----

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

**FORM 10-Q**

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

For the  quarterly period ended June 30, 2005

OR

[  ]

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

Commission File Number 0-14488

 

**SEITEL, INC.**

(Exact name of registrant as  specified in charter)

 
 

 
Delaware

76-0025431 

(State or other jurisdiction of  incorporation or organization)

(IRS Employer Identification  Number) 
   
 
10811 S. Westview Circle

 
Building C, Suite 100

77043 

Houston, Texas

(Zip Code) 

(Address of principal executive  offices)

    
 
Registrant's  telephone number, including area code:

(713) 881-8900

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes

[ X ]

No

[    ]

Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Act).

 

Yes

[    ]

No

[ X ]

 

Indicate by check mark whether theregistrant has filed all documents and reports required to be filed by Sections12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.

 

Yes

[ X ]

No

[    ]

Asof August 9, 2005, there were 152,908,111 shares of the Company's common stock,par value $.01 per share outstanding.

 

INDEX

Page
PART I.

FINANCIAL  INFORMATION

Item 1.

Financial Statements................................................................................  

3

 

Condensed  Consolidated Balance Sheets as of

June 30, 2005  (Unaudited) and December 31, 2004......................................................  

3

 

Condensed  Consolidated Statements of Operations (Unaudited)

for the  Three Months Ended June 30, 2005 and 2004....................................................  

4

 

Condensed  Consolidated Statements of Operations (Unaudited)

for the Six  Months Ended June 30, 2005 and 2004.......................................................  

5

 

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

for the  Three and Six Months Ended June 30, 2005 and 2004........................................  

6

 

Condensed  Consolidated Statements of Stockholders' Equity

for the  year ended December 31, 2004 and for the 

Six Months  Ended June 30, 2005 (Unaudited)..............................................................  

7

 

Condensed Consolidated  Statements of Cash Flows (Unaudited)

for the Six  Months Ended June 30, 2005 and 2004.......................................................  

8

 

Notes to Condensed  Consolidated Interim Financial Statements....................................  

10

 

Item 2.

Management's  Discussion and Analysis of

Financial  Condition and Results of Operations.............................................  

28

 

Item 3.

Quantitative  and Qualitative

Disclosures  About Market Risk..................................................................  

38

 

Item 4.

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

38

 

PART II.

OTHER  INFORMATION.............................................................................................  

38

 

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

40

 
 
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,

2005

2004

ASSETS

      Cash and  equivalents

$

47,764

$

43,285

      Restricted cash

83

162

      Receivables

            Trade, net

32,319

41,164

            Notes and  other, net

1,313

2,149

      Net seismic data  library

130,701

151,230

      Net property and equipment

9,562

11,077

      Oil and gas  operations held for sale

185

223

      Investment in  marketable securities

39

33

      Prepaid expenses,  deferred charges and other 

15,267

14,159

      Deferred income  taxes

1,210

-
                        
      TOTAL ASSETS

$

238,443

$

263,482
                        
LIABILITIES AND  STOCKHOLDERS' EQUITY

      Accounts payable  and accrued liabilities

$

23,657

$

30,472

      Oil and gas  operations held for sale

27

28

      Debt

            Senior Notes

185,036

188,726

            Notes  payable

478

697

      Obligations under  capital leases

4,377

5,294

      Deferred income  taxes

-

606

      Deferred revenue

40,928

53,488

TOTAL LIABILITIES

254,503

279,311
                        
COMMITMENTS AND CONTINGENCIES  
                        
STOCKHOLDERS' EQUITY

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

            5,000,000  shares; none issued

-

-

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

            400,000,000  shares; issued and outstanding 

            152,257,111  at June 30, 2005 and 151,414,143

            at December  31, 2004

1,523

1,514

      Additional  paid-in capital

236,590

235,081

      Retained deficit

(255,225

)

(254,384

)

      Deferred  compensation - restricted stock

(1,883

)

(1,125

)

      Notes receivable  from officers and employees

            for stock  purchases

(9

)

(21

)

      Accumulated other  comprehensive income

2,944

3,106

TOTAL STOCKHOLDERS'  DEFICIT

(16,060

)

(15,829

)
                        
TOTAL LIABILITIES AND  STOCKHOLDERS' EQUITY

$

238,443

$

263,482
   The accompanying notes are an integral part of these condensed consolidated financial statements. 
Index

 
SEITEL, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)*(In thousands, except per share amounts)* 
Three Months Ended June 30,

2005

2004
                     
REVENUE

$

35,961

$

35,096
                     
EXPENSES

      Depreciation and amortization

23,665

24,339

      Cost of sales

49

135

      Selling, general and administrative expenses

7,318

7,760

31,032

32,234
                     
INCOME FROM OPERATIONS

4,929

2,862
                     
Interest expense, net

(6,029

)

(5,320

)

Foreign currency exchange losses

(625

)

(723

)

Loss on sale of security

(11

)

-

Reorganization items

-

(1,885

)
                     
Loss from continuing operations before income taxes

(1,736

)

(5,066

)
                     
Benefit for income taxes

(1,039

)

(395

)
                     
Loss from continuing operations

(697

)

(4,671

)
                     
Income from discontinued operations

2

9
                     
NET LOSS

$

(695

)

$

(4,662

)
                     
Basic and diluted income (loss) per share:

      Loss from continuing operations

$

-

$

(.18

)

      Income from discontinued operations

-

-

      Net loss

$

-

$

(.18

)
                     
Weighted average number of common and

      common equivalent shares - basic and diluted

152,276

25,376
The accompanying notes are an integral part of these condensed consolidated financial statements. 
Index

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

Six Months Ended June 30,

2005

2004                     
REVENUE

$

83,267

$

76,360
                     
EXPENSES

      Depreciation and amortization

56,922

48,422

      Cost of sales

88

209

      Selling, general and administrative expenses

15,338

16,214

72,348

64,845
                     
INCOME FROM OPERATIONS

10,919

11,515
                     
Interest expense, net

(11,979

)

(10,268

)

Foreign currency exchange losses

(817

)

(808

)

Loss on sale of security

(11

)

-

Reorganization items

-

(6,032

)
                     
Loss from continuing operations before income taxes  

(1,888

)

(5,593

)

Provision (benefit) for income taxes

(1,028

)

311
                     
Loss from continuing operations  

(860

)

(5,904

)
                     
Income from discontinued operations

19

44
                     
NET LOSS  

$

(841

)

$

(5,860

)
                     
Basic and diluted loss per share:

      Loss from continuing operations

$

(.01

)

$

(.23

)

      Income from discontinued operations

-

-

      Net loss

$

(.01

)

$

(.23

)
                     
Weighted average number of common and  

      common equivalent shares - basic and diluted

152,065

25,376
The accompanying notes are an integral part of these condensed consolidated financial statements. 
Index

 

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

Three Months Ended
 

Six Months Ended

June 30,

June 30,

2005
 

2004
 

2005

2004
                                       
Net loss

$

(695

)

$

(4,662

)

$

(841

)

$

(5,860

)
                                       
Unrealized gains  (losses) on securities held as

      available for  sale:

      Unrealized net  holding gains (losses) arising

            during  period

1

(14

)

10

(79

)

      Less:  Reclassification adjustment for

            losses  included in income

11

-

11

-
                                       
Foreign currency  translation adjustments

(173

)

(321

)

(183

)

(774

)
                                       
Comprehensive loss

$

(856

)

$

(4,997

)

$

(1,003

)

$

(6,713

)

The accompanying notes are an integral part ofthese condensed consolidated financial statements.
 
Index
  
SEITEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

*(Inthousands, except share amounts)*

 

Accum-

ulated

Deferred

Notes

Other

Compen-

Receivable

Compre-

Additional

Retained

sation - 

from

hensive

Common Stock

Paid-In

Earnings 

Treasury Stock

Restricted

Officers &

Income

Shares

Amount

Capital

(Deficit)

Shares

Amount

Stock

Employees

(Loss)
                                                                                 
Balance, December 31, 2003

25,811,601

$

258

$

166,630

$

(159,731

)

(435,918

)

$

(5,373

)

$

-

$

(124

)

$

2,062

 Proceeds from issuance of

     common stock, net of

     expenses

125,000,000

1,250

53,639

-

-

-

-

-

-

 Issuance of restricted stock

1,038,460

10

1,137

-

-

-

(1,147

)

-

-

 Issuance of common

     stock warrant

-

-

16,489

-

-

-

-

-

-

 Amortization of deferred

     compensation cost

-

-

-

-

-

-

22

-

-

 Retirement of treasury shares

(435,918

)

(4

)

(2,814

)

(2,555

)

435,918

5,373

-

-

-

 Payments received on notes 

     receivable from officers

     and employees

-

-

-

-

-

-

-

103

-

 Net loss

-

-

-

(92,098

)

-

-

-

-

 Foreign currency translation

     adjustments

-

-

-

-

-

-

-

1,106

 Unrealized loss on marketable 

     securities 

-

-

-

-

-

-

-

(62

)

Balance, December 31, 2004

151,414,143

1,514

235,081

(254,384

)

-

-

(1,125

)

(21

)

3,106

 Issuance of restricted stock

881,032

9

1,140

-

-

-

(1,149

)

-

-

 Cancellation of restricted stock

(38,064

)

-

(48

)

-

-

-

48

-

-

 Amortization of deferred 

     compensation costs

-

-

-

-

-

-

343

-

-

 Accrual for restricted stock

     issuance under performance

     plan

-

-

401

-

-

-

-

-

-

 Expense related to stock options

-

-

16

-

-

-

-

-

-

 Payments received on notes 

     receivable from officers

     and employees

-

-

-

-

-

-

-

12

-

 Net loss

-

-

-

(841

)

-

-

-

-

-

 Foreign currency translation

     adjustments

-

-

-

-

-

-

-

-

(183

)

 Unrealized gain on marketable 

     securities 

-

-

-

-

-

-

-

-

10

 Reclassification adjustment for

    losses on marketable securities

     included in income

-

-

-

-

-

-

-

-

11

Balance, June 30, 200 (unaudited)

152,257,111

$

1,523

$

236,590

$

(255,225

)

-

$

-

$

(1,883

)

$

(9

)

$

2,944

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

 

SEITEL, INC. ANDSUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

*(in thousands)*

 

* *

Six Months Ended June 30,

2005

2004

Cash flows from operating activities:

Reconciliation of net loss to net cash provided by operating  activities

      of continuing operations:

             Net loss

$

(841

)

$

(5,860

)

             Income from discontinued operations, net of tax

(19

)

(44

)

             Depreciation and amortization

56,922

48,422

             Deferred income tax benefit

(1,786

)

(85

)

             Amortization of deferred financing costs

793

1,365

             Amortization of debt discount

310

-

             Amortization of deferred compensation

343

-

             Allowance for collection of trade receivable

-

75

             Non-cash compensation expense

401

-

             Non-cash expense related to stock options

16

-

             Non-cash sales

(10,491

)

(10,935

)

             Loss on sale of security

11

-

             Loss on sale of property and equipment

1

-

             Decrease (increase) in receivables

8,951

(4,442

)

             Decrease in other assets

1,171

901

             Increase (decrease) in deferred revenue

(6,533

)

165

             Increase (decrease) in accounts payable and other  liabilities

(3,396

)

8,784

                        Net cash provided by operating activities of

                        continuing operations

45,853

38,346
                     
Cash flows from investing activities:

      Cash invested in seismic data  

(36,424

)

(33,054

)

      Cash paid to acquire property and equipment

(542

)

(411

)

      Cash received from disposal of property and equipment

13

-

      Cash from sale of security

4

-

      Decrease in restricted cash

79

41

             Net cash used in investing activities of continuing  operations

(36,870

)

(33,424

)
                     
Cash flows from financing activities:

      Principal payments on senior notes

(4,000

)

-

      Principal payments on notes payable

(219

)

(17

)

      Principal payments on capital lease obligations

(864

)

(658

)

      Costs of debt and equity transactions

(185

)

(1,419

)

      Payments on notes receivable from officers and employees

24

55

             Net cash used in financing activities of continuing  operations

(5,244

)

(2,039

)
                     
Effect of exchange rate changes  

609

1,825

Net cash provided by discontinued operations

131

1,134

Net increase  in cash and equivalents

4,479

5,842
                     
Cash and equivalents at beginning of period

43,285

44,362

Cash and equivalents at end of period

$

47,764

$

50,204
 The accompanying notes are an integral part of these condensed consolidated financial statements. 
Index
SEITEL, INC. AND SUBSIDIARIES
CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - continued

*(in thousands)*

 

* *

Six Months Ended June 30,

2005

2004

Supplemental disclosure of cash flow information:

      Cash paid during period for:

            Interest

$

12,591

$

480

            Income taxes

$

5

$

163

Supplemental schedule of non-cash investing and financing activities:

      Additions to seismic data library

$

4,789

$

8,229
  The accompanying notes are an integral part of these condensed consolidated financial statements.  
Index
**SEITEL, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited)June 30, 2005NOTE A-BASIS OF PRESENTATION **
The accompanyingunaudited financial statements of Seitel, Inc. and its subsidiaries (the"Company") have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions of Regulation S-X.  Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States for complete financial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Certainreclassifications have been made to the amounts in the prior year's financialstatements to conform to the current year's presentation.  The condensedconsolidated balance sheet of the Company as of December 31, 2004, has beenderived from the audited balance sheet of the Company as of that date.  Operatingresults for the six months ended June 30, 2005 are not necessarily indicativeof the results that may be expected for the year ending December 31, 2005. These unaudited financial statements should be read in conjunction with thefinancial statements and notes thereto for the year ended December 31, 2004contained in the Company's Annual Report filed on Form 10-K with the Securitiesand Exchange Commission ("SEC").

