** **

----

**  **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION  Washington, DC 20549**

----

**FORM 10-Q**

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

For the quarterly period ended June 30, 2008

 

OR

 

o

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

 

Commission File Number: 333-144844

 

**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

**T**

No

o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of "acceleratedfiler," "large accelerated filer" and "smaller reportingcompany" in Rule 12b-2 of the Exchange Act. (Check one): 

 

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

**T**
(Do not check if a smaller reporting company)   
Smaller reporting company

o

 

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

 

Yes

o

No

**T**

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

**T**

No

o

Asof August 11, 2008, there were 100 shares of the Company's common stock, par value$.001 per share outstanding.

 

**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 Loss (Unaudited)...... 

6

 

Condensed  Consolidated Statement of Stockholder's 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...........................................................................	

 

29

 

Item 3.

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

40

 

Item 4T.

Controls and Procedures............................................................................	

40

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings..................................................................................... 	

40

 

Item 1A.

Risk Factors............................................................................................. 	

40

 

Item 6.

Exhibits.................................................................................................... 	

41

 

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

        	

42

 
 
*(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)

June 30,

December 31,

2008

2007

 
 
 
 
 
 
 
ASSETS

     Cash and cash equivalents

$

41,320

$

43,333

     Restricted cash

111

110

     Receivables

        Trade, net of  allowance for doubtful accounts of

           $709 and $688,  respectively

41,957

51,915

        Notes and other, net of allowance for doubtful  accounts

           of $225 and $238, respectively

861

2,190

     Net seismic data library,  net of accumulated amortization

        of $224,471 and $140,742,  respectively

319,770

349,039

     Net property and equipment, net of  accumulated depreciation

        and amortization of $3,626 and $2,335,  respectively

9,967

10,996

     Investment in marketable  securities

4,609

4,224

     Prepaid expenses,  deferred charges and other 

21,720

22,263

     Intangible assets, net of  accumulated amortization of

        $8,496 and $5,515,  respectively

48,110

51,785

     Goodwill

204,245

207,246

     TOTAL ASSETS

$

692,670

$

743,101

     

LIABILITIES AND STOCKHOLDER'S  EQUITY

     LIABILITIES

        Accounts payable and  accrued liabilities

$

47,052

$

49,325

        Income taxes payable

1,721

948

        Debt

           Senior Notes

402,291

402,333

           Notes payable

279

300

        Obligations under  capital leases

3,669

3,848

        Deferred revenue

45,625

48,151

        Deferred income taxes

11,997

17,238

     TOTAL LIABILITIES

512,634

522,143

     

COMMITMENTS AND CONTINGENCIES 

     

STOCKHOLDER'S EQUITY

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

           issued and  outstanding at June 30, 2008 and 

           December 31, 2007

-

-

        Additional paid-in  capital

268,184

264,805

        Retained deficit

(115,948

)

(77,113

)

        Accumulated other  comprehensive income

27,800

33,266

     TOTAL STOCKHOLDER'S EQUITY

180,036

220,958

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$

692,670

$

743,101

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.
 
*(Index)*

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

* *

Three Months  Ended

June 30,

2008

2007

REVENUE

$

44,719

$

30,371

EXPENSES:

      Depreciation and amortization

44,259

37,770

      Cost of sales

165

32

      Selling, general and administrative	

9,813

9,489

      Merger

-

835

54,237

48,126

LOSS FROM OPERATIONS

(9,518

)

(17,755

)

Interest expense, net

(10,179

)

(9,938

)

Foreign currency exchange gains	

133

1,478

Other income

39

-

Loss before income taxes

(19,525

)

(26,215

)

Provision (benefit) for income taxes

884

(1,970

)

NET LOSS

$

(20,409

)

$

(24,245

)

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.
**** 
*(Index)*

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

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

Six Months  Ended

February 14,  2007 - 

January 1,  2007 - 

June 30, 2008

June 30, 2007

February 13,  2007

REVENUE

$

92,101

$

47,669

$

19,010

EXPENSES:

      Depreciation and amortization

89,114

60,003

11,485

      Cost of sales

279

41

8

      Selling, general and administrative	

20,248

13,923

3,577

      Merger

357

1,280

17,457

109,998

75,247

32,527

LOSS FROM OPERATIONS

(17,897

)

(27,578

)

(13,517

)

Interest expense, net

(20,074

)

(19,123

)

(2,284

)

Foreign currency exchange gains (losses)

(713

)

1,657

(102

)

Other income

39

-

12

Loss before income taxes

(38,645

)

(45,044

)

(15,891

)

Provision (benefit) for income taxes

190

(5,967

)

452

NET LOSS

$

(38,835

)

$

(39,077

)

$

(16,343

)

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.
**** 
*(Index)*

 

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

SUCCESSOR

SUCCESSOR

PREDECESSOR 

PERIOD

PERIOD

PERIOD

Three Months  Ended June 30,

Six Months  Ended

February 14,  2007 -

January 1,  2007 -

2008

2007

June 30, 2008

June 30, 2007

February 13,  2007

Net loss

$

(20,409

)

$

(24,245

)

$

(38,835

)

$

(39,077

)

$

(16,343

)

Unrealized gains (losses)	

   on securities held as

   available for sale,	

   net of tax

(311

)

-

385

-

-

Foreign currency

   translation

   adjustments

1,598

13,820

(5,851

)

15,683

7

Comprehensive loss

$

(19,122

)

$

(10,425

)

$

(44,301

)

$

(23,394

)

$

(16,336

)

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.
 
*(Index)*

 

**SEITEL, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENT OF STOCKHOLDER'S EQUITY**(Unaudited)

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

Accumulated 

Additional

Retained

Other 

Common Stock

Paid-In

Earnings

Comprehensive 

Shares

Amount

Capital

(Deficit)

Income 

Balance, December 31, 2007

100

$

-

$

264,805

$

(77,113

)

$

33,266

   Issuance of  restricted

      stock units

-

-

604

-

-

   Amortization of  stock-based 

      compensation  costs

-

-

2,775

-

-

   Net loss

-

-

-

(38,835

)

-

   Foreign currency  translation

      adjustments

-

-

-

-

(5,851

)

   Unrealized gain on marketable

      securities, net  of tax

-

-

-

-

385

Balance, June 30, 2008

100

$

-

$

268,184

$

(115,948

)

$

27,800

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.
**** 
*(Index)*

 

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

*(In thousands)*

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

Six Months  Ended

February 14,  2007 -

January 1,  2007 -

June 30, 2008

June 30, 2007

February 13,  2007

Cash flows from operating  activities:

Reconciliation of net loss to  net cash provided 

     by operating activities:

     Net loss

$

(38,835

)

$

(39,077

)

$

(16,343

)

     Depreciation and  amortization

89,114

60,003

11,485

     Deferred income tax  provision (benefit)

(1,553

)

(7,451

)

302

     Amortization of deferred  financing costs

795

4,532

148

     Amortization of debt  discount (premium)

(42

)

(30

)

70

     Amortization of  stock-based compensation

2,775

3,547

6,673

     Amortization of favorable  facility lease

142

97

-

     Allowance for collection  of trade receivables

46

391

-

     Reversal of allowance for  notes receivables

(54

)

-

(274

)

     Non-cash compensation  expense

604

-

32

     Non-cash other income

(24

)

-

-

     Non-cash revenue

(8,359

)

(1,109

)

(88

)

     Decrease (increase) in  receivables

9,000

(3,798

)

9,074

     Decrease (increase) in  other assets

(231

)

495

(521

)

     Increase (decrease) in  deferred revenue

(6,318

)

14,154

(7,767

)

     Increase in accounts  payable and

        other liabilities

231

49

2,819

        Net cash provided by  operating activities 

47,291

31,803

5,610

Cash flows from investing  activities:

     Cash invested in seismic  data 

(49,087

)

(25,780

)

(8,369

)

     Cash paid to acquire  property and equipment

(503

)

(134

)

(60

)

     Advances to Seitel  Holdings, Inc.

(14

)

-

-

     Increase in restricted  cash

(1

)

(2

)

-

        Net cash used in  investing activities 

(49,605

)

(25,916

)

(8,429

)

Cash flows from financing  activities:

     Issuance of 9.75% Senior  Notes

-

400,000

-

     Repayment of 11.75%  Senior Notes

-

(233,352

)

-

     Contributed capital

-

153,473

-

     Purchase of Seitel stock

-

(386,556

)

-

     Principal payments on  notes payable

(21

)

(17

)

(3

)

     Principal payments on  capital lease obligations

(66

)

(32

)

(6

)

     Borrowings on line of  credit

286

88

119

     Payments on line of  credit

(286

)

(88

)

(119

)

     Cost of debt and equity  transactions

-

(16,982

)

-

     Purchase of common stock  subsequently retired

-

-

(400

)

     Payments on notes  receivable from officers

        and employees

-

274

-

        Net cash used in  financing activities

$

(87

)

$

(83,192

)

$

(409

)

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.
**** 
*(Index)*

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

*(In thousands)*

 

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

Six Months  Ended

February 14,  2007 -

January 1,  2007 -

June 30, 2008

June 30, 2007

February 13,  2007

Effect of exchange rate  changes 

$

388

$

(1,642

)

$

46

Net decrease in cash and  equivalents

(2,013

)

(78,947

)

(3,182

)

Cash and cash equivalents at  beginning of period

43,333

104,208

107,390

Cash and cash equivalents at  end of period

$

41,320

$

25,261

$

104,208

Supplemental disclosure of  cash flow information:

     Cash paid during the  period for:

        Interest

$

19,754

$

1,913

$

11,207

        Income taxes

$

44

$

547

$

1

Supplemental schedule of  non-cash

     investing activities:

     Additions to seismic data  library

$

13,741

$

2,162

$

(7

)

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.
**** 
*(Index)*

 

**SEITEL, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDINTERIM FINANCIAL STATEMENTS (Unaudited)June 30, 2008**

**NOTE A-ORGANIZATION**

 

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

 

In connection with the Merger, Acquisition Corp. conducted acash tender offer and consent solicitation for all of the $189.0 millionaggregate principal amount of the Company's 11.75% senior notes due 2011 (the "11.75%Senior Notes").  On February 14, 2007, the Company paid $187.0 millionaggregate principal amount for all of the notes tendered.  Inconnection with the tender offer and consent solicitation, the Company enteredinto a supplemental indenture for the 11.75%Senior Notes. The supplemental indenture effected certain amendments to theoriginal indenture, primarily to eliminatesubstantially all of the restrictive covenants and certain events of defaulttriggered or implicated by the Merger.  $2.0 million aggregate principal amountof the 11.75% Senior Notes remains outstanding.

 

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

 

The Company also entered into an Amended and Restated Loan and Security Agreement withWells Fargo Foothill, Inc. with a maximum credit amount of $25.0 million,subject to certain borrowing base limitations. All obligations areunconditionally guaranteed by the Company's domestic subsidiaries that are notborrowers under the new facility, subject to customary exceptions, exclusions and release mechanisms. The new facilityis secured by a lien on substantially all of the Company's domesticassets, including equity interests in the company's U.S. subsidiaries.

 

Pursuantto the Merger, all of the Company's outstanding common stock (other than sharesowned by ValueAct Capital, which were contributed to Holdings, and certainshares owned by management investors, which were exchanged for ownership in Holdings)was exchanged for $3.70 per share.  

 

**NOTE B-BASIS OF PRESENTATION**

****

The accompanying condensed consolidated financial statements ofthe Company and its subsidiaries have been prepared in accordance with generallyaccepted accounting 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.  Operating results for the three and sixmonths ended June 30, 2008 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2008.  The condensedconsolidated balance sheet of the Company as of December 31, 2007, has beenderived from the audited balance sheet of the Company as of that date.  Thesefinancial statements should be read in conjunction with the financialstatements and notes thereto for the year ended December 31, 2007 contained inthe Company's Annual Report on Form 10-K.

