<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
/X/ AMENDED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
OF 1934. FOR THE TRANSITION PERIOD FROM_________________ TO
____________________.
COMMISSION FILE NUMBER 0-18842
-------
FIRST SEISMIC CORPORATION
-------------------------
(Exact name of registrant as specified in charter)
DELAWARE 76-0062729
-------- ----------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2470 GRAY FALLS, SUITE 190, HOUSTON, TEXAS 77077-6513
------------------------------------------------------
(Address of principal executive offices)
(281) 556-5656
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF DECEMBER 31, 1999
-----------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK, $0.01 PER SHARE 9,238,777 SHARES
-----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FIRST SEISMIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets ....................................... 3
Condensed Consolidated Statements of Income and Comprehensive Income ........ 4
Condensed Consolidated Statements of Cash Flows ............................. 5
Notes to Condensed Consolidated Financial Statements ........................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................. 12
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ........................................................... 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ................................... 13
ITEM 5. OTHER INFORMATION ........................................................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................ 15
SIGNATURE ................................................................... 16
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 9/30/99 12/31/98
------- --------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,260 $ 169,679
Accounts receivable, net 495,058 418,435
--------------- ---------------
TOTAL CURRENT ASSETS 497,318 588,114
Data library, net 1,652,888 2,658,011
Data and agency use position, net 21,310 23,185
Property and equipment, net 64,366 82,493
Investment in oil and gas prospects, at cost 171,210 170,710
Deferred tax asset, net 150,000 -0-
Other assets 33,872 42,458
--------------- ---------------
TOTAL ASSETS 2,590,964 3,564,971
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit 99,000 -0-
Current portion of long-term debt 2,085 -0-
Accounts payable, trade 661,908 1,083,581
Accrued expenses 295,627 199,431
Accrued compensation 69,062 17,408
Deferred revenue 29,500 -0-
--------------- ---------------
TOTAL CURRENT LIABILITIES 1,157,182 1,300,420
Long-term debt 6,838 1,457,974
Data use payables, net 40,432 73,810
--------------- ---------------
TOTAL LIABILITIES 1,204,452 2,832,204
--------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $1.00 par value, 200,000 shares
authorized; 50,000 (1999) and 0 shares outstanding (1998) 50,000 -0-
Common Stock, voting, $0.01 par value, 10,000,000 shares authorized;
9,098,777 (1999) and 5,776,865 (1998) issued 90,988 57,769
Additional paid-in capital 11,345,987 9,531,278
Retained earnings (deficit) (10,012,379) (8,778,997)
Foreign currency translation adjustments (14,418) (11,929)
Less treasury stock, 138,855 (1999) 43,855 (1998) shares at cost (73,666) (65,354)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 1,386,512 732,767
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,590,964 $ 3,564,971
=============== ===============
</TABLE>
See accompanying notes.
3
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
-------------------------------- -------------------------------
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE
Company owned geophysical $ 263,738 $ 37,864 $ 447,328 $ 105,130
Company owned geological 165,492 361,432 280,692 1,003,527
Brokerage third party geophysical 10,494 271,995 17,800 755,203
Brokerage third party geological 25,411 117,146 43,100 325,260
Commissions 4,826 15,872 8,186 44,069
Geo-scientific services 115,723 63,750 196,279 177,005
Reproduction and other 29,296 36,736 49,686 101,998
-------------- ------------- ------------- -------------
Total revenue 614,980 904,795 1,043,071 2,512,192
COST OF SALES 147,917 490,424 364,407 1,376,750
Gross Margin 467,063 414,371 678,664 1,135,442
-------------- -------------- ------------- -------------
OPERATING EXPENSES
Selling, general and administrative expenses 147,000 233,120 600,256 680,476
Amortization and depreciation 1,095,940 58,140 1,313,104 281,787
-------------- ------------- ------------- -------------
Total operating expenses 1,242,939 291,260 1,913,360 962,263
Net operating income (775,876) 123,111 (1,234,696) 173,179
-------------- ------------- ------------- -------------
OTHER (INCOME) AND EXPENSES
Interest expense 2,866 1,081 6,867 3,277
Interest (income) (10) (569) (477) (3,807)
Other (income) expense (25,790) -0- (25,790) -0-
Settlements/Liability extinguishments -0- (7,654) -0- (50,404)
-------------- ------------- ------------- -------------
Total other (income) and expenses (22,934) (7,142) (19,400) (50,934)
NET INCOME (LOSS) BEFORE TAX (752,942) 130,253 (1,215,296) 224,113