**Contractual Obligations:**  Asof June 30, 2005, the Company had approximately $344.9 million of outstandingdebt and lease obligations, with aggregate contractual cash obligationssummarized as follows (in thousands):

 

Payments due by period

Remainder of

2006 -

2009-

2011 and

Contractual cash obligations

Total

2005

2008

2010

thereafter

Debt obligations (1) (2)

$

334,005

$

11,224

$

66,841

$

44,559

$

211,381

Capital lease obligations (2)

7,167

1,772

870

605

3,920

Operating lease obligations 

3,763

498

1,857

921

487

                                          
Total contractual cash obligations

$

344,935

$

13,494

$

69,568

$

46,085

$

215,788

 

(1)  Debtobligations include the face amount of the 11.75% senior notes totaling $189.0million.

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

**NOTE B-REORGANIZATION PROCEEDINGS AND PLAN OFREORGANIZATION**

On July 21, 2003 (the "Petition Date"), Seitel,Inc. and its wholly owned U.S. subsidiaries filed voluntary petitions forrelief under Chapter 11 of the United States Bankruptcy Code (the"Bankruptcy Code") in the United States Bankruptcy Court for theDistrict of Delaware (the "Bankruptcy Court") (Chapter 11 Case No.03-12227 (PJW)).  Seitel, Inc. and its 30 U.S. subsidiaries that filedpetitions are collectively referred to herein as the "Debtors" andthe Chapter 11 Cases of these entities are collectively referred to herein asthe "Cases."  By order of the Bankruptcy Court dated July 25, 2003,the Cases were jointly administered.  From the Petition Date until theeffective date of its plan of reorganization, the Debtors operated theirbusiness and managed their properties as "Debtors-in-possession" pursuantto Sections 1107(a) and 1108 of the Bankruptcy Code.  No trustee was appointedin the Cases.  

None of the Company's direct or indirect subsidiaries or affiliatesincorporated in Canada or other non-U.S. jurisdictions filed Chapter 11.  Suchnon-filing, non-U.S. based subsidiaries and affiliates are called"non-Debtors".   

On January 17, 2004, the Debtorsfiled with the Bankruptcy Court the third amended joint plan of reorganization(the "Plan"), which subsequently was amended on February 6, 2004. ThePlan was supported by the Official Committee of Equity Holders of Seitel, Inc.,as well as Berkshire Hathaway, Inc. and Ranch Capital L.L.C., holders of $255million aggregate principal amount of the Company's old senior unsecured notes,and was accepted by the holders of more than 99.6% of the shares of theCompany's common stock who voted on the Plan.  On March 18, 2004, theBankruptcy Court confirmed the Plan and on July 2, 2004, the Plan becameeffective.
 
Index

In accordance with the Plan:
- All of the Company's     outstanding allowed pre-petition claims were fully paid, in cash, together     with post-petition interest, except with respect to any disputed claims     and any claims that were reinstated under the Plan.
- On July 2, 2004, all 25,375,683     outstanding shares of the Company's common stock were cancelled and     converted into:
-  25,375,683 shares of reorganized common stock, representing allof the outstanding shares of reorganized common stock on the effective date ofthe Plan, and
-  warrants to purchase an aggregate of 125,000,000 shares ofreorganized common stock ("Stockholder Warrants") at an exerciseprice of $.60 per share exercisable through August 2, 2004.
-  To the extent the Stockholder Warrants were not exercised in full prior to August 2, 2004, Mellon HBV Alternative Strategies LLC ("Mellon HBV") agreed (for itself and on behalf of certain of its affiliated funds and managed accounts, collectively the "Standby Purchasers") to purchase, at $.60 per share, after the Stockholder Warrants expired on August 2, 2004 but in no event later than August 12, 2004 (the "Guaranty Performance Date"), all shares of reorganized common stock not purchased upon the exercise of the Stockholder Warrants.   
-  As compensationfor Mellon HBV's obligation to act as Standby Purchasers, the Company issued tothem on August 12, 2004 warrants to purchase 15,037,568 shares of the Company'sreorganized common stock (the "Standby Purchaser Warrants"). TheStandby Purchaser Warrants are exercisable until August 12, 2011 at an initialexercise price of $.72 per share, subject to adjustment upon the occurrence ofcertain events.

On August 2, 2004, theexpiration date of the warrants, 24,183,206 Stockholder Warrants were exercisedand the Company issued 119,126,154 shares of common stock for $0.60 per shareor $71,475,693 in the aggregate.  On August 12, 2004, Mellon HBV purchased fromthe Company, at $0.60 per share, 5,873,846 shares of common stock not purchasedas a result of the exercise of Stockholder Warrants, for an aggregate of$3,524,307.  In total, the Company received $75 million of gross proceedsthrough the exercise of Stockholder Warrants and the sale of standby purchaseshares to Mellon HBV.

On July 2, 2004, the Companycompleted the private placement of $193.0 million face value 11.75% new seniornotes due 2011 for proceeds of $188.5 million which were placed in escrowpending the completion of the issuance of common stock pursuant to the Plan,among other things.  On August 12, 2004, the proceeds from the debt offering,net of underwriters' fees, of $182.9 million were released from escrow to theCompany.

The Company utilized the netproceeds from the exercise of Stockholder Warrants and the sale of shares toMellon HBV, the net proceeds from the sale of the new senior notes along withavailable cash to pay, in full, allowed pre-petition claims together withpost-petition interest totaling approximately $291.0 million.  The payment ofallowed pre-petition claims was completed on August 13, 2004.
 
Index

Reorganization items under the Cases are expense orincome items that were incurred or realized by the Debtors because they were inreorganization. These items include, but are not limited to, professional feesand similar types of expenses incurred directly related to the Cases, lossaccruals or gains or losses resulting from activities of the reorganizationprocess, and interest earned on cash accumulated by the Debtors because theywere not paying their pre-petition liabilities. For the three and six monthsended June 30, 2004, reorganization items were as follows (in thousands):

Three Months

Six Months

Ended

Ended

June 30, 2004

June 30, 2004

Professional fees

$

1,985

$

5,309

Interest Income

(46

)

(77

)

Accelerated amortization of deferred debt issue costs

-

1,007

Reduction of pre-petition liabilities

(89

)

(515

)

Other

35

308

Total

$

1,885

$

6,032
 
**NOTE C-REVENUE RECOGNITION**
*Revenue from Data Acquisition*
 

The Company generates revenue when it creates a newseismic survey that is initially licensed by one or more of its customers touse the resulting data.  The initial licenses usually provide the customer witha limited exclusivity period, which will normally last for six months afterfinal delivery of the processed data.  The payments for the initial exclusivelicenses are sometimes referred to as underwriting or prefunding.  Customersmake periodic payments throughout the creation period, which generallycorrespond to costs incurred and work performed.  These payments arenon-refundable.

Revenue from the creation of new seismic data isrecognized throughout the creation process using the proportional performancemethod based upon costs incurred and work performed to date as a percentage oftotal estimated costs and work required.  Management believes that this methodis the most reliable and representative measure of progress for its datacreation projects.  The duration of most data creation projects is generallyless than one year.  Under these contracts, the Company creates new seismicdata designed in conjunction with its customers and specifically suited to thegeology of the area using the most appropriate technology available. 

The Company outsources the substantial majority of thework required to complete data acquisition projects to third partycontractors.  The Company's payments to these third party contractors comprisethe substantial majority of the total estimated costs of the project and arepaid throughout the creation period.  A typical survey includes specificactivities required to complete the survey; each activity has value to thecustomers.  Typical activities, that often occur concurrently, include:
-  permitting for land access, mineral rights, and regulatoryapproval;
-  surveying;
-  drilling for the placement of energy sources; 
-  recording the data in the field; and 
-  processing the data.

The customers paying for the initial exclusive licensesreceive legally enforceable rights to any resulting product of each activity. The customers also receive access to and use of the newly acquired, processeddata.  

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

 
*Revenue from Non-Exclusive Data Licenses*
******The Company recognizes a substantial portion of its revenue from datalicenses sold after any exclusive license period.  These are sometimes referredto as resale licensing, post acquisition license sales or shelf sales.

 

These sales fall under the following four basic forms ofnon-exclusive license contracts.
-  Specific license contract - The     customer licenses and selects data from the data library at the time the     contract is entered into and holds this license for a long-term period.-  Library card license contract -     The customer initially receives only access to data. The customer may then     select specific data, from the collection of data to which it has access,     to hold long-term under its license agreement. The length of the selection     periods under the library card contracts is limited in time.-  Review and possession license     contract - The customer obtains the right to review a certain quantity of     data for a limited period of time. During the review period, the customer     may select specific data from that available for review to hold long-term     under its license agreement. Any data not selected for long-term licensing     must be returned to the Company at the end of the review period.-  Review only license contract -     The customer obtains rights to review a certain quantity of data for a     limited period of time, but does not obtain the right to select specific     data to hold long-term.
The Company's non-exclusivelicense contracts specify the following:
-  that all customers must sign a license agreement governing theuse of data;
-  the specific payment terms, generally ranging from 30 days to 18months, and that such payments are non-cancelable and non-refundable; 
-  the actual data that is accessible to the customer; and 
-  that the data is licensed in     its present form, where is and as is and the Company is under no     obligation to make any enhancements, modifications or additions to the     data unless specific terms to the contrary are included.  
Revenue from the non-exclusivelicensing of seismic data is recognized when the following criteria are met:
-  the Company has an arrangement with the customer that is validatedby a signed contract;
-  the sales price is fixed and determinable; 
-  collection is reasonably assured;
-  the customer has selected the specific data or the contract hasexpired without full selection; and
-  the license term has begun.

Copies of the data are available to the customerimmediately upon request.

For licenses that have been invoiced but have not met theaforementioned criteria, the revenue is deferred along with the related directcosts (primarily sales commissions).  This normally occurs under the librarycard license contracts, review and possession license contracts 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 for licensing.
*Revenue from Non-Monetary Exchanges*
In certain cases, the Company will take ownership of acustomer's seismic data in exchange for a non-exclusive license to selecteddata from the Company's library.  Occasionally, in connection with specificdata acquisition contracts, the Company receives both cash and ownership ofseismic data from the customer as consideration for the underwriting of newdata acquisition.  These exchanges are referred to as non-monetary exchanges. A non-monetary exchange always complies with the following criteria: 
- the data license delivered is always distinct from the     data received;
- the customer forfeits ownership of its data; and
- the Company retains ownership in its data.
 
Index

This exchange is not a "like kind" exchangebecause the Company receives ownership of distinct seismic data to be added toits library, and this data may be relicensed by the Company on a continuingbasis, in exchange for a data license. Once data selection or creation iscompleted, the exchange represents the culmination of the earnings process withthe customer and is not merely an exchange between two seismic companies.

In non-monetary exchange transactions, the Company recordsa data library asset for the seismic data received at the time the contract isentered into and recognizes revenue on the transaction in equal value inaccordance with its policy on revenue from data licenses, that is, when thedata 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 contracts discussed above.  These transactions are valued at thefair value of the data received or delivered, whichever is more readilydeterminable.