 

Although the Company continues as the same legal entityafter the Merger, the consolidated financial statements for the first six monthsof 2007 are presented for two periods:  January 1, 2007 through February 13,2007 (the "Predecessor Period" or "Predecessor," as contextrequires), which relates to the period preceding the Merger and February 14, 2007 through June 30, 2007,which relates to the period succeeding the Merger.  All financialstatements for the periods succeeding the Merger are referred to as SuccessorPeriod or Successor, as context requires.  The consolidated financial statements for the Successor Periodsreflect the acquisition of the Company under the purchase method of accountingin accordance with Statement of Financial Accounting Standards ("SFAS")No. 141, "Business Combinations."  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.  

 
 
*(Index)*
 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.

 

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 of which has value tothe 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; andprocessing 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 ownership of the newlyacquired data, which is added to its library, and is free to license the datato 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 - The customer licensesand selects data from the data library at the time the contract is entered intoand holds this license for a long-term period.
-  Library card license contract - The customer initially receives only		access to data. The customer may then select specific data, from the		collection of data to which it has access, to hold long-term under its		license agreement.
-  The lengthof the selection periods under the library card contracts is limited in timeand 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. 
*(Index)*

 

The Company's non-exclusive license contractsspecify the following:
-  that all customers must also execute a		master license agreement that governs the use of all data received under		our 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; andthat 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.  
Revenuefrom the non-exclusive licensing of seismic data is recognized when thefollowing 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; andthe 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, review and possession or review onlylicense contracts because the data selection may occur over time. Additionally, if the contract allows licensing of data that is not currentlyavailable or enhancements, modifications or additions to the data are requiredper the contract, revenue is deferred until such time that the data isavailable.
 *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.  In connectionwith specific data acquisition contracts, the Company may choose to receiveboth cash and ownership of seismic data from the customer as consideration forthe underwriting of new data acquisition.  In addition, the Company may receiveadvanced data processing services on selected existing data in exchange for anon-exclusive license to selected data from the Company's library.  Theseexchanges are referred to as non-monetary exchanges.  A non-monetary exchange fordata always complies with the following criteria:
-  the data license delivered is always distinct from thedata received;
-  the customer forfeits ownership of its data; and 
-  the Company retains ownership in its data. 

In non-monetary exchangetransactions, the Company records a data library asset for the seismic datareceived or processed at the time the contract is entered into or the data iscompleted, as applicable, and recognizes revenue on the transaction in equalvalue 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, asapplicable.  The data license to the customer is in the form of one of the fourbasic forms of non-exclusive license contracts discussed above.  Thesetransactions are valued at the fair value of the data received or delivered,whichever is more readily determinable.
 
*(Index)*

 

Fairvalue of the data exchanged is determined using a multi-step process asfollows.
-  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 maximum limitation on		the value it assigns per square mile for the data it receives based on	relevant criteria.  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.  The		range of cash transactions by the Company for licenses of similar data		during the prior six months are evaluated to assist in this	determination. In evaluating the range of		cash transactions, the Company does not consider transactions that are		disproportionately high or low.Third, the Company obtains		concurrence from an independent third party on the portfolio of all		non-monetary exchanges for data of $500,000 or more in order to support		the Company's valuation of the data received.  The Company obtains		this concurrence on an annual basis, usually in connection with the		preparation of its annual financial statements.
 

Dueto the Company's revenue recognition policies, revenue recognized onnon-monetary exchange transactions may not occur at the same time the seismicdata acquired is recorded as an asset.  The activity related to non-monetaryexchanges for the relevant periods was as follows (in thousands):

 

SUCCESSOR

SUCCESSOR

PREDECESSOR

PERIOD

PERIOD

PERIOD

Three Months  Ended June 30,

Six Months  Ended

February 14,  2007 -

January 1,  2007 -

2008

2007

June 30, 2008

June 30, 2007

February 13,  2007

Seismic data library 

   additions

$

3,972

$

600

$

13,741

$

2,162

$

(7

)

Revenue recognized 

   on specific data

   licenses and selections

   of data

1,048

461

2,737

1,082

71

Revenue recognized 

   related to

   acquisition contracts

1,900

12

5,622

27

11

Revenue recognized 

   related to data

   management services

-

-

-

-

6
  *Revenue from Seitel Solutions*
 

Revenue from Seitel Solutions ("Solutions") isrecognized as the services for reproduction and delivery of seismic data areprovided 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. 
 
*(Index)*

 

***Costs of Seismic Data Library* **

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 under *"Revenue from Non-Monetary Exchanges"* for a discussion of the process used to determine fairvalue.

 

For internally created data, the capitalized costs includecosts paid to third parties for the acquisition of data and related permitting,surveying and other activities associated with the data creation activity.  Inaddition, the Company capitalizes certain internal costs related to processingthe created data.  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 $562,000 and $476,000 for the threemonths ended June 30, 2008 and 2007, respectively, and $1,143,000, $712,000 and$265,000 for the six months ended June 30, 2008 (Successor Period), for the periodFebruary 14, 2007 to June 30, 2007 (Successor Period), and for the periodJanuary 1, 2007 to February 13, 2007 (Predecessor Period), respectively. 

***Data LibraryAmortization***

The Company amortizes its seismic data library investment using the greater ofthe amortization 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, the straight-linepolicy is applied from the time such survey is available for licensing tocustomers on a non-exclusive basis, since some data in the library may not belicensed until an exclusivity period (usually six months) has lapsed.

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 suchcomponent.  The lowest amortization rate the Company applies using the incomeforecast method is 70%.  In addition, in connection with the forecast reviewsand updates, the Company evaluates the recoverability of its seismic datalibrary investment, and if required under SFAS No. 144, "Accounting forthe Impairment and Disposal of Long-Lived Assets," records an impairmentcharge with respect to such investment.  See discussion on *"SeismicData Library Impairment"* below.

The actual aggregate rate of amortization depends on the specific seismicsurveys licensed and selected by the Company's customers during the period andthe amount of straight-line amortization recorded.  Theincome forecast amortization rates can vary by component and, as of July 1,2008, the amortization rate utilized under the income forecast method for allcomponents is 70%.  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 isapplied quarterly on a cumulative basis at the individual survey level. Inconnection with the Merger, this policy was also applied at February 13, 2007for the Predecessor Period.  Under this policy, the Company first recordsamortization using the income forecast method.  The cumulative amortizationrecorded for each survey is then compared with the cumulative straight-lineamortization. If the cumulative straight-line amortization is higher for anyspecific survey, additional amortization expense is recorded, resulting inaccumulated amortization being equal to the cumulative straight-lineamortization for such survey.  This requirement is applied regardless offuture-year revenue estimates for the library component of which the survey isa part and does not consider the existence of deferred revenue with respect tothe library component or to any survey.  
* *
***Seismic Data Library Impairment***

******TheCompany evaluates its seismic data library investment by grouping individualsurveys into components based on its operations and geological and geographicaltrends, resulting in the following data library segments for purposes ofevaluating impairments:  (I) Gulf of Mexico offshore comprised of the followingcomponents:  (a) multi-component data, (b) ocean bottom cable data, (c) shelfdata, (d) deep water data, and (e) value-added products; (II) North Americaonshore comprised of the following components: (a) Texas Gulf Coast, (b)Northern, Eastern and Western Texas, (c) Southern Louisiana/Mississippi, (d)Northern Louisiana, (e) Rocky Mountains, (f) North Dakota, (g) other UnitedStates, (h) Canada and (i) value-added products; and (III) international dataoutside North America.  The Company believes that these library componentsconstitute the lowest levels of independently identifiable cash flows.
 
*(Index)*

 

As events or conditions require, the Companyevaluates the recoverability of its seismic data library investment inaccordance with SFAS No. 144.  The Company evaluates its seismic data libraryinvestment for impairment whenever events or changes in circumstances indicatethat the carrying amounts may not be recoverable.  The Company considers thelevel of sales performance in each component compared to projected sales, aswell as industry conditions, among others, to be key factors in determiningwhen its seismic data investment should be evaluated for impairment.  Inevaluating sales performance of each component, the Company generally considers fiveconsecutive quarters of actual performance below forecasted sales to be anindicator of potential impairment.

 

In accordance with SFAS No. 144, the impairment evaluationis based first on a comparison of the undiscounted future cash flows over eachcomponent's remaining estimated useful life with the carrying value of eachlibrary component.  If the undiscounted cash flows are equal to or greater thanthe carrying value of such component, no impairment is recorded.  Ifundiscounted cash flows are less than the carrying value of any component, theforecast of future cash flows related to such component is discounted to fairvalue and compared with such component's carrying amount. The differencebetween the library component's carrying amount and the discounted future valueof the expected revenue stream is recorded as an 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 base,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 recordimpairment losses relative to its seismic data library investment, which couldbe material to any particular reporting period.

 

The Company did not have any impairment charges during the six months ended June 30, 2008 (SuccessorPeriod), for the period February 14,2007 to June 30, 2007 (Successor Period) or for the period January 1, 2007 toFebruary 13, 2007 (Predecessor Period).

 
NOTE E-DEBT
 

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

June 30,

December 31,

2008

2007

9.75%  Senior Notes

$

400,000

$

400,000

11.75%  Senior Notes

2,000

2,000

Revolving  Credit Facility

-

-

Subsidiary  revolving line of credit

-

-

Note  payable to former executive

279

300

402,279

402,300

Plus:   Premium on debt

291

333

$

402,570

$

402,633

 

**9.75% Senior Unsecured Notes: **On February 14, 2007, the Company issued in aprivate placement $400.0 million aggregate principal amount of 9.75% SeniorNotes.  The proceeds from the 9.75% Senior Notes were used to partially fundthe transactions in connection with the Merger.  As required by their terms,the 9.75% Senior Notes were exchanged for senior notes of like amounts andterms in a registered exchange offer in August 2007.  These notesmature on February 15, 2014.  Interest is payable in cash, semi-annuallyin arrears on February 15 and August 15 of each year.  The 9.75% Senior Notesare unsecured and are guaranteed by substantially all of the Company's domesticsubsidiaries on a senior basis. The 9.75% Senior Notes contain restrictivecovenants which limit the Company's ability to, among other things, incuradditional indebtedness, pay dividends and complete certain mergers,acquisitions and sales of assets.
 
*(Index)*

 

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

** **

**11.75% Senior Unsecured Notes: **On July 2, 2004, the Company issued in a privateplacement $193.0 million aggregate principal amount of 11.75% Senior Notes.  Asrequired by their terms, the 11.75% Senior Notes were exchanged for seniornotes of like amounts and terms in a registered exchange offer inFebruary 2005.  In connection with the 2004 excess cash flow offer in March2005, $4.0 million aggregate principal amount of these notes was tendered andaccepted.  In connection with the Merger and related transactions, $187.0million aggregate principal amount of these notes was tendered and accepted onFebruary 14, 2007.  The fair value of these notes washigher than the face value on the date of the Merger and consequently, a premiumhas been reflected in the Successor financial statements related to thesenotes.  Interest on the remaining notes is payable semi-annually inarrears on January 15 and July 15 of each year.  The remaining $2.0 million ofnotes mature on July 15, 2011.  The 11.75% Senior Notes are unsecured and areguaranteed by substantially all of the Company's U.S. subsidiaries on a seniorbasis.

