 

*(Index)*

**SEITEL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited) **- continued**

*(In thousands)*

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

February 14, 2007 -

January 1, 2007 -

Nine Months Ended

September 30, 2007

February 13, 2007

September 30, 2006

                              
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

(27

)

(3

)

(29

)

     Principal payments on capital lease obligations

(62

)

(6

)

(29

)

     Borrowings on line of credit

103

119

25

     Payments on line of credit

(103

)

(119

)

(25

)

     Payment of financing fees

(17,085

)

-

-

     Contributed capital

153,473

-

-

     Purchase of common stock subsequently retired

-

(400
)

(595

)

     Payments on notes receivable from officers

         and employees

274

-

14

         Net cash used in financing activities

             of continuing operations

(83,335

)

(409

)

(639

)
                              
Effect of exchange rate changes 

(2,320

)

46

(969

)

Net cash provided by discontinued operations:

     Cash provided by operating activities

-

-

8

     Cash provided by investing activities

-

-

9

Net increase (decrease) in cash and equivalents

(71,014
)

(3,182

)

18,876

Cash and cash equivalents at beginning of period

104,208

107,390

78,097

Cash and cash equivalents at end of period

$

33,194

$

104,208

$

96,973

                              
Supplemental disclosure of cash flow information:

     Cash paid during the period for:

         Interest

$

21,661

$

11,207

$

22,433

         Income taxes

$

1,418

$

1

$

284

     Income tax refunds received

$

-

$

-

$

393

Supplemental schedule of non-cash investing activities:

        	Additions to seismic data library
$
2,235

 
$
(7

)
$
8,889

 

 

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

Page 9 of 51

 
****
*(Index)*

**SEITEL, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)September 30, 2007**

**NOTE A-BUSINESS COMBINATION**

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

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

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

The Companyalso entered into an Amended and Restated Loan and Security Agreement for anew senior secured credit facility with Wells Fargo Foothill, Inc. with amaximum credit amount of $25.0 million, subject to certain borrowing baselimitations. All obligations are unconditionally guaranteed by the Company'sdomestic subsidiaries that are not borrowers under the new facility, subject tocustomary exceptions, exclusions and releasemechanisms. The new facility is secured by a lien on substantially all of theCompany's domestic assets.

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

The Merger has been accounted forin accordance with the provisions of Statement of Financial Standards ("SFAS")No. 141, "Business Combinations."  The total purchase price wasallocated to the Company's net tangible and identifiable intangible assetsbased on their estimated fair values established, in part, by an independentappraisal 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 identifiableintangible assets was recorded as goodwill.  The preliminary allocation of thepurchase price for seismic data library, property and equipment, intangibleassets and deferred income taxes was based upon valuation data at the date ofthe Merger and the estimates and assumptions are subject to change.  Theinitial purchase price allocation may be adjusted within one year of theeffective date of the Merger (February 14, 2007) for changes in estimates ofthe fair value of assets acquired and liabilities assumed based on the resultsof the purchase price allocation process.

During the second quarter ended June 30, 2007, the Companyrecorded an additional step-up of its seismic data library of $0.7 million withan offsetting adjustment to goodwill of approximately $0.5 million and deferredincome tax liability of $0.2 million resulting from the finalization ofadjusting the seismic data library to fair value.  The Company recordedapproximately $107,000 of additional amortization of the additional seismicdata library step-up for the period February 14, 2007 through September 30,2007.  During the second and third quarters of 2007, the Company also recordedadjustments totaling approximately $3.1 million to increase goodwill anddeferred income tax liability to adjust its accounting for the Merger. 

Page 10 of 51

*(Index)*

The following table summarizes thepreliminary estimated fair values of the assets acquired and liabilitiesassumed (in thousands):

Cash and receivables

$

145,106

Property and equipment

8,159

Seismic data library 

395,560

Identifiable intangibles 

54,101

Goodwill 

194,305

Prepaids and other assets 

7,410

Accounts payable and accrued liabilities

(37,642

)

Debt 

(231,253

)

Deferred revenue 

(13,031

)

Deferred income tax

(25,189

)

     Net assets acquired

$

497,526

A summary of the preliminaryallocation of purchase price to identifiable intangible assets, other thangoodwill 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 oninformation that is available as of the date of the Merger and the expectationsand assumptions that have been deemed reasonable by management.  No assurancecan be given, however, that the underlying assumptions of events associatedwith such assets will occur as projected.  For these reasons, among others, theactual results may vary from the projected results.

The goodwill amount as well asadjustments to the fair value of our Canadian net assets recorded in connectionwith the Merger will vary at each reported balance sheet date due to the impactof foreign currency fluctuations.