Fair value of the data exchanged is determined using amulti-step process as follows:
-  First, 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 for licenses in the United States and for the prior twelve     months for licenses in Canada are evaluated. In evaluating the range of     cash transactions, the Company does not consider transactions that are     disproportionately high or low.-  Second, the Company considers     the value of the data 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 as well as the cost that would     be required to create the data.  In the United States, the Company applies     a limitation on the value it assigns per square mile on the data     exchanged. In Canada, in the event of a difference greater than 2% between     the value of the license granted and the value of the data received, the     Company assigns the lower value to the exchange.  -  Third, the Company obtains     concurrence from an independent third party on the portfolio of all     non-monetary exchanges 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.
Due to the Company's revenue recognition policies, revenuerecognized on non-monetary exchange transactions may not occur at the same timethe seismic data acquired is recorded as an asset.  The activity related tonon-monetary exchanges was as follows (in thousands):

 

Three Months

Six Months

Ended June 30,

Ended June 30,

2005

2004

2005

2004
                                       
Seismic data library  additions

$

3,797

$

5,068

$

4,789

$

8,148
                                       
Revenue recognized  based on

   selections of data

5,037

5,526

9,794

9,016
                                       
Revenue recognized  related to

   acquisition  contracts

310

26

697

1,838
*Revenue from Seitel Solutions Business Unit*
Revenue from Seitel Solutionsbusiness unit ("Solutions") is recognized as the services for reproduction anddelivery of seismic data are provided to customers.

**NOTE D-SEISMIC DATA LIBRARY**

** **

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

For internally created data, the capitalized costs include costs paid to thirdparties for the acquisition of data and related permitting, surveying and otheractivities associated with the data creation activity.  In addition, theCompany capitalizes certain internal costs related to processing the createddata.  Such costs include salaries and benefits of the Company's processingpersonnel and certain other costs incurred for the benefit of the processingactivity.  The Company believes that the internal processing costs capitalizedare not greater than, and generally are less than, those that would be incurredand capitalized if such activity were performed by a third party.  Capitalizedcosts for internal data processing were $427,000 and $436,000 and for the threemonths ended June 30, 2005 and 2004, respectively, and $841,000 and $872,000for the six months ended June 30, 2005 and 2004, respectively.  

*Data Library Amortization*

The Company amortizes its seismic data library using the greater of theamortization that would result from the application of the income forecastmethod subject to a minimum amortization rate or a straight-line basis over theuseful life of the data.  Effective July 1, 2004, the estimated useful life ofthe Company's seismic data was changed to four years (see *"Revision ofUseful Life"* below).  For existing surveys less than four years of ageat July 1, 2004, the revision in useful life is being recognized prospectivelyover the remaining useful life of each seismic survey.  With respect to eachsurvey in the data library, the useful life policy is applied from the timesuch survey is available for licensing to customers on a non-exclusive basis,since some data in the library may not be licensed until an exclusivity period(usually six months) has lapsed.

The Company applies the income forecast method by forecasting the 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.  Effective July 1, 2004, the lowest amortization rate the Companyapplies using the income forecast method is 70%.  In addition, in connectionwith the forecast reviews and updates, the Company evaluates the recoverabilityof its seismic data library, and if required under Statement of FinancialAccounting Standards ("SFAS") No. 144, "Accounting for theImpairment and Disposal of Long-Lived Assets," records an impairmentcharge with respect to such data.  See discussion on *"Seismic DataLibrary Impairment"* below.

The actual rate of amortization depends on the specific seismic surveyslicensed and selected by the Company's customers during the period.  Theamortization rates vary by component and, effective July 1, 2005, range from alow of 70% to a high of 73% with a weighted average rate of 70.02% based on thenet book value of each component compared with the net book value of the entireseismic data library as of such date.  Additionally, certain library componentshave been fully amortized; consequently, no amortization expense is required onrevenue recorded for these library components.

The greater of the income forecast or straight-line amortization policy isapplied quarterly on a cumulative basis at the individual survey level. Underthis policy, the Company first records amortization using the income forecastmethod.  The cumulative amortization recorded for each survey is then comparedwith the cumulative straight-line amortization. If the cumulative straight-lineamortization is higher for any specific survey, additional amortization expenseis recorded, resulting in accumulated amortization being equal to thecumulative straight-line amortization for such survey.  (See *"Revisionof Useful Life"* below.)  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.  
* 
Index

*Revision of Useful Life*

 

The Company reevaluated its estimate of the useful life ofits seismic data library and, effective July 1, 2004, revised the estimateduseful life of all of its seismic data library to four years from five yearsfor offshore data and from seven years for onshore data.  In making thisdecision, the Company considered a number of factors, including, among others,the useful lives used by others in the industry, additional amortizationcharges recorded, previous impairment charges recorded and seismic industryconditions.  With respect to each survey in the data library, the useful lifepolicy is applied from the time such survey is available for licensing tocustomers generally, since some data in the library may not be licensed untilan exclusivity period (usually six months) has lapsed.  For existing surveysless than four years of age at July 1, 2004, the revision in useful life isbeing recognized prospectively over the remaining useful life of each seismicsurvey.

 

Since certain surveys within the seismic data library wereolder than the revised estimate of useful life, the Company recorded additionalamortization expense of $59.1 million on July 1, 2004, the date therevision became effective.  The effect from this change on reported results wasa reduction in net income of $0.9 million, or $.01 per share, for the threemonths ended June 30, 2005 and a reduction in net income of $3.4 million, or $.02per share, for the six months ended June 30, 2005.

 

*Seismic Data Library Impairment*

******The Company evaluates its seismic data library 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) value-added products, (c) oceanbottom cable data, (d) shelf data, and (e) deep water data; (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.

 

As events or conditions require,the Company evaluates the recoverability of its seismic data library inaccordance with SFAS No. 144.  The Company evaluates its seismic data libraryfor impairment whenever events or changes in circumstances indicate that thecarrying amounts may not be recoverable.  The Company considers the level of salesperformance in each component compared to projected sales, as well as industryconditions, among others, to be key factors in determining when its seismicdata should be evaluated for impairment.  In evaluating sales performance ofeach component, the Company generally considers three consecutive quarters ofactual performance below forecasted sales, among other things, to be anindicator of potential impairment.

****In accordance with SFAS No. 144, the impairment evaluation is based firston a comparison of the undiscounted future cash flows over each component'sremaining estimated useful life with the carrying value of each librarycomponent.  If the undiscounted cash flows are equal to or greater than thecarrying value of such component, no impairment is recorded.  If undiscountedcash flows are less than the carrying value of any component, the forecast offuture cash flows related to such component is discounted to fair value andcompared with such component's carrying amount. The difference between thelibrary component's carrying amount and the discounted future value of theexpected 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 baseand expected changes in technology. The cash flow estimates exclude expectedfuture revenues attributable to non-monetary data exchanges and future datacreation projects.

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

 
 
Index

**NOTE E-DISCONTINUED OPERATIONS**

**** In June 2002, the Company's Board of Directors unanimouslyadopted a plan to dispose of the Company's oil and gas operations by sale.Accordingly, the Company's consolidated financial statements report the oil andgas operations as discontinued operations.  In January 2004, the Company sold aportion of its remaining oil and gas assets for approximately $1,287,000.  TheCompany continues to market its remaining oil and gas assets for sale.

Revenue from discontinued operations was $38,000 for each of the three monthsended June 30, 2005 and 2004, and $87,000 and $110,000 for the six months endedJune 30, 2005 and 2004, respectively. Pre-tax income from discontinuedoperations was $2,000 and $9,000 for the three months ended June 30, 2005 and2004, respectively, and $19,000 and $44,000 for the six months ended June 30,2005 and 2004, respectively. 

The Company uses the full-cost method of accounting for its oil and gasoperations.

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

 

June 30,

December 31,

2005

2004
                     
11.75% Senior  Notes

$

189,000

$

193,000

Revolving  Credit Facility

-

-

Subsidiary  revolving line of credit

-

-

Note payable  to former executive

397

415

Term loans

81

282

189,478

193,697

Less:  Debt  discount

(3,964

)

(4,274

)

$

185,514

$

189,423

**11.75%Senior Notes:**  OnJuly 2, 2004, the Company completed a private placement of Senior UnsecuredNotes ("Senior Notes") in the aggregate principal amount of $193.0million.  The Senior Notes were offered at a discount of 2.325% from theirprincipal amount at maturity to yield 12.25% and resulted in cash proceeds,before offering expenses, of approximately $188.5 million received by theCompany on August 12, 2004, following release of the funds from escrow. Interest on the Senior Notes is payable semi-annually on January 15 and July 15at the annual rate of 11.75%.  The Senior Notes mature on July 15, 2011.  TheSenior Notes are unsecured and are guaranteed by substantially all of theCompany's U.S. subsidiaries on a senior basis.  The Senior Notes containrestrictive covenants that limit the Company's ability to, among other things,incur additional indebtedness, make capital expenditures in excess of specifiedamounts, pay dividends and complete mergers, acquisition and sales of assets. As required by their terms, the Senior Notes were exchanged for senior notes oflike amounts and terms in a publicly registered exchange offer in February2005.

From time to time on or before July 15, 2007, theCompany may redeem up to 35% of the aggregate principal amount of the SeniorNotes with the net proceeds of equity offerings at a redemption price equal to111.75% of the principal amount, plus accrued and unpaid interest.  Subject tocertain conditions, if at the end of each fiscal year the Company has excesscash flow (as defined in the indenture) in excess of $5.0 million, the Companywill be required to use 50% of the excess cash flow to fund an offer torepurchase the Senior Notes on a pro rata basis at 100% of its principalamount, plus accrued and unpaid interest.  If the Company has less than $5.0million in excess cash flow at the end of any fiscal year, such excess cashflow will be carried forward to succeeding years, and such repurchase offerwill be required to be made in the first year in which the cumulative excesscash flow for all years in which there has not been an offer is at least $5.0million.  Such repurchase offer will be required only if there is no event ofdefault under the Company's revolving credit facilities prior to and aftergiving effect to the repurchase payment.  Because of excess cash flow generatedfor the year ended December 31, 2004, in the first quarter of 2005 the Companymade a repurchase offer for principal of up to $4.8 million to the holders ofits Senior Notes.  $4.0 million principal amount of Senior Notes were tendered,and the Company made payment, including accrued interest, of $4.1 million onMay 5, 2005.  Upon a change of control (as defined in the indenture), eachholder of the Senior Notes will have the right to require the Company to offerto purchase all of such holder's notes at a price equal to 101% of theprincipal amount, plus accrued and unpaid interest.
 
Index

**Revolving Credit Facility:**  On April 16, 2004, theCompany entered into a revolving credit facility with Wells Fargo Foothill,Inc., as lender, to which a revolving loan commitment of $30 million, subjectto borrowing base limitations, was made available on July 2, 2004.  Interest ispayable at an applicable margin above either LIBOR or the prime rate. Borrowings under the revolving credit facility are secured by a first priority,perfected security interest in and lien on substantially all of the Company's U.S. assets and a pledge of all of the issued and outstanding capital stock of the Company's U.S. subsidiaries.  The revolving credit facility contains covenants requiring the Companyto achieve and maintain certain financial results, and restricts, among otherthings, the amount of capital expenditures, the ability to incur additionalindebtedness and the ability to grant additional liens.  The revolving creditfacility requires the payment of an unused line fee of .375% per annum payablein arrears.

**Subsidiary Revolving****Line of Credit:**  TheCompany's wholly owned subsidiary, Olympic Seismic Ltd. ("Olympic"),has a revolving credit facility, which allows it to borrow up to $5 million(Canadian) subject to an availability formula by way of prime-based loans,bankers' acceptances or letters of credit. The rate applicable to borrowings isthe bank's prime rate plus 0.35% per annum and the bankers' acceptances is 1.50%per annum.  Letter of credit fees are based on scheduled rates in effect at thetime of issuance. The facility is secured by the assets of Olympic, SEIC TrustAdministration Ltd. (as sole trustee of, and for and on behalf of, SEICBusiness Trust) and SEIC Holdings, Ltd., but is not guaranteed by Seitel, Inc.or any of its other U.S. subsidiaries.  However, all intercompany debt owing byOlympic, SEIC Trust Administration Ltd., SEIC Business Trust or SEIC Holdings,Ltd. to Seitel, SEIC Partners' Limited Partnership or to any Seitel U.S. subsidiary(approximately $73.0 million (Canadian) at June 30, 2005) has beensubordinated to the repayment of the revolving credit facility.  Availableborrowings under the facility are equivalent to a maximum of $5 million(Canadian), subject to a requirement that such borrowings may not exceed 75% ofgood accounts receivable (as defined in the agreement) of SEIC TrustAdministration, less prior-ranking claims, if any, relating to inventory oraccounts. The facility is subject to repayment upon demand and is availablefrom time to time at the bank's sole discretion.