 

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.  A repurchase offer is required only if there isno event of default under the Company's revolving credit facilities prior toand after giving effect to any repurchases.  The Company was not requiredto make anexcess cash flow offer for the year ended December 31, 2007.  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 amended and restated U.S. revolving credit facilitywith Wells Fargo Foothill, Inc., as lender, which provides for up to $25.0million, subject to borrowing base limitations.  Interest is payable at anapplicable margin above either LIBOR or the prime rate.  The facility issecured by a first priority, perfected security interest onsubstantially all of the Company's U.S. assets and a pledge of all of theissued 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 certain mergers, acquisitions and sales of assets.  The revolvingcredit facility requires the payment of an unused line fee of .25% per annumpayable in arrears.

 

**Subsidiary Revolving****Line of Credit:  **The Company's wholly-ownedsubsidiary, Olympic Seismic Ltd. ("Olympic") has a revolving creditfacility, which allows it to borrow up to $5.0 million (Canadian), subject to anavailability formula, by way of prime-based loans or letters of credit. Theinterest rate applicable to borrowings is the bank's prime rate plus 0.35% perannum.  Letter of credit fees are based on scheduled rates in effect at thetime of issuance. The facility is secured by the assets of Olympic, but is notguaranteed by the Company or any of its other U.S. subsidiaries.  Availableborrowings under the facility are equivalent to a maximum of $5.0 million(Canadian), subject to a requirement that the borrowings may not exceed 75% ofgood accounts receivable (as defined in the agreement) of Olympic, less prior-rankingclaims, if any, relating to inventory or accounts. The facility is subject torepayment upon demand and is available from time to time at the bank's solediscretion.
 
*(Index)*

 

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

** **

**NOTE F-INCOME TAXES**

 

The following is the detail of income tax expense (benefit)recorded for the three and six months ended June 30, 2008 (in thousands):

 

* *

Three Months  Ended

Six Months  Ended

June 30, 2008

June 30, 2008

Tax expense (benefit)  resulting from:

     Current operations

$

(3,798

)

$

(9,828

)

     Change in valuation  allowance

4,682

10,018

$

884

$

190

 

For thethree and six months ended June 30, 2008, the Company continued to provide afull valuation allowance against the Federal tax benefit generated from itsU.S. operations  as it was more likely than not that such benefit would not berealized.  For the same period, the Company has recognized the tax benefitsgenerated from its Canadian operations.  Offsetting the Canadian tax benefitsin the second quarter of 2008 was an additional reserve of approximately $2.4million on uncertain tax positions.

 

**NOTE G-STOCK BASED COMPENSATION**

 

In connection with the Merger and to appropriately accountfor the elimination of equity-based compensation under the Company's incentiveplan that existed prior to the Merger, Holdings, the Company's parent, adopteda stock-based compensation plan (the "2007 Non-Qualified Stock OptionPlan") in order to provide an equity component to management compensationfollowing the Merger.  The 2007 Non-Qualified Stock Option Plan becameeffective February 14, 2007.  The board of directors of Holdings, whichadministers the 2007 Non-Qualified Stock Option Plan, may issue options to purchaseup to 105,200 shares of Holdings' common stock to employees, directors andother service providers of Holdings and its subsidiaries, including theCompany, under the 2007 Non-Qualified Stock Option Plan.  In April 2008, Holdings adopted the 2008 Restricted Stockand Restricted Stock Unit Plan which is designed to provide incentives topresent and future employees of the Company through the grant of restrictedstock and restricted stock unit awards. The 2008 Restricted Stock andRestricted Stock Unit Plan authorizes the issuance of up to 25,000 shares ofHoldings' common stock pursuant to such grants.  The Company accounts forgrants of its stock options, restricted stock and restricted stock units inaccordance with SFAS 123(R), "Share Based Payment."

 

During the six months ended June 30, 2008, 2,341restricted stock units with a fair value of $604,000 and 14,145 stock optionswith a fair value of $2.8 million were granted. The restricted stock unitsvested immediately, whereas the stock options contain continued employmentrequirements and vest ratably over a period of four years from date of grantand expire 10 years after the date of grant.  Total share-based compensationcost that has been recognized in the Company's Statements of Operations was $1.6 millionand $2.4 million for the three months ended June 30, 2008 and 2007,respectively, and $3.4 million, $3.5 million and $6.7 million for the six months ended June 30,2008 (Successor Period), for the period from February 14, 2007 to June 30, 2007(Successor Period), and for the period from January 1, 2007 to February 13,2007 (Predecessor Period), respectively.  Included inthe $6.7 million share-based compensation cost for the Predecessor Period was$6.3 million related to the accelerated vesting of all outstanding unvested restrictedstock as a result of the Merger and change in control of theCompany which was included in merger expenses in the Company's Statement of Operations. The Company has not recognized any tax benefits related to stock basedcompensation for the three and six months ended June 30, 2008, theperiod from February 14, 2007 to June 30, 2007 (Successor Period), or for theperiod from January 1, 2007 to February 13, 2007 (Predecessor Period).  As of June 30, 2008, the total futurecompensation cost related to non-vested options not yet recognized in theCompany's Statement of Operations was $9.4 million and will be recognized using gradedvesting over a weighted average period of 2.8 years.
**** 
*(Index)*

 

**NOTE H-FAIR VALUE MEASUREMENTS**

 

Effective January 1, 2008, the Company adopted SFAS No. 157,"Fair Value Measurements" for recurring financial assets andliabilities carried at fair value.  The adoption of SFAS No. 157 had no impacton the Company's consolidated results of operations, cash flows or financialposition.

 

SFAS No. 157 provides a framework for measuring fair valueand establishes a fair value hierarchy that prioritizes the inputs used tomeasure fair value, giving the highest priority to unadjusted quoted prices inactive markets for identical assets or liabilities (Level 1 inputs) and thelowest priority to unobservable inputs (Level 3 inputs).  

 

The Company uses valuation techniques that maximize the useof observable inputs and minimize the use of unobservable inputs. In measuringthe fair value of the Company's assets and liabilities, market data orassumptions are used that the Company believes market participants would use inpricing an asset or liability, including assumptions about risk whenappropriate. The Company's investment in marketable securities is the onlybalance that is measured at fair value on a recurring basis.  As of June 30,2008, the fair value was $4.6 million, which was determined using significantother observable inputs (Level 2 inputs).  

 

**NOTE I-STATEMENT OF CASH FLOWINFORMATION**

****

The Companyhad restricted cash at June 30, 2008 and December 31, 2007 of $111,000 and $110,000,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):  

 

SUCCESSOR

PREDECESSOR 

PERIOD

PERIOD

Six Months  Ended

February 14,  2007- 

January 1,  2007-

June 30, 2008

June 30, 2007

February 13,  2007

Non-monetary exchanges related to resale

      licensing revenue

$

6,269

$

2,738

$

(7

)

Non-monetary exchanges from underwriting

      of new data acquisition

9,681

-

-

Other non-monetary exchanges

24

-

-

Completion of data in progress from prior

      non-monetary exchanges

367

600

-

Less:  Non-monetary exchanges

      for data in progress

(2,600

)

(1,176

)

-

Total non-cash additions to seismic data library

$

13,741

$

2,162

$

(7

)

 

 

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

 

SUCCESSOR

PREDECESSOR 

PERIOD

PERIOD

Six Months  Ended

February 14,  2007- 

January 1,  2007-

June 30, 2008

June 30,2007

February 13,  2007

Acquisition  revenue on underwriting from 

      non-monetary  exchange contracts

$

5,622

$

27

$

11

Licensing  revenue from specific data licenses 

      and  selections on non-monetary

      exchange  contracts

2,737

1,082

71

Data  management revenue

-

-

6

Total  non-cash revenue

$

8,359

$

1,109

$

88

 
 
*(Index)*

 

**NOTEJ-COMMITMENTS AND CONTINGENCIES**
*Litigation*
 

OnJuly 18, 2002, Paul Frame, the Company's former chief executive officer, suedthe Company in the 113th Judicial District Court of Harris County, No. 2002-35891(the "District Court"). Mr. Frame alleged a breach of his employment contract and defamation.He also sought a declaratory judgment that certain funds he received from theCompany were proper and did not have to be repaid.  Mr. Frame filed claimstotaling $20.2 million in the Company's chapter 11 cases from its reorganizationin 2004, which were disallowedby order of the U.S. Bankruptcy Court for the District of Delaware.  On April 1, 2005, the Company filed a motionfor summary judgment seeking dismissal of Mr. Frame's complaint in the DistrictCourt.  In late April 2005, Mr. Frame filed a motion for leave to file anamended complaint in the District Court.  In 2002, the Company filed a countersuit to recover approximately $4.2 million in corporate funds that the Companybelieved Mr. Frame inappropriately caused the Company to pay him or for hisbenefit plus over $800,000 due on two notes that were accelerated pursuant totheir respective terms. The Company also held a judgment against Mr. Frame inthe amount of at least $590,000 relating to a loan made to Mr. Frame by BankOne N.A. and guaranteed by the Company.  Effective March 27, 2008, the Companyand Mr. Frame entered into a settlement and release agreement providing for amutual release of all claims and causes of action.  As a part of thissettlement and release agreement, the parties agreed to dismiss this lawsuit.  Theparties' motion to dismiss was approved by the court on May 20, 2008.  Thelawsuit has now been dismissed and the matter settled.

 

The Company is involved fromtime to time in ordinary, routine claims and lawsuits incidental to itsbusiness. In the opinion of management, 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 June 30, 2008, the Company did not have anyamounts accrued related to litigation and claims, as the Company believes it isnot probable that any amounts will be paid relative to such litigation andclaims.  

 

**NOTE K-RECENTACCOUNTING PRONOUNCEMENTS**

 

InMay 2008, the FASB issued SFAS No. 162, "The Hierarchy of GenerallyAccepted Accounting Principles." This Statement identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles in the United States. This Statement is effective 60 days following theSecurities and Exchange Commission's approval of thePublic Company Accounting Oversight Board amendments to AU Section 411, *TheMeaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples*. The Company does not expect the adoption of SFAS No. 162 tohave a material effect on its results of operations or financial condition.

 

InFebruary 2008, the Financial Accounting Standards Board ("FASB")issued Staff Position ("FSP") FAS 157-2, "Effective Date of FASBStatement No. 157," which delayed the effective date of SFAS No. 157 forall non-financial assets and non-financial liabilities, except those that aremeasured at fair value on a recurring basis. FSP FAS 157-2 establishes January1, 2009 as the effective date of SFAS No. 157 with respect to these fair valuemeasurements for the Company. The Company does not currently expect theapplication of the fair value framework established by SFAS No. 157 tonon-financial assets and liabilities measured on a non-recurring basis to havea material impact on its consolidated financial statements. However, we willcontinue to assess the potential effects of SFAS No. 157 as additional guidancebecomes available.

 

In December 2007, the FASB issued SFAS No. 141(R), "BusinessCombinations," which replaces SFAS No. 141*.*SFASNo. 141(R) establishes principles and requirements for how the acquirer ina business combination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree. In addition, SFAS No. 141(R) recognizes andmeasures the goodwill acquired in the business combination or a gain from abargain purchase. SFAS No. 141(R) also establishes disclosure requirementsto enable users to evaluate the nature and financial effects of the businesscombination. SFAS No. 141(R) is effective as of the beginning of anentity's fiscal year that begins after December 15, 2008, with earlyadoption prohibited. The Company will apply the standard prospectively tofuture business combinations with an acquisition date on or after January 1,2009.
**** 
*(Index)*
 **NOTE L-SUPPLEMENTALGUARANTORS CONSOLIDATING CONDENSED FINANCIAL INFORMATION**
 

On February 14, 2007, the Company completed a privateplacement of 9.75% Senior Notes in the aggregate principal amount of $400.0million. Seitel, Inc.'s (the "Parent") payment obligations under the9.75% Senior Notes are jointly and severally guaranteed by certain of itsdomestic subsidiaries ("Guarantor Subsidiaries"). All subsidiariesof Seitel, Inc. that do not guaranty the 9.75% Senior Notes are referred to asNon-Guarantor Subsidiaries. 