-------------- ------------- ------------- -------------
INCOME TAX (BENEFIT) -0- -0- (150,000) -0-
-
NET INCOME (LOSS) AFTER INCOME TAX BENEFIT (752,942) 130,253 (1,065,296) 224,113
-------------- ------------- ------------- -------------
COMPREHENSIVE INCOME:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (3,839) (6,509) (2,489) (6,509)
COMPREHENSIVE INCOME: $ (756,781) $ 123,744 $ (1,067,785) $ 217,604
============== ============= ============= =============
Earnings (Loss) per share: Basic $ (0.08) $ 0.02 $ (0.13) $ 0.04
-------------- ------------- ------------- -------------
WEIGHTED NUMBER OF COMMON SHARES USED
IN COMPUTING NET INCOME (LOSS) PER SHARE $ 9,046,929 $ 5,587,735 $ 7,960,618 $ 5,477,383
============== ============= ============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
9/30/99 9/30/98
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,065,296) $ 224,113
------------- -------------
ADJUSTMENTS TO RECONCILE NET INCOME(LOSS) TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization 1,313,104 281,787
Change in allowance for doubtful accounts (116,018) -0-
Settlements/liability extinguishments -0- (51,766)
Reserve for potential liabilities -0- (1,865)
Deferred income taxes (150,000) -0-
Stock issued as compensation 10,969 -0-
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable, trade 39,395 (367,842)
Other current assets 30,486 -0-
Accounts payable, trade (363,405) 482,229
Accrued expenses 94,585 143,914
Accrued compensation, officer 51,654 -0-
Deferred revenue 29,500 (44,388)
------------- -------------
Total adjustments 940,270 442,069
------------- -------------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES (125,026) 666,182
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Disposition of marketable securities -0- 46,905
Acquisition of other assets -0- (6,119)
Acquisition of property and equipment -0- (19,444)
Investment in oil and gas prospects (500) -0-
Acquisition in data library (232,515) (500,374)
Increase/(Decrease) in data use payables (33,378) (142,739)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (266,393) (621,771)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted stock issued 192,500 60,000
Purchase of Treasury Stock (17,500) -0-
Borrowings on line of credit 264,000 596,926
Payments on line of credit (165,000) (498,000)
Principal payments on long-term debt (50,000) (374,566)
------------- -------------
NET CASH USED BY FINANCING ACTIVITIES $ 224,000 $ (215,640)
============= =============
NET INCREASE (DECREASE) IN CASH (167,419) (171,229)
CASH AT BEGINNING OF THE YEAR 169,679 193,281
------------- -------------
CASH AT END OF YEAR $ 2,260 $ 22,052
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 6,867 $ 3,299
============= =============
</TABLE>
See accompanying notes.
5
<PAGE>
NOTE 1. BASIS OF PRESENTATION
These condensed consolidated financial statements of FIRST SEISMIC
Corporation ("FIRST"), its wholly-owned subsidiaries: FIRST EXCHANGE Corporation
("FEC"), First Exchange Limited ("FEL"), BLACKWELL SUPPLY, Inc., d.b.a.
BLACKWELL TRADING, Inc. ("BTI") and FORTESA Corporation ("FORTESA") which we
collectively refer to as "the Company", have been prepared by us, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
we believe that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read
in conjunction with the financial statements and the notes thereto included in
our latest Annual Report to Shareholders' and the Annual Report on Form 10-K for
the year ended December 31, 1998. In our opinion, all normal recurring
adjustments necessary to present fairly our financial position as of September
30, 1999, as well as the results of operations for the nine months ended
September 30, 1999 and 1998, and cash flows for the nine months ended September
30, 1999 and 1998 have been included. The foregoing interim results are not
necessarily indicative of the results of the operations for the full fiscal year
ending December 31, 1999.
OPERATIONS
The Company would have experienced losses in all of the periods covered by
these statements, had it not successfully obtained settlements and liability
extinguishments from amounts originating from its former USA domestic seismic
brokerage operations. As of September 30, 1999 current liabilities exceeded
current assets by $659,864.
FORTESA ACQUISITION
Effective March 31, 1999 we purchased all outstanding shares of stock of
FORTESA Corporation, a Texas corporation, from the Beall Living Trust, its sole
shareholder, the trustee for which is Rogers E. Beall, our Chairman and Chief
Executive officer for FORTESA. We paid 50,000 shares of our Series A Convertible
Preferred Stock plus 8,055 shares of Common Stock. At the time of the
acquisition, FORTESA's assets consisted of oil and gas interests located in East
Texas and the Republic of Senegal and were valued at FORTESA's historic costs
for the properties of $171,000. This transaction was handled as a pooling of
interests. FORTESA had no significant operations prior to 1998. Financial
Statements for all periods shown have been restated for this acquisition.