**Note Payable to Former Executive:**  In connectionwith the settlement of certain litigation, the Company entered into a notepayable to a former executive consisting of payments of $6,417 per month for 36months commencing June 2003, and payments of $6,000 per month for 84 monthscommencing June 2006.  The note is non-interest bearing.  The note isguaranteed by Olympic.  

**Other:**  In 2004, theCompany entered into a short-term financing arrangement totaling $361,000 inorder to finance certain of its insurance premiums.  The loan is for less thanone year, matures in July 2005 and bears interest at the rate of 4.5%.

**NOTE G-EARNINGS PER SHARE**

In accordance with SFAS No. 128, "Earnings per Share," basic earningsper share is computed based on the weighted average shares of common stockoutstanding during the periods.  Diluted earnings per share is computed basedon the weighted average shares of common stock plus the assumed issuance of commonstock for all potentially dilutive securities.  For the three and six monthsended June 30, 2005 and 2004, the Company did not have any potentially dilutivesecurities.  A weighted average number of options and warrants to purchase 6,453,000,1,969,000, 6,385,000 and 2,013,000 shares of common stock were outstandingduring the second quarter of 2005 and 2004 and the six months ended June 30,2005 and 2004, respectively, but were not included in the computation ofdiluted per share income because they were antidilutive.  
 
Index

The Company accounts for employee stock-basedcompensation using the intrinsic value method prescribed by AccountingPrinciples Board ("APB") Opinion No. 25, "Accounting for StockIssued to Employees."  APB Opinion No. 25 generally does not requirecompensation costs to be recorded on options which have exercise prices atleast equal to the market price of the stock on the date of grant. Accordingly,no compensation cost has been recognized for the Company's stock-based plans.Had compensation cost for the Company's stock-based compensation plansbeen determined based on the fair value at the grant dates for awards underthose plans consistent with the optional accounting method prescribed by SFASNo. 123, "Accounting for Stock-Based Compensation" and expensedpro-rata over the vesting period of the awards, the Company's net loss and lossper share would have been reduced to the pro forma amounts indicated below (inthousands, except per share data):      
Three Months Ended    
Six Months Ended       
June 30, 
    
June 30,        
2005
    
2004    
2005    
2004
 
Net income (loss):

      As reported

$

(695

)

$

(4,662

)

$

(841

)

$

(5,860

)

      Less:  Total stock-based  employee expense

            determined under SFAS  No. 123, net of tax

-

(396

)

-

(956

)

      Pro forma

$

(695

)

$

(5,058

)

$

(841

)

$

(6,816

)

Basic and diluted income (loss) per share:

      As reported

$

-

$

(.18

)

$

(.01

)

$

(.23

)

      Pro forma

$

-

$

(.20

)

$

(.01

)

$

(.27

)

For issuances of restricted stock to employees,compensation expense is determined as the difference between the purchaseprice, if any, and the fair market value of such stock on the date ofissuance.  Such compensation expense is recognized pro-rata over the vesting periodsof the awards.

**NOTE H-STATEMENT OF CASH FLOW INFORMATION**The Company had restricted cashat June 30, 2005 and December 31, 2004 of $83,000 and $162,000, respectively,related to collateral on a seismic operations bond.

During the six months ended June30, 2005 and 2004, the Company had non-cash additions to its seismic datalibrary comprised of the following (in thousands):  

* *

Six Months Ended June 30,

2005

2004
                     
Non-monetary exchanges

$

4,789

$

8,148

Offset of certain data  creation costs against amounts due from the

customer for data  license fees and certain data creation costs that

were paid to the Company's vendors from an escrow account

maintained jointly by the Company and its customer

-

81

Total non-cash  additions

$

4,789

$

8,229

Non-cash sales consistedof the following for the six months ended June 30, 2005 and 2004 (inthousands):

* *

Six Months Ended June 30,

2005

2004
                     
Acquisition revenue on underwriting from non-monetary

exchange contracts

$

697

$

1,838

Licensing revenue from selections on non-monetary exchange  contracts

9,794

9,016

Offset of certain data creation costs against amounts due  from the

customer for data license fees and certain data creation  costs that

were paid to the Company's vendors from an escrow account

maintained jointly by the Company and its customer

-

81

Total non-cash revenue

$

10,491

$

10,935
  
Index

 

Operatingcash flows resulting from reorganization items for the six months ended June30, 2004 included the following (in thousands):

 

Six Months

Ended June 30,

2004

Interest  received on cash accumulated

     because  of the Chapter 11 proceeding

$

(77

)

Professional  and other fees paid for services 

     rendered  in connection with the Chapter 11 proceeding

5,721

$

5,644

** **

**NOTEI-COMMITMENTS AND CONTINGENCIES**
 Litigation
 

See "Note B - ReorganizationProceedings and Plan of Reorganization" for a detailed discussion of theCompany's Chapter 11 reorganization and the Plan.

 

The Company and certain of its former and currentofficers and directors were named as defendants in eleven lawsuits brought asclass actions alleging violations of the federal securities laws, all of whichwere consolidated by an Order entered August 7, 2002, under Cause No. 02-1566,styled *In re Seitel, Inc. Securities Litigation*, in the United StatesDistrict Court for the Southern District of Texas. The Court appointed a leadplaintiff and lead counsel for plaintiffs, who subsequently filed aconsolidated amended complaint, which added the Company's previous auditors,Ernst & Young LLP, as a defendant. The consolidated amended complaintalleged that during a proposed class period of May 5, 2000 through April 1,2002, the defendants violated sections 10(b) and 20(a) of the Securities andExchange Act of 1934 by overstating revenues in violation of generally acceptedaccounting principles. The plaintiffs sought an unspecified amount of actualand exemplary damages, costs of court, pre- and post-judgment interest andattorneys' and experts' fees.  The Company, its named current and/or formerdirectors and officers, and the class representative entered into a memorandumof understanding, which contemplated allowance of a "class claim" toassert the rights of the class in the Chapter 11 Cases and an ultimatesettlement for cash to be funded out of the Debtors' cash and directors' andofficers' insurance policies. The memorandum of understanding was approved uponnotice and a hearing by order of the Bankruptcy Court dated December 10, 2003. Pursuantthereto, the Company funded its portion of the settlement amount ($980,000) toan escrow account in 2003. The parties have since finalized their settlementagreement, which contains terms substantially in accordance with the terms ofthe memorandum of understanding. On December 29, 2004, the Bankruptcy Courtgranted Seitel's motion for approval of the parties' full settlement agreement.By order dated July 29, 2005, the United States District Court approved the parties'settlement. The carrier of the Company's directors' and officers' insurancepolicies is obligated to timely fund the balance of the settlement (itsportion), in accordance with the terms of the order.  The action is expected tocontinue as between the class representative and Ernst & Young LLP.

 

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

 
 
Index

 

The Company and its subsidiary,Seitel Data, Ltd., were parties to a class action lawsuit for geophysicaltrespass entitled *Juan O. Villarreal v. Grant Geophysical, Inc.*, et al.,Cause No. DC-00-214, in the 229th District Court of Starr County, Texas that was initiated on April 1, 2002. The plaintiffs sued a number of defendants,including the Company and Seitel Data, Ltd. The plaintiffs alleged that certaindefendants conducted unauthorized 3-D seismic exploration of the mineralinterests by obtaining seismic data on adjoining property, and sold theinformation obtained to other defendants. The plaintiffs sought an unspecifiedamount of damages. All defendants obtained summary judgments dismissing theplaintiffs' claims, and the plaintiffs appealed to the San Antonio Court ofAppeals under Cause No. 04-02-00674-CV. During the pendency of the Company'sbankruptcy proceedings, the San Antonio Court of Appeals affirmed the trialcourt's decision as to the Company's co-defendants and stayed the appeal as tothe Company. The Texas Supreme Court denied plaintiffs Petition for Certiorari,refusing to hear the matter.  The plaintiff filed an unliquidated claim (amountunspecified) in the Chapter 11 Cases. The Company objected to this claim, whichwas withdrawn by order of the Bankruptcy Court dated June 29, 2005.  This June2005 order includes the plaintiffs' agreement to dismiss their appeal, and theparties are preparing an agreed order of dismissal to be filed with the SanAntonio Court of Appeals.

 

The Company sued its former in-housecounsel and law firm in *Seitel, Inc. v. Cynthia Moulton and FranklinCardwell & Jones, P.C.,* Cause No. 2003-09151 in the 127th Judicial District Court of Harris County, Texas. The suit alleges negligence, breach offiduciary duty and breach of contract surrounding the settlement of a personallawsuit against the former chief executive officer and other aspects ofrepresentation. The Company seeks recovery for fees paid of approximately$750,000 and related expenses. Initial pleadings were filed on February 21,2003 and discovery is underway.  On July 29, 2005, the parties attempt atmediation was not successful.  The trial, originally set for October 2005, isexpected to be reset to a later date.  The defendants have joined Paul Frameand Kevin Fiur, both of who were the Company's former chief executive officers,in the action. 

 

In addition to the lawsuitsdescribed above, the Company is involved from time to time in ordinary, routineclaims and lawsuits incidental to its business. In the opinion of management,uninsured losses, if any, resulting from the ultimate resolutions of thesematters should not be material to the Company's financial position or resultsof operation. 

 

It is not possible to predict ordetermine the outcomes of the legal actions brought against it or by it, or toprovide an estimate of all additional losses, if any, that may arise. At June30, 2005, the Company did not have any amounts accrued related to the claimsset forth above, as all amounts have been paid or the Company believes it isnot probable that any amounts will be paid relative to the litigation andclaims set forth above.  However, if one or more of the parties were to prevailagainst the Company in one or more of the cases described above that have notbeen settled, the amounts of any judgments against the Company or settlementsthat the Company may enter into, could be material to the Company's financialstatements for any particular reporting period.
NOTE J-SUPPLEMENTAL GUARANTORS CONSOLIDATINGCONDENSED FINANCIAL INFORMATION
On July 2, 2004, Seitel, Inc.(the "Parent") completed a private placement of 11.75% SeniorUnsecured Notes in the aggregate principal amount of $193.0 million of which$189.0 million was outstanding at June 30, 2005. Seitel, Inc.'s paymentobligations under the Senior Notes are jointly and severally guaranteed bycertain of its 100% owned U.S. subsidiaries ("GuarantorSubsidiaries"). All subsidiaries of Seitel, Inc. that do not guaranty theSenior Notes are referred to as Non-Guarantor Subsidiaries. 

The consolidating condensed financialstatements are presented below and should be read in connection with the CondensedConsolidated Financial Statements of the Company. Separate financial statementsof the Guarantor Subsidiaries are not presented because (i) the GuarantorSubsidiaries are wholly-owned and have fully and unconditionally guaranteed theSenior Notes on a joint and several basis, and (ii) the Company's managementhas determined such separate financial statements are not material toinvestors. 