 

The consolidating condensedfinancial statements are presented below and should be read in connection withthe Consolidated Financial Statements of the Company. Separate financialstatements of the Guarantor Subsidiaries 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 consolidatingcondensed financial information presents: the consolidating condensed balancesheets as of June 30, 2008 (Successor Period) and December 31, 2007 (SuccessorPeriod), and the consolidating condensed statements of operations andstatements of cash flows for the six months ended June 30, 2008 (SuccessorPeriod), the period February 14, 2007 to June 30, 2007 (Successor Period) and theperiod January 1, 2007 to February 13, 2007 (Predecessor Period) of (a) the Parent;(b) the Guarantor Subsidiaries; (c) the Non-Guarantor Subsidiaries; (d)elimination entries; and (e) the Parent, the Guarantor Subsidiaries and theNon-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. 
**** 
*(Index)*

**  **

 

**CONSOLIDATING CONDENSED BALANCESHEET**

**SUCCESSOR PERIOD**

**As of June 30, 2008**

(In thousands)

** **

 
** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

 
** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **

 
 
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

          
ASSETS

   Cash and cash equivalents

$

-

$

36,559

$

4,761

$

-

$

41,320

   Restricted cash

-

111

-

-

111

   Receivables

      Trade, net

-

33,563

8,394

-

41,957

      Notes and other, net

-

801

60

-

861

   Intercompany receivables (payables)

168,688

(156,662

)

(12,026

)

-

-

   Investment in subsidiaries

388,074

451,761

1,054

(840,889

)

-

   Net seismic data library

-

226,794

92,976

-

319,770

   Net property and equipment

-

3,601

6,366

-

9,967

   Investment in marketable securities

-

4,609

-

-

4,609

   Prepaid expenses, deferred charges

      and other	

12,937

8,158

625

-

21,720

   Intangible assets, net	

900

27,705

19,505

-

48,110

   Goodwill

-

107,108

97,137

-

204,245

   TOTAL ASSETS

$

570,599

$

744,108

$

218,852

$

(840,889

)

$

692,670

LIABILITIES AND STOCKHOLDER'S

   EQUITY

   Accounts payable and accrued liabilities

$

15,209

$

16,488

$

15,355

$

-

$

47,052

   Income taxes payable

580

5

1,136

-

1,721

   Senior Notes

402,291

-

-

-

402,291

   Notes payable

279

-

-

-

279

   Obligations under capital leases

-

-

3,669

-

3,669

   Deferred revenue

-

36,962

8,663

-

45,625

   Deferred income taxes

4

-

11,993

-

11,997

TOTAL LIABILITIES

418,363

53,455

40,816

-

512,634

STOCKHOLDER'S EQUITY

   Common stock

-

-

-

-

-

   Additional paid-in capital

268,184

-

-

-

268,184

   Parent investment

-

764,753

172,172

(936,925

)

-

   Retained deficit

(115,948

)

(78,709

)

(17,327

)

96,036

(115,948

)

   Accumulated other comprehensive income

-

4,609

23,191

-

27,800

TOTAL STOCKHOLDER'S EQUITY

152,236

690,653

178,036

(840,889

)

180,036

TOTAL LIABILITIES AND

   STOCKHOLDER'S EQUITY	

$

570,599

$

744,108

$

218,852

$

(840,889

)

$

692,670
 
*(Index)*

 

 

**CONSOLIDATING CONDENSEDBALANCE SHEET**

**SUCCESSOR PERIOD**

**As of December 31, 2007**

(In thousands)

 

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **

** **

**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

** **

ASSETS

   Cash and equivalents

$

-

$

36,847

$

6,486

$

-

$

43,333

   Restricted cash

-

110

-

-

110

   Receivables

      Trade, net

-

36,183

15,732

-

51,915

      Notes and other, net

-

1,335

855

-

2,190

   Intercompany receivables (payables)

174,299

(159,894

)

(14,405

)

-

-

   Investment in subsidiaries

418,152

457,966

775

(876,893

)

-

   Net seismic data library

-

243,957

105,082

-

349,039

   Net property and equipment

-

4,291

6,705

-

10,996

   Investment in marketable securities

-

4,224

-

-

4,224

   Prepaid expenses, deferred charges

      and other	

13,050

8,645

568

-

22,263

   Intangible assets, net

923

29,310

21,552

-

51,785

   Goodwill

-

107,108

100,138

-

207,246

   TOTAL ASSETS

$

606,424

$

770,082

$

243,488

$

(876,893

)

$

743,101

LIABILITIES AND STOCKHOLDER'S

   EQUITY

      Accounts payable and accrued  liabilities

$

15,374

$

18,792

$

15,159

$

-

$

49,325

      Income taxes payable

721

209

18

-

948

      Senior Notes

402,333

-

-

-

402,333

      Notes payable

300

-

-

-

300

      Obligations under capital leases

-

-

3,848

-

3,848

      Deferred revenue

-

34,823

13,328

-

48,151

      Deferred income taxes

4

-

17,234

-

17,238

TOTAL LIABILITIES

418,732

53,824

49,587

-

522,143

STOCKHOLDER'S EQUITY

   Common stock

-

-

-

-

-

   Additional paid-in capital

264,805

-

-

-

264,805

   Parent investment

-

764,762

172,172

(936,934

)

-

   Retained deficit

(77,113

)

(52,728

)

(7,313

)

60,041

(77,113

)

   Accumulated other comprehensive

      income	

-

4,224

29,042

-

33,266

TOTAL STOCKHOLDER'S EQUITY

187,692

716,258

193,901

(876,893

)

220,958

TOTAL LIABILITIES AND 

   STOCKHOLDER'S EQUITY	

$

606,424

$

770,082

$

243,488

$

(876,893

)

$

743,101
 
*(Index)*

 

 

**CONSOLIDATING CONDENSED STATEMENT OFOPERATIONS**

**SUCCESSOR PERIOD**

**For the Six Months Ended June 30,2008**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **
   
** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**
      
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
      
REVENUE

$

-

$

62,582

$

31,956

$

(2,437

)

$

92,101

EXPENSES:

   Depreciation and amortization

22

57,529

31,563

-

89,114

   Cost of sales

-

243

36

-

279

   Selling, general and administrative

3,390

10,406

8,889

(2,437

)

20,248

   Merger

-

357

-

-

357

3,412

68,535

40,488

(2,437

)

109,998

LOSS FROM OPERATIONS

(3,412

)

(5,953

)

(8,532

)

-

(17,897

)

Interest expense, net

(9,442

)

(10,126

)

(506

)

-

(20,074

)

Foreign currency exchange losses

-

(123

)

(590

)

-

(713

)

Other income

-

15

24

-

39

Loss before income taxes and	

   equity in loss of subsidiaries	

(12,854

)

(16,187

)

(9,604

)

-

(38,645

)

Provision (benefit) for income taxes

-        	

(220

)

410

-

190

Equity in loss of subsidiaries

(25,981

)

(10,014

)

-

35,995

-

NET LOSS

$

(38,835

)

$

(25,981

)

$

(10,014

)

$

35,995

$

(38,835

)
 
*(Index)*

 

 

**CONSOLIDATING CONDENSED STATEMENT OFOPERATIONS**

**SUCCESSOR PERIOD**

**February 14, 2007 - June 30, 2007**

 (In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
         
REVENUE

$

-

$

35,778

$

12,734

$

(843

)

$

47,669

EXPENSES:

   Depreciation and amortization

67

44,131

15,805

-

60,003

   Cost of sales

-

38

3

-

41

   Selling, general and administrative

3,328

6,423

5,015

(843

)

13,923

   Merger

-

1,254

26

-

1,280

3,395

51,846

20,849

(843

)

75,247

LOSS FROM OPERATIONS

(3,395

)

(16,068

)

(8,115

)

-

(27,578

)

Interest expense, net

(8,389

)

(10,318

)

(416

)

-

(19,123

)

Foreign currency exchange gains	

-

-

1,657

-

1,657

Loss before income taxes and equity

   in loss of subsidiaries	

(11,784

)

(26,386

)

(6,874

)

-

(45,044

)

Benefit for income taxes

-

(3,962

)

(2,005

)

-

(5,967

)

Equity in loss of subsidiaries

(27,293

)

(1,162

)

-

28,455

-

NET LOSS

$

(39,077

)

$

(23,586

)

$

(4,869

)

$

28,455

$

(39,077

)
 
*(Index)*

 

 

**CONSOLIDATING CONDENSED STATEMENT OFOPERATIONS**

**PREDECESSOR PERIOD**

**January 1, 2007 - February 13, 2007**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
         
REVENUE

$

-

$

13,346

$

6,055

$

(391

)

$

19,010

EXPENSES:

   Depreciation and amortization

-

6,989

4,669

(173

)

11,485

   Cost of sales

-

7

1

-

8

   Selling, general and administrative	

240

1,871

1,857

(391

)

3,577

   Merger

1,054

15,823

580

-

17,457

1,294

24,690

7,107

(564

)

32,527

LOSS FROM OPERATIONS

(1,294

)

(11,344

)

(1,052

)

173

(13,517

)

Interest expense, net

(236

)

(1,878

)

(170

)

-

(2,284

)

Foreign currency exchange losses

-

-

(102

)

-

(102

)

Other income

12

-

-

-

12

Loss before income taxes and equity

   in loss of subsidiaries	

(1,518

)

(13,222

)

(1,324

)

173

(15,891

)

Provision for income taxes

-

99

353

-

452

Equity in loss of subsidiaries

(14,825

)

(1,677

)

-

16,502

-

NET LOSS

$

(16,343

)

$

(14,998

)

$

(1,677

)

$

16,675

$

(16,343

)
 
*(Index)*

 

 

**CONSOLIDATING CONDENSED STATEMENT OFCASH FLOWS**

**SUCCESSOR PERIOD**

**For the Six Months Ended June 30,2008**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
            
Cash  flows from operating activities:
   
            Net  cash provided by (used in) 

                        operating  activities 

$

(21,015

)

$

43,477

$

24,829

$

-

$

47,291

Cash  flows from investing activities:

       Cash  invested in seismic data

-

(27,616

)

(21,471

)

-

(49,087

)

       Cash  paid to acquire property

            and  equipment

-

(63

)

(440

)

-

(503

)

       Advances  to Seitel Holdings, Inc.