NOTE 2. INCOME TAXES
We use the balance sheet approach for recording deferred taxes. The balance
sheet approach accounts for deferred income taxes by applying statutory rates in
effect at the balance sheet date to the differences between the book basis and
the tax basis of assets and liabilities. The resulting deferred tax assets and
liabilities are adjusted to reflect changes in tax law or rates. We have not
been required to pay any Federal Income taxes since 1990. Currently we have a
Net Operating Loss Deduction (NOL) of $15,000,998. We have utilized $1,567,249
of the NOL in the past four years (1995-1998). The potential future tax benefits
of the NOL assuming a 34% Federal tax rate and utilization in one year would be
$5,100,339. We have discounted the future tax benefits of $5,100,339 to $
150,000 in 1999. We have recognized a net $150,000 tax benefit on March 31,
1999, with our acquisition of FORTESA. We believe that with the production of
taxable income due to FORTESA's Senegal holdings will allow us to recognize
additional tax benefits in future years by utilizing the NOL. We believe that we
can utilize the NOL however we recognize that a change in control and, or
changes in law by the Internal Revenue Service can permanently affect our
ability to utilize this asset against future taxable earnings.
6
<PAGE>
NOTE 3. EARNINGS PER SHARE
The following sets forth the computation of basic earnings per
share at June 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
NUMERATOR 9/30/99 9/30/98 9/39/00 9/30/98
<S> <C> <C> <C> <C>
NET INCOME $ (752,942) $130,253 $ (1,065,296) $ 224,113
============ ======== ============ ==========
DENOMINATOR FOR BASIC EARNINGS PER SHARE
WEIGHTED NUMBER OF SHARES USED IN
COMPUTING NET INCOME (LOSS) PER SHARE 9,046,929 5,587,735 7,960,618 5,477,383
NET INCOME PER SHARE $ (0.08) $ 0.02 $ (0.13) $ 0.04
============ =========== ============= ==========
</TABLE>
Based on estimated fair market values, outstanding Options and
Warrants are considered antidilutive for all years presented.
NOTE 4. RECLASSIFICATIONS
Certain 1998 amounts reported in previous filings have been reclassified to
conform to 1999 presentation.
NOTE 5. ASSET IMPAIRMENT
At September 30, 1999, based on our estimates of future net
realizable revenues associated with our balance sheet net costs of specific
portions of both our 2D seismic data and publication libraries, we charged to
income approximately $841,000. Of this amount, approximately $606,000 was
attributable to impairment of our domestic 2D seismic data library and
approximately $235,000 was attributable to our International Geotechnical
publications library.
NOTE 6. SUBSEQUENT EVENTS
In November 1999 we entered into a series of transactions to enhance the
value of our holdings in the Republic of Senegal. Specifically, the following
projects/actions were undertaken or completed:
The national oil company of the Republic of Senegal as well as the
Government of Senegal agreed to transfer responsibility for development of the
THEIS Block to FORTESA and concurrently released Benton from its obligation to
invest $5,400,000 to develop the THEIS Block. In connection with this
transaction, FORTESA released Benton from its obligation to pay the first
$1,350,000 of development costs attributable to our 25% working interest. In
addition, we assumed Benton's privileges and obligations under the Farm-out
Agreement dated December 27, 1997 to develop the THEIS Block, including
ownership of 60% of the venture's equity and the responsibility for $5,400,000
of the venture's $6,000,000 of phase one development expenditures. See recent
developments concerning FORTESA under Item 2. "Recent Developments".
In December 1999 we initiated discussions with AFRICAP, L.L.C., a Delaware
Limited Liability Company to act as guarantor of the proposed Citibank pipeline
interim construction loan. AFRICAP has indicated a willingness to guarantee up
to $1,000,000 of the loan proceeds in exchange for (i) our purchase of a $60,000
investment equity interest (representing a 1% ownership interest) in AFRICAP
L.L.C, (ii) a 2% fee (i.e. $20,000) due at closing, and, (iii) Warrants to
purchase 50,000 shares of our Common Stock at $1.00 per share. We have no
assurance that this arrangement will be consummated.
NOTE 7. NONCASH INVESTING AND FINANCING ACTIVITIES
During 1999 we had significant noncash activities in conjunction with the
conversion of debt with our 6% and 12% Noteholders. $448,285 of debt including
accrued interest held by our 6% Noteholders was converted into 1,073,734 shares
of Common Stock. $981,496 of debt held by our 12% Noteholders was converted into
1,363,111 shares of Common Stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "expects", "plans",
"anticipates", "believes", "estimates", "predicts", "potential", or other
comparable terminology. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance when or if our goals will be
achieved. Important factors that could cause actual results to differ materially
from those in the forward looking statements we have made in this report include
at a minimum changes in the exploration budgets of our customers for seismic
data, geo-scientific studies and related services. Some additional factors will
be actual customer demand for our seismic data, geo-scientific studies and
related services, the extent of our success in acquiring and funding oil and gas
properties and in discovering, developing and producing reserves, the timing and
extent of changes in commodity prices for natural gas, crude oil and condensate,
natural gas liquids and conditions in the capital and equity markets during the
periods covered by the forward looking statements. These are all factors that
will be experienced in the future that we have based our estimates and plans on,
and they may vary significantly from the present and cause us not to realize our
plans in the future. Some of the risk factors that we believe our business is
subject to are listed in our annual Form 10-K report, which is incorporated
herein by reference.