The following consolidatingcondensed financial information presents: the consolidating condensed balancesheets as of June 30, 2005 and December 31, 2004, and the consolidatingcondensed statements of operations and statements of cash flows for the sixmonths ended June 30, 2005 and 2004 of (a) the Parent; (b) the GuarantorSubsidiaries; (c) the Non-Guarantor Subsidiaries; (d) elimination entries; and(e) the Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiarieson 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

**CONSOLIDATINGCONDENSED BALANCE SHEET**

**As of June 30, 2005**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **

** **

**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

** **
                                                
ASSETS

   Cash and equivalents

$

-

$

37,185

$

10,579

$

-

$

47,764

   Restricted cash

-

83

-

-

83

   Receivables

      Trade, net

-

23,749

8,570

-

32,319

      Notes and other,  net

-

38

1,275

1,313

   Intercompany  receivables (payables)

268,346

(249,334

)

(19,012

)

-

-

   Investment in  subsidiaries

(94,511

)

238,047

46,704

(190,240

)

-

   Net seismic data  library

-

80,360

52,609

(2,268

)

130,701

   Net other property and equipment

-

5,259

4,303

-

9,562

   Oil and gas  operations held for sale

-

185

-

-

185

   Investment in  marketable securities

-

-

39

-

39

   Prepaid expenses,  deferred charges

      and other assets

7,050

7,506

711

-

15,267

   Deferred income taxes

-

-

1,210

-

1,210
                                                
   TOTAL ASSETS

$

180,885

$

143,078

$

106,988

$

(192,508

)

$

238,443
                                                
LIABILITIES AND  STOCKHOLDERS'

   EQUITY

   Accounts payable and  accrued liabilities

$

12,903

$

5,767

$

4,987

$

-

$

23,657

   Oil and gas  operations held for sale

-

27

-

-

27

   Senior Notes

185,036

-

-

-

185,036

   Notes payable

397

81

-

-

478

   Obligations under  capital leases

1,554

-

2,823

-

4,377

   Deferred revenue

-

31,362

9,566

-

40,928

TOTAL LIABILITIES

199,890

37,237

17,376

-

254,503
                                                
STOCKHOLDERS' EQUITY

   Common stock

1,523

-

-

-

1,523

   Additional paid-in  capital

236,590

-

-

-

236,590

   Parent investment

-

209,770

25,866

(235,636

)

-

   Retained earnings  (deficit)

(255,225

)

(103,911

)

60,781

43,130

(255,225

)

   Deferred  compensation - restricted stock 

(1,883

)

-

-

-

(1,883

)

   Notes receivable  from officers

      and employees

-

(9

)

-

-

(9

)

   Accumulated other  comprehensive

      income (loss)

(10

)

(9

)

2,965

(2

)

2,944

TOTAL STOCKHOLDERS'  EQUITY (DEFICIT)

(19,005

)

105,841

89,612

(192,508

)

(16,060

)
                                                
TOTAL LIABILITIES AND

   STOCKHOLDERS' EQUITY  

$

180,885

$

143,078

$

106,988

$

(192,508

)

$

238,443
 
Index

**CONSOLIDATINGCONDENSED STATEMENT OF OPERATIONS**

**For the Six MonthsEnded June 30, 2005**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **

** **

**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

** **
                                                
REVENUE

$

-

$

54,810

$

30,916

$

(2,459

)

$

83,267
                                                
EXPENSES:

   Depreciation and  amortization

-

35,737

21,408

(223

)

56,922

   Cost of sales

-

77

11

-

88

   Selling, general and

      administrative  expenses

1,032

9,710

7,055

(2,459

)

15,338

1,032

45,524

28,474

(2,682

)

72,348
                                                
INCOME (LOSS) FROM  OPERATIONS

(1,032

)

9,286

2,442

223

10,919
                                                
Interest expense, net

(1,127

)

(9,506

)

(1,346

)

-

(11,979

)

Foreign currency  exchange gains (losses)

-

5

(822

)

-

(817

)

Loss on sale of  security

-

-

(11

)

-

(11

)
                                                
Income (loss) from  continuing operations 

   before income taxes  and equity in 

   income of  subsidiaries 

(2,159

)

(215

)

263

223

(1,888

)

Provision (benefit) for  income taxes

-

23

(1,051

)

-

(1,028

)

Equity in income of  subsidiaries

1,318

1,324

-

(2,642

)

-
                                                
Income (loss) from  continuing operations 

(841

)

1,086

1,314

(2,419

)

(860

)
                                                
Income from  discontinued operations,

   net of tax

-

19

-

-

19
                                                
NET INCOME (LOSS)

$

(841

)

$

1,105

$

1,314

$

(2,419

)

$

(841

)
 
Index

**CONSOLIDATINGCONDENSED STATEMENT OF CASH FLOWS**

**For the Six MonthsEnded June 30, 2005**

(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 of

                continuing  operations

$

(13,449

)

$

41,910

$

17,392

$

-

$

45,853
                                                
Cash flows from investing activities:

       Cash  invested in seismic data

-

(16,573

)

(19,851

)

-

(36,424

)

       Cash  paid to acquire property

            and  equipment

-

(428

)

(114

)

-

(542

)

       Cash  received from disposal of property

            and  equipment

-

-

13

-

13

       Cash  from sale of security

-

-

4

-

4

       Decrease  in restricted cash

-

79

-

-

79

           Net  cash used in investing activities of 

                 continuing operations

-

(16,922

)

(19,948

)

-

(36,870

)
                                                
Cash flows from financing activities:

       Principal  payments on senior notes

(4,000

)

-

-

-

(4,000

)

       Principal  payments on notes payable

(18

)

(201

)

-

-

(219

)

       Principal  payments on capital

            lease  obligations

(848

)

-

(16

)

-

(864

)

       Costs  of debt and equity transactions

(185

)

-

-

-

(185

)

       Payments  on notes receivable from 

            officers,  employees and director

-

24

-

-

24

       Intercompany  transfers

18,500

(18,500

)

-

-

-

           Net  cash provided by (used in) 

                financing  activities of

                continuing  operations

13,449

(18,677

)

(16

)

-

(5,244

)
                                                
Effect of  exchange rate changes

-

(2

)

611

-

609

Net cash  provided by discontinued

       operations

-

131

-

-

131

Net increase (decrease)  in cash

       and  equivalents

-

6,440

(1,961

)

-

4,479

Cash and  equivalents at beginning of period

-

30,745

12,540

-

43,285

Cash and  equivalents at end of period

$

-

$

37,185

$

10,579

$

-

$

47,764
 
Index

**CONSOLIDATINGCONDENSED BALANCE SHEET**

**As of December 31,2004**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **

** **

**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

** **
                                                
ASSETS

   Cash and equivalents

$

-

$

30,745

$

12,540

$

-

$

43,285

   Restricted cash

-

162

-

-

162

   Receivables

      Trade, net

-

27,754

13,410

-

41,164

      Notes and other,  net

-

143

2,006

-

2,149

   Intercompany  receivables (payables)

273,516

(255,917

)

(17,599

)

-

-

   Investment in  subsidiaries

(94,501

)

235,512

46,602

(187,613

)

-

   Net seismic data  library

-

102,537

51,183

(2,490

)

151,230

   Net other property and equipment

-

5,837

5,240

-

11,077

   Oil and gas  operations held for sale

-

223

-

-

223

   Investment in  marketable securities

-

-

33

-

33

   Prepaid expenses,  deferred charges

      and other assets

7,509

5,377

1,273

-

14,159
                                                
   TOTAL ASSETS

$

186,524

$

152,373

$

114,688

$

(190,103

)

$

263,482
                                                
LIABILITIES AND  STOCKHOLDERS'

   EQUITY

      Accounts payable  and accrued liabilities

$

13,905

$

10,625

$

5,942

$

-

$

30,472

      Oil and gas  operations held for sale

-

28

-

-

28

      Senior Notes

188,726

-

-

-

188,726

      Notes payable

415

282

-

-

697

      Obligations under  capital leases

2,402

-

2,892

-

5,294

      Deferred income  taxes

-

-

606

-

606

      Deferred revenue

-

36,714

16,774

-

53,488

TOTAL LIABILITIES

205,448

47,649

26,214

-

279,311
                                                
STOCKHOLDERS' EQUITY

   Common stock

1,514

-

-

-

1,514

   Additional paid-in  capital

235,081

-

-

-

235,081

   Parent investment

-

209,770

25,882

(235,652

)

-

   Retained earnings  (deficit)

(254,384

)

(105,016

)

59,467

45,549

(254,384

)

   Deferred  compensation - restricted stock 

(1,125

)

-

-

-

(1,125

)

   Notes receivable  from officers

      and employees

-

(21

)

-

-

(21

)

   Accumulated other  comprehensive

      income (loss)

(10

)

(9

)

3,125

-

3,106

TOTAL STOCKHOLDERS'  EQUITY (DEFICIT)

(18,924

)

104,724

88,474

(190,103

)

(15,829

)
                                                
TOTAL LIABILITIES AND 

   STOCKHOLDERS' EQUITY  

$

186,524

$

152,373

$

114,688

$

(190,103

)

$

263,482
** **
Index

**CONSOLIDATINGCONDENSED STATEMENT OF OPERATIONS**

**For the Six MonthsEnded June 30, 2004**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **

** **

**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

** **
                                                
REVENUE

$

-

$

55,136

$

25,003

$

(3,779

)

$

76,360
                                                
EXPENSES:

   Depreciation and  amortization

-

33,239

15,398

(215

)

48,422

   Cost of sales

-

174

35

-

209

   Selling, general and  administrative

      expenses

980

10,945

8,068

(3,779

)

16,214

980

44,358

23,501

(3,994

)

64,845
                                                
INCOME (LOSS) FROM  OPERATIONS

(980

)

10,778

1,502

215

11,515
                                                
Interest expense, net

(315

)

(9,296

)

(657

)

-

(10,268

)

Foreign currency  exchange losses

-

-

(808

)

-

(808

)

Reorganization items

-

(6,026

)

(6

)

-

(6,032

)
                                                
Income (loss) from  continuing operations

   before income taxes  and equity in 

   loss of subsidiaries

(1,295

)

(4,544

)

31

215

(5,593

)

Provision for income  taxes

-

11

300

-

311

Equity in loss of  subsidiaries

(4,565

)

(257

)

-

4,822

-
                                                
Loss from continuing  operations

(5,860

)

(4,812

)

(269

)

5,037

(5,904

)
                                                
Income (loss) from  discontinued 

   operations, net of  tax

-

47

(3

)

-

44
                                                
NET LOSS

$

(5,860

)

$

(4,765

)

$

(272

)

$

5,037

$

(5,860

)
 
Index

**CONSOLIDATINGCONDENSED STATEMENT OF CASH FLOWS**

**For the Six MonthsEnded June 30, 2004**

(In thousands)

** **

** **

** **

** **

** **

** **

** **

** **

**Non-**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Guarantor**

** **

** **

**Guarantor**

** **

** **

**Consolidating**

** **

** **

**Consolidated**

** **

** **

**Parent**

** **

** **

**Subsidiaries**

** **

** **

**Subsidiaries**

** **

** **

**Eliminations**

** **

** **

**Total**

** **
                                                
Cash flows  from operating activities:

       Net cash  provided by operating  

             activities of  continuing operations

$

928

$

23,084

$

14,334

$

-

$

38,346
                                                
Cash flows from investing activities:

       Cash  invested in seismic data

-

(15,753

)

(17,301

)

-

(33,054

)

       Cash  paid to acquire property

            and  equipment

-

(276

)

(135

)

-

(411

)

       Decrease  in restricted cash

-

41

-

-

41

            Net  cash used in investing 

             activities of continuing operations

-

(15,988

)

(17,436

)

-

(33,424

)
                                                
Cash flows from financing activities:

       Principal  payments on notes payable

(17

)

-

-

-

(17

)

       Principal  payments on capital

            lease  obligations

(620

)

-

(38

)

-

(658

)

       Costs  of debt and equity transactions

(1,419

)

-

-

-

(1,419

)

       Payments  on notes receivable from 

            officers,  employees and director

-

55

-

-

55

       Intercompany  transfers

1,128

(1,128

)

-

-

-

            Net  cash used in financing activities

                        of  continuing operations

(928

)

(1,073

)

(38

)

-

(2,039

)
                                                
Effect of  exchange rate changes

-

-

1,825

-

1,825

Net cash  provided by (used in)

       discontinued  operations

-

1,139

(5

)

-

1,134

Net increase  (decrease) in cash

       and  equivalents

-

7,162

(1,320

)

-

5,842

Cash and  equivalents at beginning of period

-

41,125

3,237

-

44,362

Cash and  equivalents at end of period

$

-

$

48,287

$

1,917

$

-

$

50,204
 
Index

**NOTE K-RECENT ACCOUNTINGPRONOUNCEMENTS**

In December 2002, the FASB issuedSFAS No. 148 - "Accounting for Stock-Based Compensation - Transition andDisclosure - an amendment of FASB Statement No. 123."  In December 2004,the FASB issued SFAS No. 123(R), "Share-Based Payment," whichsupersedes SFAS No. 148.  SFAS No. 123(R) establishes standards fortransactions in which an entity exchanges its equity instruments for goods orservices.  This standard requires a public entity to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award.  This eliminates the exception toaccount for such awards using the intrinsic method previously allowable underAPB Opinion No. 25.  In March 2005, the SEC issued Staff Accounting Bulletin("SAB") 107. Among other things, SAB 107 provides interpretive guidance relatedto the interaction between SFAS No. 123(R) and certain SEC rules andregulations, as well as provides the SEC staff's views regarding the valuationof share-based payment arrangements for public companies.  On April 14, 2005,the SEC issued press release 2005-57 which amends the compliance date of SFASNo. 123(R).  As a result, SFAS No. 123(R) will be effective for annualreporting periods beginning on or after June 15, 2005.  The Company currentlyexpects to adopt SFAS No. 123(R) effective January 1, 2006.  The Company hasnot yet quantified the financial impact of the adoption of this standard.