-

(14

)

-

-

(14

)

       Increase  in restricted cash

-

(1

)

-

-

(1

)

       Net  cash used in investing activities

-

(27,694

)

(21,911

)

-

(49,605

)

Cash  flows from financing activities:

       Principal  payments on notes payable

(21

)

-

-

-

(21

)

       Principal  payments on capital

            lease  obligations

-

-

(66

)

-

(66

)

       Borrowings  on line of credit

-

-

286

-

286

       Payments  on line of credit

-

-

(286

)

-

(286

)

       Intercompany  transfers

21,036

(16,071

)

(4,965

)

-

-

            Net  cash provided by (used in) 

                        financing  activities

21,015

(16,071

)

(5,031

)

-

(87

)

Effect  of exchange rate changes

-

-

388

-

388

Net  decrease in cash and cash

       equivalents

-

(288

)

(1,725

)

-

(2,013

)

Cash and  cash equivalents at

       beginning  of period

-

36,847

6,486

-

43,333

Cash and  cash equivalents at end of period

$

-

$

36,559

$

4,761

$

-

$

41,320
 
*(Index)*

 

**CONSOLIDATING CONDENSED STATEMENT OFCASH FLOWS**

**SUCCESSOR PERIOD**

**February 14, 2007 - June 30, 2007**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
            
Cash  flows from operating activities:
   
            Net  cash provided by (used in) 

                        operating  activities 

$

(1,209

)

$

16,979

$

16,033

$

-

$

31,803

Cash  flows from investing activities:

       Cash  invested in seismic data

-

(11,171

)

(14,609

)

-

(25,780

)

       Cash  paid to acquire property

            and  equipment

-

(105

)

(29

)

-

(134

)

       Increase  in restricted cash

-

(2

)

-

-

(2

)

       Net  cash used in investing activities

-

(11,278

)

(14,638

)

-

(25,916

)

Cash  flows from financing activities:

       Issuance  of 9.75% Senior Notes

400,000

-

-

-

400,000

       Repayment  of 11.75% Senior Notes

(233,352

)

-

-

-

(233,352

)

       Contributed  capital

153,473

-

-

-

153,473

       Purchase  of Seitel stock

(386,556

)

-

-

-

(386,556

)

       Principal  payments on notes payable

(17

)

-

-

-

(17

)

       Principal  payments on capital

            lease  obligations

-

-

(32

)

-

(32

)

       Borrowings  on line of credit

-

-

88

-

88

       Payments  on line of credit

-

-

(88

)

-

(88

)

       Payment  of financing fees

(16,982

)

-

-

-

(16,982

)

       Payments  on notes receivable from 

            officers  and employees 

-

274

-

-

274

       Intercompany  transfers

84,643

(84,643

)

-

-

-

            Net  cash provided by (used in) 

                        financing  activities 

1,209

(84,369

)

(32

)

-

(83,192

)

Effect  of exchange rate changes

-

-

(1,642

)

-

(1,642

)

Net decrease  in cash

       and  cash equivalents

-

(78,668

)

(279

)

-

(78,947

)

Cash and  cash equivalents at

       beginning  of period

-

102,788

1,420

-

104,208

Cash and  cash equivalents at end of period

$

-

$

24,120

$

1,141

$

-

$

25,261
 
*(Index)*

 

 

**CONSOLIDATING CONDENSED STATEMENT OFCASH FLOWS**

**PREDECESSOR PERIOD**

**January 1, 2007 - February 13, 2007**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **
   
**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**
            
Cash  flows from operating activities:
   
            Net  cash provided by (used in) 

                        operating  activities 

$

(11,821

)

$

19,894

$

(2,463

)

$

-

$

5,610

Cash  flows from investing activities:

       Cash  invested in seismic data

-

(7,500

)

(869

)

-

(8,369

)

       Cash  paid to acquire property

            and  equipment

-

(27

)

(33

)

-

(60

)

       Net  cash used in investing activities

-

(7,527

)

(902

)

-

(8,429

)

Cash  flows from financing activities:

       Principal  payments on notes payable

(3

)

-

-

-

(3

)

       Principal  payments on capital

            lease  obligations

-

-

(6

)

-

(6

)

       Borrowings  on line of credit

-

-

119

-

119

       Payments  on line of credit

-

-

(119

)

-

(119

)

       Purchase  of common stock

            subsequently  retired

(400

)

-

-

-

(400

)

       Intercompany  transfers

12,224

(10,622

)

(1,602

)

-

-

            Net  cash provided by (used in) 

                        financing  activities 

11,821

(10,622

)

(1,608

)

-

(409

)

Effect  of exchange rate changes

-

-

46

-

46

Net  increase (decrease) in cash

       and  cash equivalents

-

1,745

(4,927

)

-

(3,182

)

Cash and  cash equivalents at

       beginning  of period

-

101,043

6,347

-

107,390

Cash and  cash equivalents at end of period

$

-

$

102,788

$

1,420

$

-

$

104,208
  
*(Index)*
 Item 2.   MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
** **

*The following discussion should be readin conjunction with our consolidated financial statements and the related notesto the financial statements included elsewhere in this document.*

 
CAUTIONARY STATEMENTS CONCERNINGFORWARD-LOOKING INFORMATION
 

This Quarterly Report on Form 10-Q (this "QuarterlyReport") contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended (the "Exchange Act").  Statements contained inthis report about Seitel, Inc.'s future outlook, prospects, strategies andplans, and about industry conditions, demand for seismic services and thefuture economic life of our seismic data are forward-looking.  All statementsthat express belief, expectation, estimates or intentions, as well as thosethat are not statements of historical fact, are forward looking. The words"proposed," "anticipates," "anticipated,""will," "would," "should," "estimates"and similar expressions are intended to identify forward-looking statements. Forward-looking statements represent our present belief and are based on ourcurrent expectations and assumptions with respect to future events. While webelieve our expectations and assumptions are reasonable, they involve risks anduncertainties beyond our control that could cause the actual results or outcometo differ materially from the expected results or outcome reflected in ourforward-looking statements.  In light of these risks, uncertainties andassumptions, the forward-looking events discussed in this Quarterly Report maynot occur. Such risks and uncertainties include, without limitation, ourability to comply with the terms of our final judgment of permanent injunctionby the Securities and Exchange Commission ("SEC"), the impact on ourresults of operations of our significant amount of debt, our significant amountof debt service and interest expense, our ability to obtain and maintain normalterms with our vendors and service providers, our ability to maintain contractsthat are critical to our operations, changes in the oil and gas industry or theeconomy generally, changes in the exploration budgets of our customers, actualcustomer demand for our seismic data and related services, the timing andextent of changes in commodity prices for natural gas, crude oil and condensateand natural gas liquids, conditions in the capital markets during the periodscovered by the forward-looking statements and our ability to obtain financingon satisfactory terms if internally generated funds are insufficient to fundour capital needs.  The foregoing and other risk factors are identified in ourAnnual Report on Form 10-K filed with the SEC for the year endedDecember 31, 2007.  

 

Theforward-looking statements contained in this report speak only as of the datehereof.  Except as required by federal and state securities laws, we undertakeno obligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or any other reason.  Allforward-looking statements attributable to Seitel, Inc. or any person acting onits behalf are expressly qualified in their entirety by the cautionarystatements contained or referred to in our Annual Report filed on Form 10-K andin our future periodic reports filed with the SEC. 

 

**Overview**

** **

***General***

** **

Our products and services are used by oil and gas companies toassist in the exploration for, and development and management of, oil andgas reserves. We have ownership in an extensive library of onshore and offshoreseismic data that we offer for license to oil and gas companies. Oil and gascompanies use seismic data in oil and gas exploration and development efforts toincrease the probability of drilling success. We believe that our library ofonshore seismic data is one of the largest libraries available for licensing inthe United States and Canada. We primarily generate revenue by licensing datafrom our data library and from new data creation products, which aresubstantially underwritten or paid for by our clients.  By participating inunderwritten, nonexclusive surveys or purchasing licenses to existing data, oiland gas companies can obtain access to surveys at reduced costs as compared toacquiring 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 toexperience major changes.  Having spent several years increasing their focus oninternational exploration opportunities, several major oil companies havebecome more active in the U.S. market than in the past few years.  Independentoil and gas companies continue to be responsible for a significant portion ofcurrent U.S. drilling activity.  Production decline rates are acceleratingworldwide and are pronounced in mature fields of North America, while commodityprices for oil and natural gas remain a positive driver.  We expect demand fornatural gas to continue to increase exploration activity over the next two tothree years in the United States and Canada.

 
 
*(Index)*

 

Our clients continue to seek ourservices to create data in the United States and Canada.  Our clients' commitmentfor underwriting on new data creation projects was $28.6 million as of June 30,2008.  Licensing data "off the shelf" does not require the longerplanning and lead times like new data creation and thus is more likely tofluctuate quarter to quarter.

 

***The Merger***

 

On February 14, 2007, Seitel Acquisition Corp. ("AcquisitionCorp.") was merged with and into Seitel, Inc. ("Seitel"), pursuant toa merger agreement between Seitel, Acquisition Corp. and Seitel Holdings, Inc.("Holdings") dated October 31, 2006 (the "Merger").  Pursuant to themerger agreement, Seitel continued as the surviving corporation and became aprivately owned corporation and wholly-owned subsidiary of Holdings. 

 

Although Seitel continues as the same legal entity after theMerger, the consolidated financial statements for the first six months of 2007are presented for two periods:  January 1, 2007 through February 13, 2007 (the"Predecessor Period" or "Predecessor," as context requires),which relates to the period preceding the Merger and February 14,2007 through June 30, 2007, which relates to the periodsucceeding the Merger.  All financial statements for the periods succeedingthe Merger are referred to as Successor Period or Successor, as contextrequires.  The combined results for the six monthsended June 30, 2007 represent the addition of Predecessor and 2007 Successor Periods("Combined").  This combination does not comply with U.S. GAAP orwith the rules for pro forma presentation but is presented because we believeit provides a meaningful comparison of our results.  The consolidated financialstatements for the Successor Periods reflect the acquisition of Seitel under thepurchase method of accounting in accordance with Statement of FinancialAccounting Standards ("SFAS") No. 141, "BusinessCombinations."  The results between these periods are not comparable tothe Predecessor due to the difference in the basis of presentation of purchaseaccounting as compared to historical cost.  

 

***Principal Factors Affecting Our Business***

** **

Our business is dependent upon a varietyof factors, many of which are beyond our control. The following are those thatwe consider to be principal factors affecting our business.

 

**Demand for Seismic Data:**  Demand for ourproducts and services is cyclical due to the nature of the oil and gasindustry.  In particular, demand for our seismic data services depends uponexploration, production, development and field management spending by oil andgas companies and, in the case of new data creation, the willingness of those companies to forgo ownership inthe seismic data. Capital expenditures by oil and gas companies depend uponseveral factors, including actual and forecasted oil and natural gas commodityprices, prospect availability and the companies' own short-term and strategicplans. These capital expenditures may also be affected by worldwide economic orindustry-wide conditions. Demand for our seismic data is more likely to beinfluenced by natural gas prices rather than crude oil prices due to thegeographic location of our seismic data. 

 

**Availability of Capital for Our Customers:**  Many of our customersconsist of independent oil and gas companies and private prospect-generatingcompanies that rely primarily on private capital markets to fund theirexploration, production, development and field management activities.Significant changes in the private capital market and the availability ofcapital could have a material impact on the ability of these companies to obtainfunding necessary to purchase our seismic data.

 

**Merger and Acquisition Activity:** In recent years, therehas been an increase in the level of merger and acquisition activity within ourclient base. This activity could have a negative impact on seismic companiesthat operate in markets with a limited number of participating clients.However, we believe that, over time, this activity could have a positive impacton our business, as it should generate re-licensing fees, result in increasedvitality in the trading of mineral interests and result in the creation of newindependent customers through the rationalization of staff within those companiesaffected by this activity.

 
 
*(Index)*

 

**Natural Gas Reserve Replacement:**  Gas reserve replacementin the United States and Canada has lagged.  As a result, we believe there isan increasing need in the oil and gas industry to replace these reserves, whichwe anticipate will increase the demand for our seismic data.

 

**Government Regulation:**  Our operations aresubject to a variety of federal, provincial, state, foreign and local laws andregulations, including environmental and health and safety laws. We investfinancial and managerial resources to comply with these laws and related permitrequirements. Modification of existing laws or regulations and the adoption ofnew laws or regulations limiting or increasing exploration or productionactivities by oil and gas companies may have a material effect on our businessoperations.

** **

**Non-GAAP Key PerformanceMeasures**

** **

Management considers certain performance measures inevaluating and managing our financial condition and operating performance atvarious times and from time to time. Some of these performance measures are non-GAAPfinancial measures. Generally, a non-GAAP financial measure is a numericalmeasure of a company's performance, financial position or cash flows thateither excludes or includes amounts that are not normally excluded or includedin the most directly comparable measure calculated and presented in accordancewith United States generally accepted accounting principles, or GAAP. Thesenon-GAAP measures are not in accordance with, nor are they a substitute for,GAAP measures. These non-GAAP measures are intended to supplement ourpresentation of our financial results that are prepared in accordance withGAAP.