Goodwillis tested for impairment at the reporting unit level as defined in SFAS No.142, "Goodwill and Other Intangible Assets." This test is a two-stepprocess. The first step of the goodwillimpairment test, used to identify potential impairment, compares the fair valueof the reporting unit with its carryingamount, including goodwill. If the fair value, which is based on future cash flows, exceeds thecarrying amount, goodwill isnot considered impaired. If the carrying amount exceeds the fair value, the second step must be performed tomeasure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit's goodwill with the carrying amount ofthat goodwill.  The Company will evaluate goodwill in the fourth quarter ofeach year on a separate reportingunit basis to assess recoverability, and impairments, if any, will be recognized in earnings. An impairment loss would be recognized in an amount equal tothe excess of the carrying amount ofthe goodwill over the implied fair value of the goodwill.  SFAS No. 142also requires that intangible assets withdeterminable useful lives be amortized over their respective estimateduseful lives and reviewed annually for impairment in accordance with SFAS No.144, "Accounting for the Impairment or Disposal of Long-LivedAssets."

Page 11 of 51

*(Index)*

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

 

Three Months

Nine Months

Ended

Ended

September 30,

September 30,

September 30,

2006

2007

2006

                              
Revenue

$

41,714

$

86,465

$

119,168

Operating loss

(6,456

)

(57,773

)

(30,841

)

Net loss

(11,603

)

(78,531

)

(49,584

)

 

The pro forma financialinformation reflects the decreased revenue from selections of previouslydeferred revenue, additional amortization and depreciation expense andincreased interest expense.  The pro forma financial information also reflectsthe elimination of merger expenses.

 

**NOTE B-BASIS OF PRESENTATION**

 

The accompanying condensed financial statements of the Company and itssubsidiaries have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions of Regulation S-X.  Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States for complete financial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included.  In preparingthe Company's financial statements, a number of estimates and assumptions aremade by management that affect the accounting for and recognition of assets,liabilities, revenues and expenses.  The condensed consolidated balance sheetof the Company as of December 31, 2006, has been derived from the auditedbalance sheet of the Company as of that date.  These financial statementsshould be read in conjunction with the financial statements and notes theretofor the year ended December 31, 2006 contained in the Company's Annual Report.

 

Althoughthe Company continues as the same legal entity after the Merger, theconsolidated financial statements for the first nine months of 2007 arepresented for two periods:  January 1, 2007 through February 13, 2007 (the"Predecessor Period" or "Predecessor," as context requires) and February 14,2007 through September 30, 2007 (the "Successor Period" or "Successor," ascontext requires), which relate to the period preceding the Merger and theperiod succeeding the Merger, respectively.  The consolidated financialstatements for the Successor Period (including for the three months ended September30, 2007) reflect the acquisition of the Company under the purchase method ofaccounting in accordance with SFAS No. 141.  The results between these periodsare not comparable to the Predecessor due to the difference in the basis ofpresentation of purchase accounting as compared to historical cost.  Theconsolidated financial statements as of December 31, 2006 and for the three andnine months ended September 30, 2006 are also presented as Predecessor.

 
NOTE C-REVENUE RECOGNITION *Revenue from DataAcquisition*
 

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

 

Page 12 of 51

 

*(Index)*

Revenue from the creation of newseismic data is recognized throughout the creation period using theproportional performance method based upon costs incurred and work performed todate as a percentage of total estimated costs and work required.  Managementbelieves that this method is the most reliable and representative measure ofprogress for its data creation projects.  The duration of most data creationprojects is generally less than one year.  Under these contracts, the Companycreates new seismic data designed in conjunction with its customers andspecifically suited to the geology of the area using the most appropriatetechnology available. 

The Company outsources thesubstantial majority of the work required to complete data acquisition projectsto third party contractors.  The Company's payments to these third partycontractors comprise the substantial majority of the total estimated costs ofthe project and are paid throughout the creation period.  A typical survey includesspecific activities required to complete the survey; each activity has value tothe customers.  Typical activities, that often occur concurrently, include:
-  permitting for land access,mineral rights, and regulatory approval;
-  surveying;
-  drilling for the placementof energy sources;
-  recording the data in thefield; and
-  processing the data.

The customers paying for theinitial exclusive licenses receive legally enforceable rights to any resultingproduct of each activity described above.  The customers also receive access toand use of the newly acquired, processed data.  

The customers' access to and useof the results of the work performed and of the newly acquired, processed datais governed by a license agreement, which is a separate agreement from theacquisition contract. The Company's acquisition contracts require the customereither to have a license agreement in place or to execute one at the time theacquisition contract is signed. The Company maintains sole ownership of thenewly acquired data, which is added to its library, and is free to license thedata to other customers when the original customers' exclusivity period ends. 
*Revenue fromNon-Exclusive Data Licenses*
TheCompany recognizes a substantial portion of its revenue from data licenses soldafter any exclusive license period.  These are sometimes referred to as resalelicensing revenue, post acquisition license sales or shelf sales.