In December 2004, the FASB issuedSFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB OpinionNo. 29".  This statement addresses the measurement of exchanges of nonmonetaryassets.  It eliminates the exception from fair value measurement fornonmonetary exchanges of similar productive assets in paragraph 21(b) of APBOpinion No. 29, *Accounting for Nonmonetary Transactions*, and replaces itwith an exception for exchanges that do not have commercial substance.  Thisstatement specifies that a nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange.  SFAS No. 153 will be effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.  TheCompany does not expect the adoption of SFAS No. 153 to have any effect on itsfinancial position or results of operations.

 

**NOTE L-INCOME TAXES**

 

As of June 30, 2005,the Company had a netdeferred tax asset of $1.2 million attributable to its Canadian operations.  Asof June 30, 2005, the Company determined that it was more likely than not that a portionof the deferred tax asset related to the Canadian operations would be realized;thus, the net deferred tax asset resulted.  In the U.S., the Company had a net deferredtax asset of $89.6 million, all of which was fully offset by a valuationallowance. Additionally, in Canada, the Company had a remaining net deferred tax assetof $5.2 million, all of which was fully offset by a valuation allowance.  Therecognition of such remaining deferred tax assets will not occur until suchtime that it is more likely than not that some portion or all of the deferredtax asset will be realized.  As of June 30, 2005, the recovery of suchremaining deferred tax assets is not assured of realization.

 
Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
**CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING INFORMATION**

****This Quarterly Report on Form 10-Q contains forward-looking statements.  Statementscontained in this report about Seitel, Inc.'s future outlook, prospects,strategies and plans, and about industry conditions, demand for seismicservices and the future economic life of our seismic data are forward-looking. All statements that express belief, expectation, estimates or intentions, aswell as those that are not statements of historical fact, are forward looking.The words "proposed", "anticipates","anticipated", "will", "would","should", "estimates" and similar expressions are intendedto identify forward-looking statements.  Forward-looking statements representour reasonable present belief and are based on our current expectations andassumptions with respect to future events. While we believe our expectationsand assumptions are reasonable, they involve risks and uncertainties beyond ourcontrol that could cause the actual results or outcome to differ materiallyfrom the expected results or outcome. Such risks and uncertainties include,without limitation, our ability to comply with the terms of our final judgmentof permanent injunction by the SEC, the impact on our results of operations ofour significant amount of debt, our significant amount of debt service andinterest expense, our ability to obtain and maintain normal terms with ourvendors and service providers, our ability to maintain contracts that arecritical to our operations, changes in the oil and gas industry or the economygenerally, changes in the exploration budgets of our seismic data customers,actual customer demand for our seismic data and related services, the timingand extent of changes in commodity prices for natural gas, crude oil andcondensate and natural gas liquids, conditions in the capital markets andequity markets during the periods covered by the forward-looking statements andour ability to obtain alternate debt or equity financing on satisfactory termsif internally generated funds are insufficient to fund our capital needs.  Theforegoing and other risk factors are discussed in our Annual Report on Form10-K filed with the SEC for the year ended December 31, 2004, and certainrisks and uncertainties are discussed below.  

The forward-looking statementscontained in this report speak only as of the date hereof.  Except as requiredby the federal and state securities laws, we undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or any other reason.  All forward-lookingstatements attributable to Seitel, Inc. or any person acting on its behalf areexpressly qualified in their entirety by the cautionary statements contained orreferred to in our 2004 Annual Report filed on Form 10-K and in our 2005 quarterlyreports filed with the SEC. In light of these risks, uncertainties andassumptions, the forward-looking events discussed in this Quarterly Report maynot occur.
 
Index

**Overview**

 

**General**

** **

We have ownership in an extensive libraryof onshore and offshore seismic data that we offer for license to oil and gascompanies. We believe that our library of onshore seismic data is one of thelargest available for licensing in the United States and Canada. We also have ownership in a library of offshore data covering parts of the U.S. Gulf ofMexico shelf and certain deep water areas in the western and central U.S. Gulfof Mexico. We generate revenue primarily by licensing data from our datalibrary and from new data acquisition substantially underwritten or paid for byclients.  Oil and gas companies use seismic data in oil and gas exploration anddevelopment efforts to increase the probability of drilling success.  Byparticipating in underwritten, nonexclusive surveys or purchasing licenses toexisting data, oil and gas companies can obtain access to surveys that they maynot otherwise be able to afford to acquire on an exclusive basis.

 

Our primary areas of focus areonshore U.S. and Canada and, to a lesser extent, offshore U.S. Gulf of Mexico. These markets continue to experience major changes.  The major internationaloil companies are increasing their focus on exploration opportunities outsidethe U.S., with independent oil and gas companies responsible for the majorityof current U.S. drilling activity.  Production decline rates are acceleratingworldwide and are the most pronounced in mature fields of North America. However, commodity prices for oil and natural gas are at high levels and thedemand for natural gas in the U.S. could exceed supply during the next two tothree years unless new production is brought on line in the U.S. and Canada.  Liquid natural gas imports, while growing, are not expected to make up theforecasted shortfall in the supply of natural gas in the U.S. in the near term.

We believe that we will be ableto continue the improvement of our return on investment over the next yearprovided the overall demand for seismic data improves with the strongercommodity prices.  Our clients continue to seek our services to create data inthe U.S. and in Canada, while the level of underwriting or pre-funding for theseprojects has been strong throughout 2004 and the current year.  Licensing data "off the shelf" does notrequire the longer planning and lead times like new data creation and thus ismore likely to fluctuate quarter to quarter.

We filed bankruptcy in mid-2003and our Plan of Reorganization became effective on July 2, 2004.  Our clientscontinued to engage our services and license our data throughout our bankruptcyperiod. We have both grown the library and continued to license our data atsteady levels during the last two years. 

Since 2002, we have eliminatednon-core business activities, improved our capital discipline and reducedoperating costs.  We believe our operating cost structure is aligned with ourcurrent level of business.  Costs and expenses associated with ourrestructuring efforts and bankruptcy were significant.  Since emerging frombankruptcy, such fees and expenses have been substantially reduced.  Theprincipal amount of our indebtedness has been reduced; however, our annualinterest expense is higher on the debt we now have.

**Principal FactorsAffecting Our Business**

** **

Ourbusiness is dependent upon a variety of factors, many of which are beyond ourcontrol. The following are those that we consider to be principal factorsaffecting our business.

 

***Demand for Seismic Data.***  Demand for our products and services iscyclical due to the nature of the energy industry.  In particular, demand forour seismic data services depends upon exploration, production, development andfield management spending by oil and gas companies and, in the case of new datacreation, their willingness to forgo ownership in the seismic data. Capitalexpenditures by oil and gas companies depend upon several factors, includingactual and forecasted petroleum commodity prices and the companies' ownshort-term and strategic plans. These capital expenditures may also be affectedby worldwide economic conditions. Demand for our seismic data is more likely tobe influenced by natural gas prices rather than crude oil prices due to thegeographic location of our seismic data. The recent level of high commodityprices has resulted in many oil and gas companies focusing their efforts ondevelopment drilling to produce existing reserves rather than expending timeand capital on exploration.  We do not believe this situation represents along-term trend given new prospects are needed to find oil and gas reserves.

 
 
Index

 

***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 equity capital to fund theirexploration, production, development and field management activities.Significant changes in the private equity market and the availability ofprivate equity capital could have a material impact on the ability of suchcompanies to obtain funding 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 thosecompanies affected by this activity.

 

***Natural Gas Reserve Replacement.***  Oil and gas reservesare currently being depleted at a rate estimated by industry analysts of 5% to10% per year for the major oil and gas operators. As a result, we believe thereis an increasing need in the oil and gas industry to replace such reserves,which is expected to increase the demand for our seismic data.

 

***Government Regulation.***  Our operations are subject to a variety offederal, provincial, state, foreign and local laws and regulations, includingenvironmental laws. We invest financial and managerial resources to comply withthese laws and related permit requirements. Existing laws or regulations andthe adoption of new laws or regulations limiting or increasing exploration orproduction activities by oil and gas companies may have a material effect onour business operations.

 

**Non-GAAP Key Performance Measures**

** **

Managementconsiders a variety of performance measures in evaluating and managing ourfinancial condition and operating performance at various times and from time totime. Certain of these performance measures are non-GAAP financial measures.Generally, a non-GAAP financial measure is a numerical measure of a company'sperformance, financial position or cash flows that either excludes or includesamounts that are not normally excluded or included in the most directlycomparable measure calculated and presented in accordance with United States generally accepted accounting principles, or GAAP. These non-GAAP measuresare not in accordance with, nor are they a substitute for, GAAP measures. Thesenon-GAAP measures are intended to supplement our presentation of our financialresults that are prepared in accordance with GAAP.

 

Thefollowing are the key performance measures considered by management.

 

**Cash Resales**

 

Cash resales result frominvoicing customers for purchases of licenses to data from our library. Weexpect cash resales to generally follow a consistent trend over severalquarters, while considering our normal seasonality. Volatility in this trendover several consecutive quarters could indicate changing market conditions. The following is a reconciliation of this non-GAAP financial measure to themost directly comparable GAAP financial measure, total revenue (in thousands):

 

Three  Months Ended

Six  Months Ended

June  30,

June  30,

2005

2004

2005

2004

Cash resales

$

21,020

$

19,096

$

45,232

$

37,325

Other revenue components:

     Acquisition revenue

3,420

6,676

15,839

25,849

     Non-monetary exchanges

6,236

5,858

6,841

8,938

     Deferral of revenue

(12,057

)

(9,636

)

(24,724

)

(23,991

)

     Selections of data

15,788

11,818

37,413

25,779

     Solutions and other

1,554

1,284

2,666

2,460

Total revenue, as reported

$

35,961

$

35,096

$

83,267

$

76,360
** 
Index

**Cash Margin**

 

Cash margin includes cash resales plusall other cash revenues other than from data acquisitions, less cash selling,general and administrative expenses and cost of goods sold.  We believe thismeasure is helpful in determining the level of cash from operations we haveavailable for debt service and funding of capital expenditures (net of theportion funded or underwritten by our customers).  The following is aquantitative reconciliation of this non-GAAP financial measure to the mostdirectly comparable GAAP financial measure, operating income (in thousands):

 

Three  Months Ended

Six  Months Ended

June  30,

June  30,

2005

2004

2005

2004

Cash margin  

$

15,613

$

12,485

$

33,232

$

23,362

Add (subtract) other revenue components not  

      included in cash margin:

            Acquisition revenue

3,420

6,676

15,839

25,849

            Non-monetary exchanges

6,236

5,858

6,841

8,938

            Deferral of revenue

(12,057

)

(9,636

)

(24,724

)

(23,991

)

            Selections of data

15,788

11,818

37,413

25,779

Less:

            Depreciation and amortization

(23,665

)

(24,339

)

(56,922

)

(48,422

)

            Non-cash operating expenses

(406

)

-

(760

)

-

Operating income, as reported

$

4,929

$

2,862

$

10,919

$

11,515

 

**Cash Operating Income**

 

We define cash operatingincome as cash revenue (derived primarily from seismic data acquisitions, cashlicensing resales and Solutions) less cost of sales and selling, general andadministrative expenses.  We believe that this measure is helpful indetermining the level of cash flow we have available for debt service andfunding of capital expenditures, although management uses this measure to alesser extent than cash margin.  The following is a quantitative reconciliationof this non-GAAP financial measure to the most directly comparable GAAPfinancial measure, operating income (in thousands):

** **

Three  Months Ended

Six  Months Ended

June  30,

June  30,

2005

2004

2005

2004

Cash operating income

$

18,317

$

19,135

$

47,614

$

47,373

Add (subtract) other revenue  components

      not included in cash  operating income:

            Acquisition  underwriting from non-

            monetary exchanges

310

26

697

1,838

            Non-monetary exchanges

6,236

5,858

6,841

8,938

            Deferral of revenue

(12,057

)

(9,636

)

(24,724

)

(23,991

)

            Selections of data

15,788

11,818

37,413

25,779

Less:

            Depreciation and  amortization

(23,665

)

(24,339

)

(56,922

)

(48,422

)

Operating income, as reported

$

4,929

$

2,862

$

10,919

$

11,515

** **

**Growth of our Seismic Data Library**

 

We regularly add to our seismic datalibrary through four different methods: (1) recording new data; (2) creatingnew value-added products from existing data within our library; (3) buyingownership of existing data for cash; and (4) obtaining ownership of existingdata sets through non-monetary exchanges. For the period from January 1, 2005to August 3, 2005, we completed the addition of approximately 1,600 squaremiles of seismic data to our library.  Additions to our seismic data libraryare weighted to the early part of the year due to the winter being the optimumtime to shoot new data in Canada and due to the purchase of two micro-datalibraries in the first quarter of 2005.  For the year ended December 31, 2004,we completed the addition of approximately 2,300 square miles of seismic datato our library.  As of August 3, 2005, we had approximately 300 square miles ofseismic data in progress.
** 
Index**
**Critical Accounting 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 in our criticalaccounting policies since December 31, 2004. 