 

The following are the key performancemeasures considered by management.

 

**Cash Resales: **Cash resales representnew contracts for data licenses from our library, payable in cash.  We believethis measure is important in gauging new business activity.  We expect cashresales to generally follow a consistent trend over several quarters, while consideringour normal seasonality. Volatility in this trend over several consecutivequarters could indicate changing market conditions.  The following is areconciliation of this non-GAAP financial measure to the most directlycomparable GAAP financial measure, total revenue (in thousands):

 

SUCCESSOR

SUCCESSOR

PREDECESSOR

PERIOD

COMBINED (1)

PERIOD

PERIOD

Three Months

Six Months

Six Months

February 14,

January 1,

Ended

Ended

Ended

2007 -

2007 -

June 30,

June 30,

June 30,

June 30,

February 13,

2008

2007

2008

2007

2007

2007

Cash resales

$

32,670

$

27,794

$

52,505

$

49,506

$

43,521

$

5,985

Other revenue

   components:

      Acquisition revenue

12,546

8,909

30,949

21,294

15,196

6,098

      Non-monetary

         exchanges

798

1,176

4,457

2,731

2,738

(7

)

   Revenue deferred

(13,922

)

(13,577

)

(25,063

)

(23,954

)

(21,318

)

(2,636

)

   Recognition of revenue

      previously deferred

10,651

4,598

25,609

14,459

5,513

8,946

   Solutions and other

1,976

1,471

3,644

2,643

2,019

624

Total revenue, as

   reported

$

44,719

$

30,371

$

92,101

$

66,679

$

47,669

$

19,010

 

(1)

		Our combined results for the six months ended June 30, 2007 represent		the addition of the Predecessor Period from January 1, 2007 to February		13, 2007 and the Successor Period from February 14, 2007 to June 30,		2007.  This combination does not comply with U.S. GAAP or with the		rules for pro forma presentation, but is presented because we believe it		provides a meaningful comparison of our results.
** **
 
*(Index)*

 

**Cash Margin: **Cash margin includes cash resales plus all other cashrevenues other than from data acquisitions, less cash selling, general andadministrative expenses (excludingMerger expenses and merger and acquisition transaction costs) and cost ofgoods sold.  We believe this measure is helpful in determining the level ofcash from operations we have available for debt service and funding of capitalexpenditures (net of the portion funded or underwritten by our customers).  Thefollowing is a quantitative reconciliation of this non-GAAP financial measureto the most directly comparable GAAP financial measure, operating loss (in thousands):

 

SUCCESSOR

SUCCESSOR

PREDECESSOR

PERIOD

COMBINED (1)

PERIOD

PERIOD

Three Months

Six Months

Six Months

February 14,

January 1,

Ended

Ended

Ended

2007 -

2007 -

June 30,

June 30,

June 30,

June 30,

February 13,

2008

2007

2008

2007

2007

2007

Cash margin 

$

26,335

$

22,179

$

39,103

$

38,650

$

35,220

$

3,430

Add (subtract) other 

      revenue components

      not included in

      cash margin:

         Acquisition revenue

12,546

8,909

30,949

21,294

15,196

6,098

         Non-monetary

            exchanges

798

1,176

4,457

2,731

2,738

(7

)

         Revenue deferred

(13,922

)

(13,577

)

(25,063

)

(23,954

)

(21,318

)

(2,636

)

         Recognition of

            revenue previously

            deferred

10,651

4,598

25,609

14,459

5,513

8,946

         Recognition of	

            Solutions revenue	

            previously deferred

-

-

44

6

-

6

Less:

      Depreciation and

         amortization

(44,259

)

(37,770

)

(89,114

)

(71,488

)

(60,003

)

(11,485

)

      Merger expenses

-

(835

)

(357

)

(18,737

)

(1,280

)

(17,457

)

      Merger and acquisition

         transaction costs

(4

)

-

(5

)

-

-

-

      Non-cash operating

         expenses

(1,663

)

(2,435

)

(3,520

)

(4,056

)

(3,644

)

(412

)

   Operating loss,

      as reported

$

(9,518

)

$

(17,755

)

$

(17,897

)

$

(41,095

)

$

(27,578

)

$

(13,517

)

 

 

(1)

		Our combined results for the six months ended June 30, 2007 represent		the addition of the Predecessor Period from January 1, 2007 to February		13, 2007 and the Successor Period from February 14, 2007 to June 30,		2007.  This combination does not comply with U.S. GAAP or with the		rules for pro forma presentation, but is presented because we believe it		provides a meaningful comparison of our results.
 

**Growth of Our Seismic Data Library:**  We regularly add to our seismicdata library through four different methods: (1) recording new data; (2) buyingownership of existing data for cash; (3) obtaining ownership of existing datasets through non-monetary exchanges; and (4) creating new value-added productsfrom existing data within our library.  For the period from January 1, 2008 to June30, 2008, we completed the addition of approximately 1,200 square miles ofseismic data to our library.  As of June 30, 2008, we had approximately 850 squaremiles of seismic data in progress.  

 

**CriticalAccounting Policies**

We operate in one business segment, which is made up of seismic dataacquisition, seismic data licensing, seismic data processing and seismicreproduction services.  There have not been any changes inour critical accounting policies since December 31, 2007.
**** 
*(Index)*

 

**Results of Operations**

** **

***Revenue***

****The following tablesummarizes the components of our revenue for the periods indicated (inthousands):

 

SUCCESSOR

SUCCESSOR

PREDECESSOR

PERIOD

COMBINED (1)

PERIOD

PERIOD

Three Months

Six Months

Six Months

February 14,

January 1,

Ended

Ended

Ended

2007 -

2007 -

June 30,

June 30,

June 30,

June 30,

February 13,

2008

2007

2008

2007

2007

2007

Acquisition revenue:

       Cash underwriting

$

10,646

$

8,897

$

25,327

$

21,256

$

15,169

$
6,087

      Underwriting from

          non-monetary

         exchanges

1,900

12

5,622

38

27

11

      Total acquisition

         revenue

12,546

8,909

30,949

21,294

15,196

6,098

Licensing revenue:

       Cash resales

32,670

27,794

52,505

49,506

43,521

5,985

       Non-monetary

         exchanges

798

1,176

4,457

2,731

2,738

(7

)

      Revenue deferred

(13,922

)

(13,577

)

(25,063

)

(23,954

)

(21,318

)

(2,636

)

      Recognition of  revenue

         previously  deferred

10,651

4,598

25,609

14,459

5,513

8,946

      Total resale  revenue

30,197

19,991

57,508

42,742

30,454

12,288

Total seismic revenue

42,743

28,900

88,457

64,036

45,650

18,386

Solutions and other

1,976

1,471

3,644

2,643

2,019

624

Total revenue

$

44,719

$

30,371

$

92,101

$

66,679

$

47,669

  $
19,010

 

(1)

		Our combined results for the six months ended June 30, 2007 represent		the addition of the Predecessor Period from January 1, 2007 to February		13, 2007 and the Successor Period from February 14, 2007 to June 30,		2007.  This combination does not comply with U.S. GAAP or with the		rules for pro forma presentation, but is presented because we believe it		provides a meaningful comparison of our results.
 

Total revenue increased $14.3 million, or 47.2%, to $44.7million in the second quarter of 2008 from $30.4 million in the second quarterof 2007.  Acquisition revenue increased 40.8% to $12.5 million in the secondquarter of 2008 primarily from increased data creation activity in the U.S.  Total resale revenue increased 51.1% from $20.0 million in the second quarter of 2007to $30.2 million in the second quarter of 2008 and was the result of variouschanges in the components of resale revenue.  Cash resales for the 2008 second quarterwere $32.7 million compared to $27.8 million in the 2007 second quarter.  The17.5% growth in cash resales reflected 19.4% growth in our core resales (U.S. 3D and Canada 2D and 3D), with particularly robust licensing activity in Canada.  Non-core cash resales (U.S. 2D and offshore) increased by 4.7%. Revenue recognized from previouslydeferred contracts, or selections, increased $6.1 million, or 131.6%, betweenquarters.  This increase was primarily due to several large selections on openlibrary cards and the growth in the inventory of open library cards from whichclients selected subsequent to the Merger.  Solutions and other revenueincreased 34.3% between quarters primarily due to the increase in total seismicrevenue and the types of products delivered.

 

Totalrevenue for the first six months of 2008 increased $25.4 million, or 38.1%, comparedto the 2007 six month period.  Acquisition revenue increased 45.3% from $21.3 millionto $30.9 million representing strong data creation activity in both the U.S. and Canada.  Total resale revenue increased 34.5% between the six month periods primarily dueto higher cash resales and increased selections.  Cash resales increased 6.1%from $49.5 million in the first six months of 2007 to $52.5 million in thefirst six months of 2008.  This increase reflected a 5.2% growth in our coreresales.  Revenue recognized from previously deferred contracts, or selections,increased $11.1 million, or 77.1%, primarily due to several large selections onopen library cards and the growth in the inventory of open library cards fromwhich clients selected subsequent to the Merger.  Solutions and other revenue increasedby 37.9% during the six month periods primarily resulting from the higher levelof seismic revenue and the types of products delivered.

 
 
*(Index)*

 

At June 30, 2008, we had a deferred revenue balance of $45.6 million,compared to the December 31, 2007 balance of $48.2 million.  The majority ofthe deferred revenue will be recognized when selection of the data is made bythe customer or upon expiration of the selection period, whichever occursfirst.

 

***Depreciation andAmortization***

Depreciation and amortization was comprised of the following (in thousands):

 

SUCCESSOR

SUCCESSOR

PREDECESSOR

PERIOD

COMBINED (1)

PERIOD

PERIOD

Three Months

Six Months

Six Months

February 14,

January 1,

Ended

Ended

Ended

2007 -

2007 -

June 30,

June 30,

June 30,

June 30,

February 13,

2008

2007

2008

2007

2007

2007

Amortization  of

   seismic  data:

       Income  forecast

$

25,983

$

19,321

$

54,756

$

38,054

$

31,143

$

6,911

       Straight-line

16,227

16,369

30,238

30,046

25,750

4,296

       Total amortization of

            seismic data

42,210

35,690

84,994

68,100

56,893

11,207

Depreciation  of property

   and  equipment

593

624

1,184

1,226

948

278

Amortization  of acquired

   intangibles

1,456

1,456

2,936

2,162

2,162

-

Total

$

44,259

$

37,770

$

89,114

$

71,488

$

60,003

$

11,485

 

(1)

		Our combined results for the six months ended June 30, 2007 represent		the addition of the Predecessor Period from January 1, 2007 to February		13, 2007 and the Successor Period from February 14, 2007 to June 30,		2007.  This combination does not comply with U.S. GAAP or with the		rules for pro forma presentation, but is presented because we believe it		provides a meaningful comparison of our results.
 

Total seismic data library amortization amounted to $42.2 millionin the second quarter of 2008 compared to $35.7 million in the second quarterof 2007 and $85.0 million for the first half of 2008 compared to $68.1 millionfor the first half of 2007.  The amount of seismic data library amortizationfluctuates based on the level and location of specific seismic surveys licensed(including licensing resulting from new data acquisition) and selected by ourcustomers during any period as well as the amount of straight-line amortizationrequired under our accounting policy.  The Successor Period reflects the higherlevel of amortization as a result of the step-up to fair value of our seismicdata library in connection with the Merger.