These sales fall under thefollowing four basic forms of non-exclusive license contracts.
-  Specific license contract - Thecustomer licenses and selects data from the data library at the time thecontract is entered into and holds this license for a long-term period. 
-  Library card license contract - Thecustomer initially receives only access to data. The customer may then selectspecific data, from the collection of data to which it has access, to holdlong-term under its license agreement. The length of the selection periodsunder the library card contracts is limited in time and varies from customer tocustomer.
-  Review and possession license contract- The customer obtains the right to review a certain quantity of data for alimited period of time. During the review period, the customer may selectspecific data from that available for review to hold long-term under itslicense agreement. Any data not selected for long-term licensing must bereturned to the Company at the end of the review period.
-  Review only license contract - Thecustomer obtains rights to review a certain quantity of data for a limitedperiod of time, but does not obtain the right to select specific data to hold long-term. 

The Company's non-exclusivelicense contracts specify the following:
-  that all customers must also execute amaster license agreement that governs the use of all data received under theCompany's non-exclusive license contracts;
-  the specific payment terms, generallyranging from 30 days to 18 months, and that such payments are non-cancelableand non-refundable;

Page 13 of 51

 

*(Index)*
-  the actual data that is accessible tothe customer; and
-  that the data is licensed in itspresent form, where is and as is and the Company is under no obligation to makeany enhancements, modifications or additions to the data unless specific termsto the contrary are included.  

Revenue from the non-exclusivelicensing of seismic data is recognized when the following criteria are met:
-  the Company has an arrangement with thecustomer that is validated by a signed contract;
-  the sales price is fixed anddeterminable;
-  collection is reasonably assured; 
-  the customer has selected the specificdata or the contract has expired without full selection; and
-  the license term has begun. 

Copies of the data are availableto the customer immediately upon request.

For licenses that have beeninvoiced but have not met the aforementioned criteria, the revenue is deferredalong with the related direct costs (primarily sales commissions).  Thisnormally occurs under the library card license contracts, review and possessionlicense contracts or review only license contracts because the data selectionmay occur over time.  Additionally, if the contract allows licensing of datathat is not currently available or enhancements, modifications or additions tothe data are required per the contract, revenue is deferred until such timethat the data is available.
*Revenue from Non-MonetaryExchanges*
In certain cases, the Companywill take ownership of a customer's seismic data or revenue interest(collectively referred to as "data") in exchange for a non-exclusivelicense to selected seismic data from the Company's library.  Occasionally, inconnection with specific data acquisition contracts, the Company receives bothcash and ownership of seismic data from the customer as consideration for theunderwriting of new data acquisition.  These exchanges are referred to asnon-monetary exchanges.  A non-monetary exchange always complies with thefollowing criteria:
-  the data license deliveredis always distinct from the data received;
-  the customer forfeitsownership of its data; and
-  the Company retainsownership in its data.

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

Fair value of the data exchangedis determined using a multi-step process as follows.
-  First, the Company considers the valueof the data received from the customer. In determining the value of the datareceived, the Company considers the age, quality, current demand and futuremarketability of the data and, in the case of 3D seismic data, the cost thatwould be required to create the data.  In addition, the Company applies alimitation on the value it assigns per square mile on the data received. 	
-  Second, the Company determines thevalue of the license granted to the customer.  The range of cash transactionsby the Company for licenses of similar data during the prior six months areevaluated. In evaluating the range of cash transactions, the Company does notconsider transactions that are disproportionately high or low.

Page 14 of 51

 

*(Index)*
-  Third, the Company obtains concurrencefrom an independent third party on the portfolio of all non-monetary exchangesof $500,000 or more in order to support the Company's valuation of the datareceived.  The Company obtains this concurrence on an annual basis, usually inconnection with the preparation of its annual financial statements. 

Due to the Company's revenuerecognition policies, revenue recognized on non-monetary exchange transactionsmay not occur at the same time the seismic data acquired is recorded as anasset.  The activity related to non-monetary exchanges was as follows (inthousands):

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months

February 14, 

January 1, 

Nine Months 

Ended

2007 -

2007 -

Ended

September 30,

September 30,

February 13,

September 30,

2007

2006

2007

2007

2006
                                                
Seismic data library additions

$

73

$

2,077

$

2,235

$

(7

)

$

8,889
                                                
Revenue recognized on 

    specific data  licenses

    and selections of  data

126

2,998

1,208

71

8,082
                                                
Revenue recognized  related 

    to acquisition  contracts

646

391

673

11

2,927
                                                
Revenue  recognized 

    related  to data

    management  services

-

13

-

6

20
*Revenue from Seitel Solutions*
Revenuefrom Seitel Solutions ("Solutions") is recognized as the services forreproduction and delivery of seismic data are provided to customers.