 

**Seasonality andTiming Factors**

****Our results of operations fluctuate from quarter to quarter due to a numberof factors. Our results are influenced by oil and gas industry capitalexpenditure budgets and spending patterns. These budgets are not necessarilyspent in equal or progressive increments during the year, with spendingpatterns affected by individual oil and gas company requirements as well asindustry-wide conditions. In addition, under our revenue recognition policy,revenue recognition from data licensing contracts is dependent, among otherthings, upon when the customer selects the data. As a result, our seismic datarevenue does not necessarily flow evenly or progressively during a year or fromyear to year. Although the majority of our data licensing transactions providefor fees to us of under $500,000 per transaction, occasionally a single datalicense transaction from our library, including those resulting from the mergerand acquisition of our oil and gas company customers, may be substantiallylarger. Such large license transactions or an unusually large number of, orreduction in, data selections by customers can materially impact our resultsduring a quarter, creating an impression of a revenue trend that may not berepeated in subsequent periods. In our data creation activities,weather-related or other events outside our control may impact or delay surveysduring any given quarter.

**Results of Operations**

****The following tablesummarizes the components of our revenue for the three and six months ended June30, 2005 and 2004 (in thousands):

 
      
Three months ended      
Six months ended   
June 30,

June 30,
      
2005    
2004    
2005    
2004
 
Acquisition revenue:

      Cash underwriting

$

3,110

$

6,650

$

15,142

$

24,011

      Underwriting from non-monetary exchanges

310

26

697

1,838

      Total acquisition revenue

3,420

6,676

15,839

25,849

Licensing revenue:

      New resales for cash

21,020

19,096

45,232

37,325

      Non-monetary exchanges

6,236

5,858

6,841

8,938

      Deferral of revenue

(12,057

)

(9,636

)

(24,724

)

(23,991

)

      Selections of data

15,788

11,818

37,413

25,779

      Total resale revenue

30,987

27,136

64,762

48,051

Solutions and other

1,554

1,284

2,666

2,460

Total revenue

$

35,961

$

35,096

$

83,267

$

76,360

The increase in total revenue forthe three and six month periods ended June 30, 2005 compared to thecorresponding periods of 2004 was primarily due to the strong level oflicensing data from our existing library, both in cash resales and selectionsof data.  The level of licensing activity during 2005 reflects the increase incurrent demand for seismic data from our library.  Cash resales increased 10%and 21% for the three and six month periods ended June 30, 2005 compared to thesame periods in 2004, respectively, while selections of seismic data increased34% and 45%, respectively, for the same periods.  These increases werepartially offset by a decrease in the level of new data acquisition revenueduring these periods.  The decrease in the second quarter of 2005 was primarilydue to a delay in one of the Company's new seismic programs resulting inacquisition revenue being delayed to future periods.  The acquisition revenuefor the six months ended June 30, 2005 was lower than the same period in 2004due to the delay discussed previously as well as a reduction in new dataacquisitions to allow for cash purchases of existing data, a trend we expect tocontinue throughout 2005.
 
Index

 

At June 30, 2005, we had a deferred revenue balance of $40.9 million, ofwhich $5.0 million resulted from non-monetary exchanges, compared to theDecember 31, 2004 balance of $53.5 million.  The deferred revenue will be recognizedwhen selection of the data is made by the customer or upon expiration of theselection period, whichever occurs first.

Seismic data library amortization amounted to $22.9 million in the second quarterof 2005 compared to $23.2 million in the second quarter of 2004 and $55.2 millionfor the first half of 2005 compared to $45.8 million for the first half of 2004. The amount of seismic data library amortization fluctuates based on the leveland location of specific seismic surveys licensed (including licensingresulting from new data acquisition) and selected by our customers during anyperiod as well as the amount of straight-line amortization required under ouraccounting policy.  

Seismic data amortization as a percentageof seismic licensing revenue is summarized as follows (in thousands):

Three Months Ended

Percentage of

Components of Amortization

June 30,

Revenue

2005

2004

2005

2004

Income forecast

$

11,980

$

15,868

34.8

%

46.9

%

Straight-line

10,967

7,291

31.9

%

21.6

%

Total

$

22,947

$

23,159

66.7

%

68.5

%
                     
Six Months Ended

Percentage of

Components of Amortization

June 30,

Revenue

2005

2004

2005

2004

Income forecast

$

32,774

$

35,570

40.7

%

48.1

%

Straight-line

22,399

10,210

27.8

%

13.8

%

Total

$

55,173

$

45,780

68.5

%

61.9

%

The decrease in the rate ofincome forecast amortization in 2005 is principally due to the mix of databeing licensed, including the effects of the level of revenue recognized ondata whose costs have been fully amortized.  The increase in the rate ofstraight-line amortization in 2005 is primarily due to the reduction in theuseful life to four years from seven years for onshore data and from five yearsfor offshore data, effective July 1, 2004.

Selling,general and administrative ("SG&A") expenses were $7.3 million inthe second quarter of 2005 compared to $7.8 million in the second quarter of2004.  The decrease inSG&A expense is primarily due to the 2004 period including non-recurringcharges of $153,000 related to severance costs paid to a former consultant tothe chief executive officer pursuant to his retention and change of controlagreement and $331,000 related to settlement of certain litigation.  SG&Aexpenses were $15.3 million in the first half of 2005 compared to $16.2 millionin the first half of 2004.  The decrease in the six month SG&A expense isprimarily due to the 2004 period including non-recurring charges of $631,000related to severance costs paid to our former chief executive officer and a formerconsultant to the chief executive officer pursuant to their retention andchange of control agreements and $331,000 related to settlement of certainlitigation.

Interest expense, net, was $6.0million and $5.3 million in the second quarters of 2005 and 2004, respectively,and was $12.0 million and $10.3 million for the six months ended June 30, 2005and 2004, respectively.  The increased expense is due to the higher interestrate on our new senior notes which were issued on July 2, 2004.
 
Index

 
During the three and six monthsended June 30, 2004, we incurred expenses associated with reorganizationtotaling $1.9 million and $6.0 million, respectively.  Reorganization items areexpense or income items that were incurred or realized by Debtors because they werein reorganization. These items include, but are not limited to, professionalfees and similar types of expenses incurred directly related to the Chapter 11Cases, loss accruals orgains or losses resulting from activities of the reorganization process, andinterest earned on cash accumulated by Debtors because they were not payingtheir pre-petition liabilities. For the three and six months ended June 30,2004, reorganization items were as follows (in thousands):
Three Months

Six Months

Ended

Ended

June 30, 2004

June 30, 2004

Professional fees

$

1,985

$

5,309

Interest Income

(46

)

(77

)

Accelerated amortization of deferred debt issue costs

-

1,007

Reduction of pre-petition liabilities

(89

)

(515

)

Other

35

308

Total

$

1,885

$

6,032

 

Tax expense (benefit) was ($1,039,000)and ($395,000) in the second quarters of 2005 and 2004, respectively, and (1,028,000)and $311,000 for the six months ended June 30, 2005 and 2004, respectively.   Asof June 30, 2005, we determined that it was more likely than not that a portionof the deferred tax asset related to the Canadian operations would berealized.  Therefore, $1.1 million of the valuation allowance previouslyprovided against this deferred tax asset was reversed resulting in the taxbenefit in both the second quarter and first six months of 2005.

 

***DiscontinuedOperations***

In June 2002, our Board of Directorsunanimously adopted a plan to dispose of our oil and gas operations by sale. Accordingly, our consolidated financial statements report the oil and gasoperations as discontinued operations.  In 2002, we sold substantially all ofour oil and gas assets.  In January 2004, we sold a portion of our remainingoil and gas assets.  Our remaining oil and gas assets are not material and wecontinue to seek buyers.  

Revenue from the discontinued operations was $38,000 for each of the threemonths ended June 30, 2005 and 2004, and $87,000 and $110,000 for the sixmonths ended June 30, 2005 and 2004, respectively. Pre-tax income fromdiscontinued operations was $2,000 and $9,000 for the three months ended June30, 2005 and 2004, respectively, and was $19,000 and $44,000 for the six monthsended June 30, 2005 and 2004, respectively.  
**Liquidity andCapital Resources**Sources and Uses of Liquidity
 

As of August9, 2005, we hadapproximately $45.5 million in consolidated cash, cash equivalents andshort-term investments.  

*** ***

***U.S. CreditFacility.***  We have in place a revolving credit facility for up to $30million, subject to borrowing base limitations.  The borrowing base isdetermined from time to time based on the lesser of:
-  $30 million,-  0.75 times our U.S. cash     operating income (defined as cash revenue, derived primarily from seismic     data acquisition revenue, cash library licensing revenue and Solutions     revenue, less cost of sales and SG&A, before depreciation and     amortization expense for the trailing 12-month period), 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), (2) 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 (3) $20 million. 
Index

Interest is payable at anapplicable margin above either LIBOR or the prime rate.  The facility issecured by a first priority, perfected security interest in substantially allof our U.S. assets and a pledge of all of the issued and outstanding capitalstock of our U.S. subsidiaries.  At August 9, 2005, there was no outstandingbalance under the facility and there was $30 million of availability. Covenants in the agreement limit our ability to, among other things, incuradditional indebtedness, pay dividends, and complete mergers, acquisitions andsales of assets.  In addition, the agreement requires us to maintain certainfinancial ratios.  We were in compliance with all such covenants and ratios asof June 30, 2005.

***CanadianCredit Facility.***  On January 12, 2004, our wholly owned subsidiary,Olympic Seismic Ltd. ("Olympic"), entered into a revolving credit facility. The facilityallows it to borrow up to $5 million (Canadian), subject to an availabilityformula, by way of prime-based loans, bankers' acceptances or letters ofcredit. The rate applicable to borrowings is the bank's prime rate plus 0.35%per annum and to bankers' acceptances is 1.50% per annum. Letter of credit feesare based on scheduled rates in effect at the time of issuance. The facility issecured by the assets of Olympic, SEIC Trust Administration Ltd. (as soletrustee of, and for and on behalf of, SEIC Business Trust) and SEIC Holdings,Ltd., but is not guaranteed by us or any of our other U.S. subsidiaries. However, all intercompany debt owing by Olympic, SEIC Trust Administration Ltd.,SEIC Business Trust or SEIC Holdings, Ltd. to us, SEIC Partners LimitedPartnership or to any of our U.S. subsidiaries (approximately $73.0 million(Canadian) at June 30, 2005) has been subordinated to the repayment of therevolving credit facility. Available borrowings under the facility areequivalent to a maximum of $5.0 million (Canadian), subject to a requirementthat such borrowings may not exceed 75% of good accounts receivable (as definedin the agreement) of SEIC Trust Administration, less prior-ranking claims, ifany, relating to inventory or accounts. The facility is subject to repaymentupon demand and is available from time to time at the bank's sole discretion.As of August 9, 2005, no amounts were outstanding on this revolving line ofcredit and $4.6 million (Canadian) was available on the line of credit. Olympicis not a party to any of the debt issued by us other than the note payable to aformer executive. 

***Operating Activities*.** Cash flows provided by operating activities from continuing operations were $45.9million and $38.3 million for the six months ended June 30, 2005 and 2004,respectively.  The increase from 2004 to 2005 was primarily due to an increasein the collection of receivables partially offset by the payment of interesttotaling $12.2 million on our new senior notes.

***Investing Activities***.  Cash flows used by investing activitiesfrom continuing operations were $36.9 million and $33.4 million for the six monthsended June 30, 2005 and 2004, respectively.  Cash expenditures for seismic datawere $36.4 million and $33.1 million for the six months ended June 30, 2005 and2004, respectively.  

***Financing Activities****.*  Cash flowsused in financing activities were $5.2 million and $2.0 million for the six monthsended June 30, 2005 and 2004, respectively.  During the six months ended June30, 2005 payments on senior notes, term loans and capital leases equaled $5.1million.  