 

Seismic data amortization as of percentage of total seismicrevenue is summarized as follows:

 

SUCCESSOR

SUCCESSOR

PREDECESSOR

PERIOD

COMBINED (1)

PERIOD

PERIOD

Three Months

Six Months

Six Months

February 14,

January 1,

Ended

Ended

Ended

2007 -

2007 -

June 30,

June 30,

June 30,

June 30,

February 13,

Components of Amortization

2008

2007

2008

2007

2007

2007

Income  forecast

60.8

%

66.9

%

61.9

%

59.4

%

68.2

%

37.6

%

Straight-line

38.0

%

56.6

%

34.2

%

46.9

%

56.4

%

23.4

%

Total

98.8

%

123.5

%

96.1

%

106.3

%

124.6

%

61.0

%

 

(1)

		Our combined results for the six months ended June 30, 2007 represent		the addition of the Predecessor Period from January 1, 2007 to February		13, 2007 and the Successor Period from February 14, 2007 to June 30,		2007.  This combination does not comply with U.S. GAAP or with the		rules for pro forma presentation, but is presented because we believe it		provides a meaningful comparison of our results.
 

The percentage of incomeforecast amortization to total seismic revenue decreased in the second quarter of2008 as compared to the second quarter of 2007 as a result of the level ofrevenue recognized on fully amortized data.  In the second quarter andfirst six months of 2008, 20% and 18%, respectively,of resale revenue recognized was from data whose costs were fully amortized. In the second quarterof 2007, and for the period from February 14, 2007 to June 30, 2007,substantially all resale revenue required income forecast amortization.

 
 
*(Index)*

 

The amount of straight-lineamortization is consistent between the periods presented.  Straight-lineamortization represents the expense required under our accounting policy toensure our data value is fully amortized within four years of when the databecomes available for sale.

 

In connection with the Merger, we recorded acquired intangible assets of $53.4million, of which $52.5 million are amortizable over their useful lives rangingfrom 1 to 10 years.  The increase in amortization of acquiredintangibles between years was due to 2008 including amortization from January 1,2008 through June 30, 2008 whereas 2007 only included amortization from the Merger date(February 14, 2007).

 

***Selling, General and AdministrativeExpenses***

 

Selling,general and administrative ("SG&A") expenses were $9.8 million inthe second quarter of 2008 compared to $9.5 million in the second quarter of 2007and $20.2 million in the first six months of 2008 compared to $17.5 million inthe first six months of 2007.  SG&A expense is made up of the followingcash and non-cash expenses (in thousands):

 

SUCCESSOR

SUCCESSOR

PREDECESSOR

PERIOD

COMBINED (1)

PERIOD

PERIOD

Three Months

Six Months

Six Months

February 14,

January 1,

Ended

Ended

Ended

2007 -

2007 -

June 30,

June 30,

June 30,

June 30,

February 13,

2008

2007

2008

2007

2007

2007

Cash SG&A expenses

$

8,150

$

7,054

$

16,728

$

13,444

$

10,279

$

3,165

Non-cash compensation

   expense

1,592

2,369

3,378

3,959

3,547

412

Non-cash rent expense

71

66

142

97

97

-

Total

$

9,813

$

9,489

$

20,248

$

17,500

$

13,923

$

3,577

 

(1)

		Our combined results for the six months ended June 30, 2007 represent		the addition of the Predecessor Period from January 1, 2007 to February		13, 2007 and the Successor Period from February 14, 2007 to June 30,		2007.  This combination does not comply with U.S. GAAP or with the		rules for pro forma presentation, but is presented because we believe it		provides a meaningful comparison of our results.
 

The increasein cash SG&A expenses of $1.1 million from the second quarter of 2007 tothe second quarter of 2008 was partly due to additional variable compensationof $0.7 million, mainly sales commissions on the higher level of revenuerecognized between the periods and higher accruals for employee incentivebonuses.  In addition, the stronger Canadian dollar added approximately $0.2million to our operating expenses.  

 

The increasein cash SG&A expenses of $3.3 million from the first six months of 2007 tothe first six months of 2008 was primarily due to (1) the 2007 period includinga $0.9 million reduction in SG&A resulting from a cash settlement of litigationand collection of a previously reserved receivable; (2) an increase of $0.7million in performance based compensation expense associated with our incentivecompensation plan; and (3) an increase of $0.6 million in commission expensedue to the higher level of revenue recognized in the 2008 period.  In addition,the stronger Canadian dollar added approximately $0.6 million to our operatingexpenses.

 

The decreasein non-cash compensation expense between the 2008 and 2007 periods wasprimarily due to a reduction in the expense related to stock options granted tocertain employees and non-employee directors since the Merger due to theexpense being recognized using graded vesting.  This reduction was partiallyoffset by a charge of $0.6 million in the second quarter of 2008 due to theissuance of fully vested restricted stock units to certain key employees. 

 

Thenon-cash rent expense in the Successor Periods related to amortization of afavorable facility lease that was recorded as an intangible asset in connectionwith the Merger and will be amortized over the remaining lease term of 6.25 years.

 
 
*(Index)*

 

***MergerExpenses***

*** ***

Mergerexpenses included the following fees and expenses incurred in connection withthe merger transaction for the periods indicated (in thousands):

 

SUCCESSOR

SUCCESSOR

PREDECESSOR

PERIOD

COMBINED (1)

PERIOD

PERIOD

Three Months

Six Months

Six Months

February 14,

January 1,

Ended

Ended

Ended

2007 -

2007 -

June 30,

June 30,

June 30,

June 30,

February 13,

2008

2007

2008

2007

2007

2007

Investment  banking fees

$

-

$

-

$

-

$

7,789

$

-

$

7,789

Legal and  advisory fees

-

218

-

984

355

629

Change in  control

   payments

-

617

357

3,670

925

2,745

Early vesting  of restricted

   stock  (non-cash)

-

-

-

6,294

-

6,294

$

-

$

835

$

357

$

18,737

$

1,280

$

17,457

 

(1)

		Our combined results for the six months ended June 30, 2007 represent		the addition of the Predecessor Period from January 1, 2007 to February		13, 2007 and the Successor Period from February 14, 2007 to June 30,		2007.  This combination does not comply with U.S. GAAP or with the		rules for pro forma presentation, but is presented because we believe it		provides a meaningful comparison of our results.
 

***Other Income (Expense)***

 

Interest expense, net, was $10.2 million in the second quarterof 2008 compared to $9.9 million in the second quarter of 2007 and was $20.1million and $21.4 million for the six months ended June 30, 2008 and 2007,respectively.  The decrease in the first half of 2008 compared to 2007 isprimarily due to the 2007 period including $4.0 million related to fees from thenon-utilized acquisition financing bridge facility.  Additionally, interestexpense in the Predecessor Period was lower as a result of our lower debt level.

 

***Income Taxes***

 

Tax expense(benefit) was $0.9 million and $(2.0) million in the second quarters of 2008and 2007, respectively.  The 2008 second quarter expense was comprised of (i) abenefit of $1.8 million related to our Canadian operations, (ii) an expense of$2.4 million related to an additional reserve on uncertain tax positions and(iii) $0.3 million of state tax expense in the U.S.  The Federal tax benefitof $4.7 million resulting from our U.S. operations in the 2008 second quarter was offset by avaluation allowance because it was more likely than not that the deferred taxasset would not be realized.  The 2007 second quarter expense was comprised of(i) a benefit of $1.7 million related to our Canadian operations, (ii) abenefit of $0.6 million related to our U.S. operations, (iii) $0.2 million ofstate tax expense in the U.S. and (iv) $0.1 million expense related topenalties and interest on uncertain tax positions.  In the 2007 second quarter,an adjustment was made to increase our U.S. deferred tax liability resultingfrom the Merger, allowing us to recognize a partial benefit on our U.S.operating results; the remainder of the benefit of $7.1 million from the U.S. book loss in thisperiod was offset by a valuation allowance because it was more likely than notthat the deferred tax asset would not be realized. 

 

Tax expense(benefit) was $0.2 million and $(5.5) million for the six months ended June 30,2008 and 2007, respectively.  The expense for the first six months of 2008 wascomprised of (i) a benefit of $2.8 million related to our Canadian operations,(ii) an expense of $2.4 million related to an additional reserve on uncertaintax positions, (iii) $0.5 million of state tax expense in the U.S. and (iv) $0.1 million of Canadian withholding taxes.  The Federal tax benefitof $10.0 million resulting fromour U.S. operations in the 2008 period was offset by a valuation allowancebecause it was more likely than not that the deferred tax asset would not berealized.  The benefit for the first six months of 2007 was comprised of (i) abenefit of $1.9 million related to our Canadian operations, (ii) a benefit of$4.3 million related to our U.S. operations, (iii) $0.3 million of state taxexpense in the U.S. and (iv) $0.4 million expense related to penalties andinterest on uncertain tax positions.  In the first half of 2007, a U.S. deferred tax liability of $4.4 million was recorded in connection with the Merger dueto the step-up in asset value related to the Merger.  In the period fromFebruary 14, 2007 to June 30, 2007, a U.S. Federal tax benefit was recordedequivalent to the amount of deferred tax liability with the remainder of thebenefit of $9.1 million from the U.S. book loss being offset by a valuationallowance because it was more likely than not that the deferred tax asset wouldnot be realized.  For the period from January 1, 2007 to February 13, 2007,the Federal income tax benefit of $5.1 million resulting from our U.S. operations was offset by a valuation allowancebecause it was more likely than not that the deferred tax asset would not berecognized.  

 
 
*(Index)*
 **Liquidity and Capital Resources**
 

As of June 30, 2008, we had $41.3million in consolidated cash, cash equivalents and short-term investments.  Other sources of liquidity include our credit facilitiesdescribed below.

 

**U.S. Credit Facility:**  OnFebruary 14, 2007, we entered into an amended and restated U.S. revolving credit facility which provides for up to $25.0 million,subject to borrowing base limitations.  The borrowing base is determined fromtime to time based on the lesser of:
-  $25.0 million, 
-  75% of our trailing twelve months' U.S. cash margin (defined as cash		resales and Solutions revenue, plus gain on sale of seismic data, less		cash cost of sales and cash SG&A expenses, before depreciation and		amortization expense), or
-  the sum of (1) 85% of eligible U.S. short term accounts (defined as		accounts that are not long term accounts and within 90 days of invoice		date), plus (2) the lesser of (a) 50% of eligible U.S. long term		accounts (defined as accounts with contracts for periods of performance		from one month to 18 months, where the account debtor makes payments		over the term of the contract) and (b) $7.5 million, plus (3) $15.0		million.
At June 30, 2008, there was no outstanding balance underthe facility and there was $25.0 million of availability.  

 

**Canadian Credit Facility:**  Ourwholly owned subsidiary, Olympic Seismic Ltd. ("Olympic"), has a revolving credit facility which allows it toborrow up to $5.0 million (Canadian), subject to an availability formula, byway of prime-based loans or letters of credit.  Available borrowings under thefacility are equivalent to a maximum of $5.0 million (Canadian), subject to arequirement that such borrowings may not exceed 75% of good accounts receivable(as defined in the agreement) of Olympic, less prior-ranking claims, if any,relating to inventory or accounts.  As of June 30, 2008, no amounts wereoutstanding on this revolving line of credit and $4.9 million (Canadian) wasavailable on the line of credit. 

* *

**9.75%Senior Unsecured Notes:**  On February 14, 2007, we issued in a privateplacement $400.0 million aggregate principal amount of our 9.75% Senior Notes. The proceeds from the notes were used to partially fund the transactions inconnection with the Merger.  Interest on these senior notes is payable in cash,semi-annually in arrears on February 15 and August 15.

 

**11.75%Senior Unsecured Notes:**  On July 2, 2004, we issued in a private placement $193.0 millionaggregate principal amount of our 11.75% Senior Notes.  As of June 30, 2008,$2.0 million of the 11.75% Senior Notes remain outstanding.  Interest on thesesenior notes is payable in cash, semi-annually in arrears on January 15 andJuly 15.
  