**NOTE D-SEISMIC DATA LIBRARY**

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

 

***Costs of Seismic DataLibrary* **

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

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

For internally created data, the capitalized costs include costs paid to third partiesfor the acquisition of data and related permitting, surveying and otheractivities associated with the data creation activity.  In addition, theCompany capitalizes certain internal costs related to processing the createddata.  Such costs include salaries and benefits of the Company's processingpersonnel and certain other costs incurred for the benefit of the processingactivity.  The Company believes that the internal processing costs capitalizedare not greater than, and generally are less than, those that would be incurredand capitalized if such activity were performed by a third party.  Capitalizedcosts for internal data processing were $506,000 and $464,000 for the threemonths ended September 30, 2007 and 2006,respectively and $1,218,000, $265,000 and $1,369,000 for the period from February14, 2007 to September 30, 2007 (Successor Period),for the period from January 1, 2007 to February 13, 2007 (Predecessor Period)and for the nine months ended September 30, 2006(Predecessor Period), respectively.  

Page 15 of 51

 

*(Index)*

***Data Library Amortization***

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

The Company applies the income forecast method by forecasting the ultimaterevenue expected to be derived from a particular data library component overthe 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 alibrary component is expected to be significantly different than the originalestimate of total revenue for such library component, the Company revises theamortization rate attributable to future revenue from each survey in such component. The lowest amortization rate the Company applies using the income forecastmethod is 70%.  In addition, in connection with the forecast reviews andupdates, the Company evaluates the recoverability of its seismic data library,and if required under SFAS No. 144, "Accounting for the Impairment andDisposal of Long-Lived Assets," records an impairment charge with respectto such data.  See discussion on *"Seismic Data Library Impairment"*below.

The actual rate of amortization depends on the specific seismic surveyslicensed and selected by the Company's customers during the period.  As of October1, 2007, the amortization rate utilized under the income forecast method forall components is 70%.  

The greater of the income forecast or straight-line amortization policy isapplied quarterly on a cumulative basis at the individual survey level. Inconnection with the Merger, the greater of the income forecast or straight-lineamortization policy was applied at February 13, 2007 (for the Predecessor Period),and March 31, 2007, June 30, 2007 and September 30, 2007 (for the Successor Period). Under this policy, the Company first records amortization using the incomeforecast method.  The cumulative amortization recorded for each survey is thencompared with the cumulative straight-line amortization. If the cumulativestraight-line amortization is higher for any specific survey, additionalamortization expense is recorded, resulting in accumulated amortization beingequal to the cumulative straight-line amortization for such survey.  Thisrequirement is applied regardless of future-year revenue estimates for thelibrary component of which the survey is a part and does not consider theexistence of deferred revenue with respect to the library component or to anysurvey.  

*** ***

***Seismic Data LibraryImpairment***

******The Company evaluates its seismic datalibrary investment by grouping individual surveys into components based on itsoperations and geological and geographical trends, resulting in the followingdata library segments for purposes of evaluating impairments:  (I) Gulf ofMexico offshore comprised of the following components:  (a) multi-componentdata, (b) ocean bottom cable data, (c) shelf data, (d) deep water data, and (e)value-added products; (II) North America onshore comprised of the followingcomponents: (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-addedproducts, and (III) international data outside North America.  The Companybelieves that these library components constitute the lowest levels ofindependently identifiable cash flows.

 

Asevents or conditions require, the Company evaluates the recoverability of itsseismic data library investment in accordance with SFAS No. 144.  The Companyevaluates its seismic data library investment for impairment whenever events orchanges in circumstances indicate that the carrying amounts may not be recoverable. The Company considers the level of sales performance in each component comparedto projected sales, as well as industry conditions, among others, to be keyfactors in determining when its seismic data investment should be evaluated forimpairment.  In evaluating sales performance of each component, the Companygenerally considers five consecutive quarters of actual performance belowforecasted sales to be an indicator of potential impairment.

Page 16 of 51

 

*(Index)*

 

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

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

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

 

The Company did not have any impairment charges during the period from February 14, 2007 to September 30, 2007(Successor Period), for the period from January 1, 2007 to February 13, 2007(Predecessor Period) or during the nine monthsended September 30, 2006 (Predecessor Period).

 

**NOTEE-INTANGIBLES**

** **

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

 

SUCCESSOR PERIOD

SEPTEMBER 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

$

2,552

$

(208

)

$

2,344

       Customer  relationships

10 years

44,652

(2,791

)

41,861

       Covenants  not to compete

1 year

180

(113

)

67

       Internally  developed software

7 years

9,332

(833

)

8,499

$

56,716

$

(3,945

)

$

52,771

Trade  names with indefinite lives

900

-

900

Total  identifiable intangible assets

$

57,616

$

(3,945

)

$

53,671

 

Amortization expense for the Company's intangibleassets was $1.5 million for the three months ended September30, 2007 and $3.8 million during the period from February 14, 2007 to September 30, 2007.  Estimated future amortizationexpense is as follows:  remainder of fiscal year end 2007 - $1.6 million,fiscal year ended 2008 - $6.2 million, fiscal year ended 2009 - $6.1 million,fiscal year ended 2010 - $6.1 million, fiscal year ended 2011 - $6.1 million,and thereafter - $26.7 million.
NOTE F-INCOME TAXES 
***FASB Interpretation No. 48***

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

Page 17 of 51

*(Index)*

As of January 1, 2007, the Company recorded the cumulative effectof adopting FIN 48 of $3.1 million as an increase to the balance of retaineddeficit.  The Company has unrecognized tax benefits of approximately $9.2million, of which $1.9 million would impact the effective income tax rate ifrecognized.