As of June 30, 2005, we had outstanding debt and lease obligations, withaggregate contractual cash obligations summarized as follows (in thousands):

 

Payments due by period

Remainder of

2006-

2009-

2011 and

Contractual cash obligations

Total

2005

2008

2010

thereafter
                                          
Debt obligations (1) (2)

$

334,005

$

11,224

$

66,841

$

44,559

$

211,381

Capital lease obligations (2)

7,167

1,772

870

605

3,920

Operating lease obligations 

3,763

498

1,857

921

487
                                          
Total contractual cash obligations

$

344,935

$

13,494

$

69,568

$

46,085

$

215,788

 

(1)        Debt obligations includethe face amount of the 11.75% senior notes totaling $189.0 million.

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

 
 
Index

 

On July 2, 2004, we consummatedan institutional private placement of 11.75% senior unsecured notes totaling$193.0 million aggregate principal amount due on July 15, 2011.  These noteswere offered at a discount of 2.325% from their principal amount at maturityresulting in cash proceeds, before offering expenses, of approximately $188.5million, which proceeds were used to partially fund payments of allowedcreditors' claims required under the Plan.  Interest is payable in cash,semi-annually in arrears on January 15 and July 15 of each year, commencing onJanuary 15, 2005. As required by their terms, our 11.75% senior notes wereexchanged for senior notes of like amounts and terms in a publicly registeredexchange offer in February 2005. The 11.75% senior notes are unsecured and areguaranteed by substantially all of our domestic subsidiaries on a seniorbasis.  The 11.75% senior notes contain restrictive covenants which limit ourand our subsidiaries' ability to, among other things, incur additionalindebtedness, make capital expenditures in excess of specified amounts, paydividends and complete mergers, acquisitions and sales of assets.

 

From time to time on orbefore July 15, 2007, we may redeem up to 35% of the aggregate principal amountof our 11.75% senior notes with the net proceeds of equity offerings at a redemptionprice equal to 111.75% of the principal amount, plus accrued and unpaidinterest.  Subject to certain conditions, if at the end of each fiscal year wehave excess cash flow (as defined in the indenture) in excess of $5.0 million,we will be required to use 50% of the excess cash flow to fund an offer torepurchase our 11.75% senior notes on a pro rata basis at 100% of its principalamount, plus accrued and unpaid interest.  If we have less than $5.0 million inexcess cash flow at the end of any fiscal year, such excess cash flow will becarried forward to succeeding years, and such repurchase offer will be requiredto be made in the first year in which the cumulative excess cash flow for allyears in which there has not been an offer is at least $5.0 million.  Suchrepurchase offer will be required only if there is no event of default underour revolving credit facilities prior to and after giving effect to therepurchase payment.  Because of excess cash flow generated for the year endedDecember 31, 2004, in the first quarter of 2005 the Company made a repurchaseoffer for principal of up to $4.8 million to the holders of its Senior Notes. $4.0 million principal amount of Senior Notes were tendered, and the Companymade payment, including accrued interest, of $4.1 million on May 5, 2005.  Upona change of control (as defined in the indenture), each holder of our 11.75%senior notes will have the right to require us to offer to purchase all of suchholder's notes at a price equal to 101% of the principal amount, plus accruedand unpaid interest.

 

***Anticipated Liquidity.***  Our ability to make requiredpayments of principal and interest on borrowings under our revolving creditfacility and in respect of our 11.75% senior notes, 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 11.75% senior notes,borrowings under our revolving credit facilities and our other indebtedness,from our operating cash flows, cash and cash equivalents on hand and, ifrequired, from additional borrowings (to the extent available under ourrevolving credit facilities and otherwise subject to the borrowing base). Ourability to satisfy our payment obligations depends substantially on our futureoperating and financial performance, which necessarily will be affected by, andsubject to, industry, market, economic and other factors. We will not be ableto predict or control many of these factors, such as economic conditions in themarkets where we operate and competitive pressures. 

For adiscussion of a number of factors that may impact our liquidity and thesufficiency of our capital resources, see " - Overview" above.
Deferred Taxes
As of June 30, 2005, we had a netdeferred tax asset of $1.2 million attributable to our Canadian operations.  Asof June 30, 2005, we determined that it was more likely than not that a portionof the deferred tax asset related to the Canadian operations would be realized;thus, the net deferred tax asset resulted.  In the U.S., we had a net deferredtax asset of $89.6 million, all of which was fully offset by a valuationallowance. Additionally, in Canada, we had a remaining net deferred tax assetof $5.2 million, all of which was fully offset by a valuation allowance.  Therecognition of such remaining deferred tax assets will not occur until suchtime that it is more likely than not that some portion or all of the deferredtax asset will be realized.  As of June 30, 2005, the recovery of suchremaining deferred tax assets is not assured of realization.

Section382 of the Internal Revenue Code places a limit on certain tax attributes whichwere in existence prior to a greater than 50% change in ownership.  The rulesuse a rolling three-year period for determination of such change.  Currently,we do not anticipate that any remaining tax credit carryforwards or certainother of our tax attributes applicable to periods prior to the effective dateof the Plan (collectively, "pre-change losses") will be subject to limitation under Section 382 of theInternal Revenue Code as a result of the Plan.  However, we will continue toanalyze and monitor ownership changes to identify potential limitationspursuant to Section 382.  

**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.

 
 
Index

 

**Capital Expenditures**

****During the first six monthsof 2005, capital expenditures for seismic data and other property and equipmentamounted to $35.9 million.  Our capital expenditures for the remainder of2005 are presently estimated to be $36.6 million.  The first six months of 2005actual and 2005 estimated remaining capital expenditures are comprised of thefollowing (in thousands):  

 

Actual for

Six Months 

Estimate For

Ended

Remainder of

June 30, 2005

2005

New data acquisition

$

21,820

$

22,536

Cash purchases of seismic data  and other

8,723

7,241

Non-monetary exchanges

4,789

6,025

Other property and equipment

542

824

Total capital expenditures

35,874

36,626

Less: Non-monetary exchanges

(4,789

)

(6,025

)

Changes in working capital

5,881

-

Cash investment per statement  of cash flows

$

36,966

$

30,601

The capital expendituresdiscussed above are within the capital expenditure limitations imposed by our11.75% senior notes and U.S. revolving credit facility.

Capitalexpenditures funded from operating cash flow are as follows (in thousands):

Actual for

Six Months 

Estimate For

Ended

Remainder of

June 30, 2005

2005

Total capital expenditures

$

35,874

$

36,626

Less:

Non-cash additions

(4,789

)

(6,025

)

Cash underwriting

(15,142

)

(14,961

)

Capital expenditures funded from operating cash flow

$

15,943

$

15,640

As of August 9, 2005, we hadcapital expenditure commitments related to data acquisition projects ofapproximately $12.5 million, for which approximately $9.5 million of cashunderwriting has been obtained.

**Recent Accounting Pronouncements**

In December 2002, the FinancialAccounting Standards Board ("FASB") issued SFAS No. 148 -"Accounting for Stock-Based Compensation - Transition and Disclosure - anamendment of FASB Statement No. 123."  In December 2004, the FASB issuedSFAS No. 123(R), "Share-Based Payment," which supersedes SFAS No.148. SFAS No. 123(R) establishes standards for transactions in which an entityexchanges its equity instruments for goods or services. This standard requiresa public entity to measure the cost of employee services received in exchangefor an award of equity instruments based on the grant-date fair value of theaward. This eliminates the exception to account for such awards using theintrinsic method previously allowable under Accounting Principles Board("APB") Opinion No. 25.  In March 2005, the SEC issued StaffAccounting Bulletin ("SAB") 107. Among other things, SAB 107 providesinterpretive guidance related to the interaction between SFAS No. 123(R) andcertain SEC rules and regulations, as well as provides the SEC staff's viewsregarding the valuation of share-based payment arrangements for publiccompanies.  On April 14, 2005, the SEC issued press release 2005-57 whichamends the compliance date of SFAS No. 123(R).  As a result, SFAS No. 123(R)will be effective for annual reporting periods beginning on or after June 15,2005.  Seitel currently expects to adopt SFAS No. 123(R) effective January 1,2006.  We have not yet quantified the financial impact of adoption of thisstandard.** **
 
Index

In December 2004, the FASB issuedSFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB OpinionNo. 29".  This statement addresses the measurement of exchanges of nonmonetaryassets.  It eliminates the exception from fair value measurement fornonmonetary exchanges of similar productive assets in paragraph 21(b) of APBOpinion No. 29, Accounting for Nonmonetary Transactions, and replaces it withan exception for exchanges that do not have commercial substance.  Thisstatement specifies that a nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange.  SFAS No. 153 will be effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.  TheCompany does not expect the adoption of SFAS No. 153 to have any effect on itsfinancial position or results of operations.

**Item 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

Weare exposed to market risk, including adverse changes in interest rates andforeign currency exchange rates.  

**Interest Rate Risk**

****We may enter into variousfinancial instruments, such as interest rate swaps, to manage the impact ofchanges in interest rates.  As of June 30, 2005, we did not have any openinterest rate swap or interest rate lock agreements.  Therefore, our exposureto changes in interest rates primarily results from our short-term andlong-term debt with both fixed and floating interest rates.

**Foreign Currency Exchange Rate Risk**

****Our Canadian subsidiaries conductbusiness in the Canadian dollar, therefore, we are subject to foreign currencyexchange rate risk on cash flows related to sales, expenses, financing andinvesting transactions in currencies other than the U.S. dollar.  As of June 30,2005, we did not have any open forward exchange contracts.  

We have not had any significant changes in the market risk exposures sinceDecember 31, 2004.

**Item4.  CONTROLS AND PROCEDURES**

**(a)**

**Evaluation of Disclosure Controls and Procedures**

 

As of the end of the period  covered by this report, our management carried out an evaluation, under the  supervision and with the participation of the Company's President and Chief  Executive Officer and Chief Financial Officer, of the effectiveness of the  design and operation of the Company's disclosure controls and procedures (as  such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange  Act), pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the  Company's President and Chief Executive Officer along with the Company's  Chief Financial Officer concluded that the Company's disclosure controls and  procedures as of June 30, 2005 are effective in ensuring that information  required to be disclosed in the reports we file or submit under the Exchange  Act is recorded, processed, summarized, and reported within the time periods  specified in the Securities Exchange Commission rules and forms, and that  such information is accumulated and communicated to our management, including  the Company's President and Chief Executive Officer and the Company's Chief  Financial Officer, as appropriate, to allow timely decisions regarding  required disclosures. 

   

**(b)**

**Changes in Internal Control Over  Financial Reporting**

   

There have been no changes in our  internal controls over financial reporting during the quarter ended June 30,  2005 that have materially affected, or are reasonably likely to materially  affect, our internal controls over financial reporting.
 
Index

**PART II - OTHER INFORMATION**

**Item 1.  LEGAL PROCEEDINGS**

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

**Items 2. and 3.**  Not applicable.

**Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

The Company's Annual Meeting ofStockholders was held on May 23, 2005.  Matters voted upon at the AnnualMeeting, and the results of those votes are as follows:

1.    The election of three director nominees to serve as Class IIIdirectors of the Company.

 

**Name**

** **

**No. of Votes For**

** **

**No. of Votes  Withheld**

Kevin S. Flannery

126,349,264

448,991

 
Jay H. Golding

126,411,248

387,207

 
Robert D. Monson

126,343,485

454,700

 
**Item 5.**  Not applicable.

**Item 6.  EXHIBITS**

10.1

†*
Employment Agreement, dated July  14, 2005, by and between William Restrepo and the Company

 

10.2

†*
Restricted Stock Agreement for William  Restrepo dated July 25, 2005

 

10.3
†*
Summary of Amendment to 2005 Non-Employee    Director and Updates to Executive Officer Compensation and Incentive    Arrangements

 
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

_______________

†          Management contract, compensation plan orarrangement.

*           Filed herewith.

**          Furnished, not filed, pursuant to Item 601(b)(32)of Regulation 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

10,

2005

/s/

Robert D. Monson

Robert D. Monson

Chief Executive Officer  and President

Dated: August

10,

2005

/s/

William J. Restrepo

William J. Restrepo

Chief Financial Officer
 
Index
 

**EXHIBIT**

**INDEX**

 

 

Page

Exhibit

Title

Number 

     
10.1

†*
Employment Agreement, dated July  14, 2005, by and between William Restrepo and the Company

 

42

10.2

†*
Restricted Stock Agreement for William  Restrepo dated July 25, 2005

 

60

10.3
†*
    Summary of Amendment to 2005 Non-Employee Director and Updates to Executive    Officer Compensation and Incentive Arrangements

      
70
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

 

73

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

 

75

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

 

77

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

79

_______________

†    Management contract, compensation plan or arrangement.

*     Filed herewith.

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

 

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