*(Index)*

 

**Contractual Obligations:**  As of June 30, 2008, we had outstanding debt andlease obligations, with aggregate contractual cash obligations summarized asfollows (in thousands):

 

Payments due by period

Remainder

of

2014 and

Contractual cash obligations

Total

2008

2009-2011

2012-2013

thereafter

Debt obligations (1)(2)

$

637,177

$

19,654

$

119,921

$

78,102

$

419,500

Capital lease obligations (2)

5,625

182

1,092

791

3,560

Operating lease obligations

5,353

625

3,671

1,057

-

Total contractual cash obligations

$

648,155

$

20,461

$

124,684

$

79,950

$

423,060

 

 

(1)

		Debt obligations include the face amount of our 9.75% Senior Notes		totaling $400.0 million and the 11.75% Senior Notes totaling $2.0		million.
		(2)
		Amounts include interest related to debt and capital lease obligations.
 

**Cash Flows from Operating Activities:** Cash flows provided byoperating activities were $47.3 million, $31.8  million and $5.6 million for the six months ended June30, 2008 (Successor Period), for the period from February 14, 2007 to June 30,2007 (Successor Period), and for the period from January 1, 2007 to February13, 2007 (Predecessor Period), respectively.  Operating cash flows for the firstsix months of 2008 increased from the first six months of 2007 primarily due tothe 2007 period including the payment of fees and expenses totalingapproximately $15.7 million related to the Merger partially offset by anincrease in interest expense paid in the first six months of 2008 ofapproximately $6.6 million.

** **

**Cash Flows from Investing Activities:**  Cash flows used in investingactivities were $49.6 million, $25.9 million and $8.4 million for the six monthsended June 30, 2008 (Successor Period), for the period from February 14, 2007to June 30, 2007 (Successor Period), and for the period from January 1, 2007 toFebruary 13, 2007 (Predecessor Period), respectively.  Cash expenditures forseismic data were $49.1 million, $25.8 million and $8.4 million for the six monthsended June 30, 2008 (Successor Period), for the period from February 14, 2007to June 30, 2007 (Successor Period), and for the period from January 1, 2007 toFebruary 13, 2007 (Predecessor Period), respectively.  The increase in cashinvested in seismic data for the first six months of 2008 compared to the first sixmonths of 2007 was primarily due to an increase in cash paid for new dataacquisition projects. 

*** ***

**Cash Flows from Financing Activities:**  Cash flows used in financingactivities were $0.1 million, $83.2 million and $0.4 million for the six monthsended June 30, 2008 (Successor Period), for the period from February 14, 2007to June 30, 2007 (Successor Period), and for the period from January 1, 2007 toFebruary 13, 2007 (Predecessor Period), respectively.  The period from February14, 2007 to June 30, 2007 included (i) the issuance of $400.0 million of our9.75% Senior Notes, (ii) a cash capital contribution of $153.5 million byValueAct Capital in connection with the Merger, (iii) acquisition of all of ouroutstanding common stock (other than shares owned by ValueAct Capital and certainshares owned by management investors) in connection with the Merger for a totalof $386.6 million, (iv) payment of $233.4 million of principal and tender andconsent fees on our 11.75% Senior Notes and (v) payment of $17.0 million offinancing fees in connection with the Merger.

** **

**Anticipated Liquidity:**  Our ability to make required paymentsof principal and interest on our 9.75% and 11.75% Senior Notes and onborrowings under our revolving credit facilities, incur additionalindebtedness, and comply with our various debt covenants, will depend primarilyon our ability to generate substantial operating cash flows. Over the next 12months, we expect to obtain the funds necessary to pay our operating, capitaland other expenses and principal and interest on our senior notes, borrowingsunder our revolving credit facilities and our other indebtedness, from ouroperating cash flows, cash and cash equivalents on hand and, if required, fromadditional borrowings (to the extent available under our revolving creditfacilities and otherwise subject to the borrowing base). Our ability to satisfyour payment obligations depends substantially on our future operating andfinancial performance, which necessarily will be affected by, and subject to,industry, market, economic and other factors. We will not be able to predict orcontrol many of these factors, such as economic conditions in the markets wherewe operate and competitive pressures. ******
 
*(Index)*
 *Deferred Taxes*
 

As of June 30, 2008, we had a net deferred tax liability of$12.0 million attributable to our Canadian operations and $4,000 attributableto U.S. state deferred taxes.  In the U.S., we had a deferred tax asset of $41.7million, all of which was fully offset by a valuation allowance.  Therecognition of the U.S. deferred 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.  As of June 30, 2008, it was more likely than not that all ofthe U.S. deferred tax asset will not be realized.

 

Section 382 of the InternalRevenue Code places a limit on certain tax attributes which were in existenceprior to a greater than 50% change in ownership.  The rules use a rollingthree-year period for determination of such change.  At February 14, 2007, we had a greater than 50% change inownership.  However, any limitations resulting from the application of theSection 382 rules are not expected to have a significant effect on us.

 

***Off-Balance Sheet Transactions*****

 

Other than operating leases, we donot maintain any off-balance sheet transactions, arrangements, obligations orother relationships with unconsolidated entities or others that are reasonablylikely to have a material current or future effect on our financial condition,changes in financial condition, revenue or expense, results of operations,liquidity, capital expenditures or capital resources.

 

***Capital Expenditures***

****During the six monthsended June 30, 2008, capitalexpenditures for seismic data and other property and equipment amounted to $59.4million.  Our capital expenditures for the full year of 2008 arepresently estimated to be $134.0 million.  The actual capital expenditures forthe six months ended June 30, 2008 and total 2008 estimated capitalexpenditures are comprised of the following (in thousands):  

 

Six Months

Full Year

Ended

Estimate 

June 30, 2008

for 2008

New data acquisition

$

43,880

$

91,000

Cash purchases of seismic data and other

1,241

8,700

Non-monetary exchanges

13,741

33,000

Other property and equipment

503

1,300

Total capital expenditures

59,365

134,000

Less: Non-monetary exchanges

(13,741

)

(33,000

)

Changes in working capital

3,966

3,966

Cash investment per

      statement of cash flows

$

49,590

$

104,966

 

 

The capital expenditures discussed above are within thecapital expenditure limitations imposed by our U.S. revolving credit facility.

 

Capital expenditures funded fromoperating cash flow are as follows (in thousands):

 

Six Months

Total

Ended

Estimate 

June 30, 2008

for 2008

Total capital expenditures

$

59,365

$

134,000

Less: Non-cash additions

(13,741

)

(33,000

)

Cash underwriting

(25,327

)

(53,000

)

Capital expenditures funded from	

      operating cash flow

$

20,297

$

48,000

 

As of June 30, 2008, we had capital expenditurecommitments related to data acquisition projects of approximately $41.9 million,of which we have obtained approximately $20.8 million of cash underwriting and $7.8million of underwriting for non-monetary exchanges.** **

 
 
*(Index)*

 

**Item 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed tomarket risk, including adverse changes in interest rates and foreign currencyexchange rates.  

 

**Interest Rate Risk**

****We may enter into variousfinancial instruments, such as interest rate swaps or interest rate lockagreements, to manage the impact of changes in interest rates.  As of June 30,2008, we did not have any open interest rate swap or interest rate lockagreements.  Therefore, our exposure to changes in interest rates primarilyresults from our short-term and long-term debt with both fixed and floatinginterest rates.

**Foreign Currency Exchange Rate Risk**

****Our Canadian subsidiaries conduct business in the Canadian dollarand are therefore subject to foreign currency exchange rate risk on cash flowsrelated to sales, expenses, financing and investing transactions in currenciesother than the U.S. dollar. Currently, we do not have any open forward exchangecontracts.

We have not had any significant changes in our market risk exposures during thequarter ended June 30, 2008.

 

**Item 4T.    CONTROLS AND PROCEDURES**

 

**(a)**  **Evaluation of Disclosure Controls and Procedures**

      

As of the end of the period covered by this report, ourmanagement carried out an evaluation, under the supervision and with theparticipation of our President and Chief Executive Officer and our ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany's disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act), pursuant to Exchange Act Rule13a-15. Based upon that evaluation, our President and Chief Executive Officeralong with our Chief Financial Officer concluded that the Company's disclosurecontrols and procedures as of June 30, 2008 are effective in ensuring thatinformation required to be disclosed in the reports we file or submit under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified in the rules and forms of the SEC, and that such informationis accumulated and communicated to our management, including our President andChief Executive Officer and our Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosures.

 

**(b)**  **Changes in Internal Control Over Financial Reporting**

      

There have been no changes in our internal controls overfinancial reporting during the quarter ended June 30, 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

**PART II -OTHER INFORMATION**

 

**Item 1.    LEGAL PROCEEDINGS**

 

See Part I, Item 1, Note J toConsolidated Financial Statements, which is incorporated herein by reference.

 

**Item 1A.  RISK FACTORS**

 

There have been no material changesfrom the risk factors as previously disclosed in our Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

**Item 2., 3., 4. and 5.     **Not applicable.
 
*(Index)*

 

**Item 6.    EXHIBITS**

 

3.1

Certificate  of Incorporation of the Company (incorporated by reference from Exhibit 3.1  to the Registration Statement on Form S-4, No. 333-144844, as filed with the  SEC on July 25, 2007).

3.2

Bylaws of  Seitel, Inc. (incorporated by reference from Exhibit 3.2 to the Registration  Statement on Form S-4, No. 333-144844, as filed with the SEC on July 25,  2007).

10.1

*

Seitel  Holdings, Inc. 2008 Restricted Stock and Restricted Stock Unit Plan, effective  April 8, 2008.

10.2

*

Form of Seitel  Holdings, Inc. Restricted Stock Unit Award Agreement

10.3

*

Seitel  Holdings, Inc. 2007 Non-Qualified Stock Option Plan, effective  February 14, 2007, as amended as of June 30, 2008.

31.1

*

Certification  of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  	pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

*

Certification  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  	pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

**

Certification  of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes−Oxley Act of 2002

32.2

**

Certification  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes−Oxley Act of 2002

 

_______________

 

*           Filed herewith.

**          Furnished, not filed, pursuant to 601(b)(32) ofRegulation S-K.
 
*(Index)*

 

****SIGNATURES
Pursuant to the requirements of the Securities and  Exchange Act of 1934, the registrant has duly caused this report

to be signed on its behalf by the undersigned thereunto  duly authorized.

**SEITEL, INC.**

Dated: August

13,

2008

/s/

Robert D. Monson

Robert D. Monson

Chief Executive Officer and President

Dated: August 

13,

2008

/s/

William J. Restrepo

William J. Restrepo

Chief Financial Officer
 
*(Index)*

EXHIBIT

INDEX

Exhibit

Title

3.1

Certificate  of Incorporation of the Company (incorporated by reference from Exhibit 3.1  to the Registration Statement on Form S-4, No. 333-144844, as filed with the  SEC on July 25, 2007).

3.2

Bylaws of  Seitel, Inc. (incorporated by reference from Exhibit 3.2 to the Registration  Statement on Form S-4, No. 333-144844, as filed with the SEC on July 25,  2007).

10.1

*

Seitel  Holdings, Inc. 2008 Restricted Stock and Restricted Stock Unit Plan, effective  April 8, 2008.

10.2

*

Form of Seitel  Holdings, Inc. Restricted Stock Unit Award Agreement

10.3

*

Seitel  Holdings, Inc. 2007 Non-Qualified Stock Option Plan, effective  February 14, 2007, as amended as of June 30, 2008.

31.1

*

Certification  of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  	pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

*

Certification  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  	pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

**

Certification  of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes−Oxley Act of 2002

32.2

**

Certification  of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes−Oxley Act of 2002

_______________

*     Filed herewith.

**    Furnished, notfiled, pursuant to Item 601(b)(32) of Regulation S-K.

 

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