In conjunction with the adoption of FIN 48, uncertain taxpositions are reflected as income tax assets and liabilities. Incometax-related interest and penalty expenses are recorded as a component of incometax expense.  The total amount of accrued income tax-related interest andpenalties included in the Consolidated Balance Sheets as of September 30, 2007 and January 1, 2007 was $2.0 millionand $1.6 million, respectively.  Income tax expense (benefit) for the threemonths ended September 30, 2007, for theperiod from January 1, 2007 to February 13, 2007 and for the period from February14, 2007 to September 30, 2007 included $(0.1)million, $0.1 million and $0.3 million, respectively, related to interest on unrecognizedtax benefits. 

The Company believes it is reasonably possible that, withinthe next 12 months, the amount of previously unrecognized tax benefits coulddecrease by approximately $3.1 million primarily as a result of the resolutionof 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 foryears 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 -

September 30, 2007

February 13, 2007

U.S.

Canada

Total

U.S.

Canada

Total
                                                         
Tax expense (benefit)  resulting from:
                                                         
     Current operations

$

(21,579

)

$

(5,693

)

$

(27,272

)

$

(5,051

)

$

354

$

(4,697

)

     Change in  Valuation Allowance

17,604

-

17,604

5,149

-

5,149
                                                         
     Total tax expense  (benefit)

$

(3,975

)

$

(5,693

)

$

(9,668

)

$

98

$

354

$

452

In the Predecessor Period, the Company provided a fullvaluation 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.  TheCompany recorded a step-up in deferred tax liabilities of $30.0 million due tothe step-up in its U.S. and Canadian net asset values as a result of theMerger.  Consequently, in the Successor Period, a portion of the Federal taxbenefit generated from the Company's U.S. operations was recognized as a taxbenefit up to the amount of the U.S. deferred tax liability recorded.  Theremaining U.S. Federal tax benefit of $17.6 million was offset by a valuationallowance because it was more likely than not that such benefit would not berealized.  

***Deferred Tax Liability***

As of September 30, 2007,the Company had a net deferred tax liability of $18.2 million, all of which wasattributable to its Canadian operations.  In the U.S., the Company had a netdeferred tax asset of $17.6 million, all of which was offset by a valuationallowance, except for $22,000 related to state deferred tax assets.  Therecognition of the U.S. federal tax asset will not occur until such time thatit is more likely than not that some portion or all of the deferred tax assetwill be realized.

Page 18 of 51

 

*(Index)*
NOTE G-DEBT
The following is a summary of the Company's debt (in thousands):

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

September 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

307

337

402,307

189,337

Plus:   Premium on debt

354

-

Less:  Debt  discount

-

(3,212

)

$

402,661

$

186,125

***9.75%Senior Unsecured Notes**** *

 

OnFebruary 14, 2007, the Company issued, in a private placement, $400.0 millionaggregate principal amount of 9.75% Senior Notes.  The proceeds from the 9.75%Senior Notes were used to partially fund the transactions in connection withthe Merger.  As required by their terms, the 9.75% Senior Notes were exchangedfor senior notes of like amounts and terms in a publicly registered exchangeoffer in August 2007.  These notes mature on February 15, 2014.  Interestis payable in cash, semi-annually in arrears on February 15 and August 15 ofeach year.  The 9.75% Senior Notes are unsecured and are guaranteed bysubstantially all of the Company's domestic subsidiaries on a senior basis. The9.75% Senior Notes contain restrictive covenants which limit the Company'sability to, among other things, incur additional indebtedness, pay dividendsand complete mergers, acquisitions and sales of assets. 

 

From time to time on or beforeFebruary 15, 2010, the Company may redeem up to 35% of the aggregate principalamount of the 9.75% Senior Notes with the net proceeds of equity offerings at aredemption price equal to 109.75% of the principal amount, plus accrued andunpaid interest.  Upon a change of control (as defined in the indenture), eachholder of the 9.75% Senior Notes will have the right to require the Company tooffer to purchase all of such holder's notes at a price equal to 101% of theprincipal 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 requiredby their terms, the 11.75% Senior Notes were exchanged for senior notes of likeamounts and terms in a publicly registered exchange offer in February 2005.  Inconnection with the 2004 excess cash flow offer in March 2005, $4.0 millionaggregate principal amount of these notes was tendered and accepted.  Inconnection with the Merger and related transactions, $187.0 million aggregateprincipal amount of these notes was tendered and accepted on February 14,2007.  The fair value of these notes was higher thanthe face value on the date of the Merger; consequently, a premium has beenreflected in the Successor financial statements related to these notes. Interest on the remaining notes is payable semi-annually in arrears on January15 and July 15 of each year.  The remaining $2.0 million of notes mature onJuly 15, 2011.  The 11.75% Senior Notes are unsecured and are guaranteed bysubstantially all of the Company's U.S. subsidiaries on a senior basis.

Page 19 of 51

 

*(Index)*

As a result of the tender and consentoffer, effective February 14, 2007, the 11.75% Senior Notes no longer containany restrictive covenants, other than the requirement to make excess cash flowoffers.  Subject to certain conditions, if at the end of each fiscal year theCompany has excess cash flow (as defined in the indenture) in excess of $5.0million, the Company is required to use 50% of the excess cash flow to fund anoffer to repurchase the 11.75% Senior Notes on a pro rata basis at 100% of itsprincipal amount, plus accrued and unpaid interest.  If the Company has lessthan $5.0 million in excess cash flow at the end of any fiscal year, suchexcess cash flow will be carried forward to succeeding years, and suchrepurchase offer is required to be made in the first year in which thecumulative excess cash flow for all years in which there has not been an offeris at least $5.0 million.  Such repurchase offer is required only if there isno event of default under the Company's revolving credit facilities prior toand after giving effect to the repurchase payment.  Because of excess cash flowgenerated 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% SeniorNotes were tendered in the 2006 excess cash flow offer.  Upon a change ofcontrol (as defined in the indenture), each holder of the 11.75% Senior Noteswill have the right to require the Company to offer to purchase all of suchholder's notes at a price equal to 101% of the principal amount, plus accruedand unpaid interest.

***Revolving Credit Facility**** *

On February 14, 2007, the Company entered into an amendedand restated U.S. revolving credit facility with Wells Fargo Foothill, Inc., aslender, which provides for up to $25.0 million, subject to borrowing baselimitations.  Interest is payable at an applicable margin above either LIBOR orthe prime rate.  The facility is secured by a first priority, perfectedsecurity 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 facilitycontains covenants requiring the Company to achieve and maintain certainfinancial results, and restricts, among other things, the amount of capitalexpenditures, the ability to incur additional indebtedness, pay dividends, andcomplete mergers, acquisitions and sales of assets.  The revolving creditfacility requires the payment of an unused line fee of .25% per annum payablein arrears.

***SubsidiaryRevolving******Line of Credit*** 

TheCompany'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 toborrowings is the bank's prime rate plus 0.35% per annum and 1.50% per annum forbankers' acceptances.  Letter of credit fees are based on scheduled rates ineffect at the time of issuance. The facility is secured by the assets ofOlympic, but is not guaranteed by the Company or any of its other U.S. subsidiaries.  However, all intercompany debt owing by Olympic to the Company or toany other U.S. subsidiary of the Company (approximately $4.4 million (Canadian)at September 30, 2007) has been subordinatedto the repayment of Olympic's obligations under the revolving credit facility. Available borrowings under the facility are equivalent to a maximum of $5.0million (Canadian), subject to a requirement that such borrowings may notexceed 75% of good accounts receivable (as defined in the agreement) of Olympic,less prior-ranking claims, if any, relating to inventory or accounts. Thefacility is subject to repayment upon demand and is available from time to timeat the bank's sole discretion.

***NotePayable to Former Executive***

Inconnection with the settlement of certain litigation, the Company entered intoa note payable to a former executive with remaining payments of $6,000 permonth until May 2013.  The note is non-interest bearing.  The note isguaranteed by Olympic.  

**NOTEH-CONTRACTUAL OBLIGATIONS**

** **

As ofSeptember 30, 2007, the Company had approximately $669.0 million of outstandingdebt and lease obligations, with aggregate contractual cash obligationssummarized 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)

$

656,842

$

12

$

117,921

$

80,379

$

458,530

Capital lease obligations (2)

6,031

93

1,117

770

4,051

Operating lease obligations

6,112

303

3,613

1,917

279

Total contractual cash  obligations

$

668,985

$

408

$

122,651

$

83,066

$

462,860

 

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

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

Page 20 of 51

 

*(Index)*

**NOTE I-STOCK-BASED COMPENSATION**

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

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

 

SUCCESSOR

PREDECESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

PERIOD

Three Months

February 14, 

January 1, 

Nine Months 

Ended

2007 -

2007 -

Ended

September 30,

September 30,

February 13,

September 30,

2007

2006

 2007

2007

2006
                                                
*Included in reported*

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

*       selling, general and*

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

*       administrative expenses*

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *
                                                
Restricted stock

$

-

$

618

$

-

$

412

$

2,016

Stock options

2,407

-

5,954

-

-

       Total

$

2,407

$

618

$

5,954

$

412

$

2,016
                                                
*Included in merger expenses*

Restricted stock

$

-

$

-

$

-

$

6,294

$

-

       Total

$

-

$

-

$

-

$

6,294

$

-
                                                
Stock-based compensation

       expense

$

2,407

$

618

$

5,954

$

6,706

$

2,016

 

***Stock and Equity-Based Compensation Plans***

 

**Successor**

 

*Non-qualified Options*

 

The 2007 Non-Qualified Stock Option Plan ("thePlan") was adopted effective February 14, 2007, and authorizes stockoptions to be granted to the Company's key employees and non-employee directorsfor up to 92,898 shares of Holdings' common stock. During 2007, the Board ofDirectors of Holdings approved an increase of 1,988 shares for issuance underthe Plan.  Since adoption of the Plan, 93,793 total non-qualified stock options("Options"), with an exercise price of $389.42 per share have been issued.  TheOptions vest 25 percent on each of the first, second, third and fourthanniversaries of each grant date. 

Page 21 of 51

 

*(Index)*

 

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

 

SUCCESSOR

PERIOD

February 14, 2007- 

September 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 expectedvolatility assumptions used in the Black-Scholes calculations for grants wasbased on historical volatilities and implied volatilities of peer companies.The Company utilized the volatilities of peer companies due to its lack ofextensive history. When establishing its expected life assumptions, the Companyused the "simplified" method prescribed in Staff Accounting BulletinNo. 107, "Shared-Based Payment," for companies that do not have adequatehistorical data. 

 

The following table summarizes stock option activityduring the Successor Period:

 

SUCCESSOR

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Options

Price

Life in Years
                        
Outstanding at February 14, 2007

-

-

       Granted

93,793

$389.42

       Exercised

-

-

       Cancelled

-

-

Outstanding at September 30,  2007

93,793

$389.42

Options exercisable at September  30, 2007

-

-

-

Options vested or expected to vest at

       September 30, 2007

-

-

-

 

As of October 1, 2007, the total futurecompensation cost related to non-vested options, not yet recognized in theStatement of Operations, was $12.6 million and will be recognized using gradedvesting over a weighted average period of 3.4 years.

 

**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 forstock-based awards, including options, restricted stock or other stock-basedawards. The exercise price, term and other conditions applicable to each awardgranted under the 2004 Stock Option Plan were generally determined by theCompensation Committee at the time of grant and varied with each award granted.

 

As a result of the Merger, any and allunvested restricted stock outstanding at February 13, 2007 immediately vested.  TheCompany recorded in merger expenses a non-cash charge for stock compensationexpense of approximately $6.3 million in the Predecessor Period as a result of thisaccelerated vesting.  

Page 22 of 51

*(Index)*

The following table summarizes the activity of non-vested restrictedstock during the Predecessor Period (shares inthousands):

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 restrictedstock during the nine months ended September 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

(443

)

$1.40  

       Forfeited

(17

)

$1.86  

Non-vested at September 30,  2006

4,346

$2.01

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

*Stock Options*

 

On July 2, 2004, the Company granted its then chairmanoptions 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 becameexercisable on July 2, 2005. Such options were not granted under the 2004 StockOption Plan.  As a result of the Merger, the outstandingstock options were purchased at the Merger consideration price of $3.70 pershare, less the exercise price of $1.30 per share.  

The following table summarizes stock option activityduring the Predecessor Period (shares inthousands):

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

-

-

-

-

Page 23 of 51

*(Index)*

The following table summarizes stock option activityduring the nine months ended September 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 September 30,  2006

100

$1.30

7.75

$237

Options exercisable at September  30, 2006

100

$1.30

7.75

$237

Options vested or expected to vest at

       September 30, 2006

100

$1.30

7.75

$237

 

**NOTE J-STATEMENT OFCASH FLOW INFORMATION**

****

The Company had restricted cash at September30, 2007 and December 31, 2006 of $108,000 and $105,000, respectively,related to collateral on a seismic operations bond.

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

 
                              
 

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

 
                              
 

Page 24 of 51

 

*(Index)*

**NOTE K-COMMITMENTS AND CONTINGENCIES**
*Litigation*
 

On July 18, 2002, Paul Frame, theCompany's former chief executive officer, sued the Company in the 113th  Judicial District Court of Harris County, No. 2002-35891. Mr. Frame alleged abreach of his employment contract and defamation. He also sought a declaratoryjudgment that certain funds he received from the Company were proper and do nothave to be repaid.  Mr. Frame filed claims totaling $20.2 million in theCompany's Chapter 11 Cases, which have been disallowed by order of theBankruptcy Court.  On April 1, 2005, the Company filed a motion for summaryjudgment seeking dismissal of Mr. Frame's complaint in the District Court.  Inlate April 2005, Mr. Frame filed a motion for leave to file an amendedcomplaint in the District Court.  Hearing dates have not been set for theseApril 2005 motions.  In 2002, the Company filed a counter suit to recoverapproximately $4.2 million in corporate funds that the Company believes Mr.Frame inappropriately caused the Company to pay him or for his benefit plusover $800,000 due on two notes that were accelerated pursuant to theirrespective terms. The Company also holds a judgment against Mr. Frame in the amountof at least $590,000 relating to a loan made to Mr. Frame by Bank One N.A. andguaranteed by the Company.  The Company has requested and is investigatinginformation with respect to Mr. Frame and the nature and extent of his assetsfor purposes of analyzing whether to continue pursuit of the civil litigationdescribed above and potential debt collection.  The parties filed a jointmotion to abate the above proceedings.  The case continues to remain inabatement.

On November 6, 2006, a purported class action complaintwas filed in the District Court of Harris County, Texas, 189thJudicial District (No. 2006-71302) by Todd Augenbaum, an alleged stockholder ofthe Company. The plaintiff filed an amended complaint on January 22, 2007. Theamended complaint named as defendants the Company and each member of its Boardof Directors as well as ValueAct Capital Master Fund, L.P. ("ValueActCapital"), Seitel Holdings, Inc. ("Holdings") and SeitelAcquisition Corp. ("Acquisition Corp.") The amended complaint alleged,among other things, that (i) the defendants breached fiduciary duties theyassertedly owed to the Company's stockholders in connection with the Companyentering into the Agreement and Plan of Merger, dated as of October 31,2006, with Holdings and Acquisition Corp., oraided and abetted in the breach thereof, (ii) the defendants breachedtheir duty of candor to the Company's stockholders by failing to disclosematerial information, or aided and abetted in the breach thereof, and(iii) the merger consideration was unfair and inadequate. The plaintiff sought,among other things, certification of a class, an injunction against theconsummation of the merger, and the costs and disbursements of the action. OnFebruary 1, 2007, the court denied the plaintiff's motion for a temporaryrestraining order and/or preliminary injunction of the shareholder vote, whichthen occurred as scheduled on February 9, 2007. On October 1, 2007, the courtapproved a joint motion filed by the parties and dismissed the plaintiff's casewith prejudice and without payment by any party. 

Inaddition to the lawsuits described above, the Company is involved from time totime in ordinary, routine claims and lawsuits incidental to its business. Inthe opinion of management, uninsured losses, if any, resulting from theultimate resolutions of these matters should not be material to the Company'sfinancial position or results of operation.  However, it is not possible topredict or determine the outcomes of the legal actions brought against it or byit, or to provide an estimate of all additional losses, if any, that may arise.At September 30, 2007, the Company didnot have any amounts accrued related to the claims set forth above, as theCompany believes it is not probable that any amounts will be paid relative tosuch litigation and claims.  If one or more of the parties were to prevailagainst the Company in one or more of the cases described above that have notbeen settled, the amounts of any judgments against the Company or settlementsthat the Company may enter into, could be material to the Company's financialstatements for any particular reporting period.

**NOTEL-SUPPLEMENTAL GUARANTORS CONSOLIDATING CONDENSED FINANCIAL INFORMATION**

 

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

Page 25 of 51

 

*(Index)*

The consolidating condensedfinancial statements are presented below and should be read in connection withthe Condensed Consolidated Financial Statements of the Company. Separatefinancial statements of the Guarantors are not presented because (i) theGuarantor Subsidiaries are wholly-owned and have fully and unconditionallyguaranteed the 9.75% Senior Notes on a joint and several basis, and (ii) theCompany's management has determined such separate financial statements are notmaterial to investors. 

The following consolidating condensedfinancial information presents the consolidating condensed balance sheets as ofSeptember 30, 2007 (Successor Period) and December31, 2006 (Predecessor Period), and the consolidating condensed statements ofoperations and statements of cash flows for the period from February 14, 2007to September 30, 2007 (Successor Period), fromJanuary 1, 2007 to February 13, 2007 (Predecessor Period) and for the nine monthsended September 30, 2006 (Predecessor Period)of (a) the Parent; (b) the Guarantor Subsidiaries; (c) the Non-GuarantorSubsidiaries; (d) elimination entries; and (e) the Parent, the GuarantorSubsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis. 

Investments in subsidiaries areaccounted for on the equity method. The principal elimination entries eliminateinvestments in subsidiaries, intercompany balances, intercompany transactionsand intercompany sales. 

 

 

 

 

Page 26 of 51

*(Index)*

** **

** **

**CONSOLIDATINGCONDENSED BALANCE SHEET**

**SUCCESSOR PERIOD**

**As of September****30,2007**

(In thousands)

** ** |
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