SEISMIC OPERATIONS
SEISMIC OPERATIONS. Historically, we have engaged in the development of a
proprietary seismic data library. Our seismic data library consists exclusively
of two-dimensional or 2D data, and was developed over a period of approximately
ten years. As of 1991 our seismic data library consisted of over 11,000 miles of
domestic 2D seismic line data. As of September 30, 1999, our seismic data
library consisted of approximately 8,500 miles of domestic, plus small amounts
of foreign 2D seismic line data. Our library is marketed to major and
independent oil and gas companies under use-license arrangements. Additionally,
we have been involved in the sale of licenses for seismic data owned by others,
under brokerage and agency agreements. Seismic surveys and the analysis of
seismic data for the identification and definition of underground geological
features and structures are principal techniques used in oil and gas exploration
and development to determine possible locations of subsurface hydrocarbons.
Beginning in 1992, technology that enabled geo-scientists to obtain seismic
data in three dimensions ("3D") became much more cost effective and universally
available. 3D seismic data makes possible a graphic geophysical depiction of the
substrata geology from two (instead of just one, as in 2D seismic) horizontal
dimensions and one vertical dimension. This process provides a substantially
more accurate representation than 2D data and significantly enhances the ability
to evaluate the probable existence and location of subsurface hydrocarbons.
Accordingly, 3D seismic data became the information of choice among our
historical customers, and as a result, the demand for and the relative value of
our extensive 2D library decreased significantly. Both the volume of 2D seismic
licenses sold and the prices which customers were willing to pay for such
information located in the domestic USA suffered severe downturns beginning in
late 1991. While a market remains for this information and we continue to engage
in this business, management believes that future prospects for growth in
ownership and marketing of 2D information are below a critical mass necessary to
be of significant commercial interest to us. During 1998, sales of 2D seismic
information accounted for approximately 20% of our revenues. Approximately 30%
of our revenues come from associated services such as reproduction and services
involving handling data.
GEO-TECHNICAL PUBLISHING AND SERVICES. Cash flow from our operations since
1993 has increasingly come from license fee and service revenue generated by our
exploration and geo-scientific research, as well as geo-technical services
performed directly for our customers. In these areas, we compete on the basis of
expertise in packaging, marketing, and supplying inter-related data for a
particular area of geologic interest. We perform these functions exclusively for
oil companies, either by our preparation of direct information on an exclusive
basis for the customer, or as multi-client studies on which (i) we attempt to
retain an ownership interest in the resulting study for on-going income, and
(ii) our customer receives the right to use the compiled information for
internal use under a licensing agreement.
We have developed and added geo-technical publications used for
multi-client sales into our data library. Typically we realize a better margin
in these products due to our partial or full ownership position in them, as
compared to information brokerage and commission revenue from data that we do
not own. Potential customers may inspect abstracts of information and data types
and determine their usefulness for a particular project via our website at
www.first-exchange.com.
8
<PAGE>
Our geo-technical publication products and services tend to be more cost
effective for customers than those which they develop at their own expense as we
provide the needed exploration information in a useful form with pricing based
on a percentage of our costs for originating the information. Further licenses
for these same reports are sold or resold for varying prices based on market
demand.
In conjunction with these services, we generate commission and service
revenue related to the compilation, interpretation, imaging and marketing of
geo-scientific data. These services typically involve fees for performance
arrangements with customers who own or desire to obtain mineral rights and are
seeking to determine viability for drilling programs. We seek to compete in this
area by exploiting our upstream relationships, data sources, and experience in
emerging areas such as Africa, South America and Eurasia. Revenue from
geo-scientific information and services accounted for over 50% of our revenue
for the nine months ended September 30, 1999.
OIL AND GAS EXPLORATION AND PRODUCTION OPERATIONS. We intend to utilize our
expertise in the application of geo-scientific technology, as well as our
relationships with suppliers and owners of information and our customers to
participate in oil and gas exploration and production in selected situations
which do not conflict with the business interests of our customers. Through our
subsidiary FORTESA, we are currently pursuing several oil and gas prospects in
the U.S. as well as in West Africa. We utilize the full cost method for
accounting for oil and gas properties. These prospects are in various stages of
development, however none are actively drilling or producing as of December
1999. The majority of these investments were accounted for at cost as we held a
minority ownership interest in 1998 in the West African opportunity
RESULTS OF OPERATIONS
SALES OF SEISMIC AND GEO-SCIENTIFIC DATA
Total revenue for the nine months ended September 30, 1999 decreased
approximately $1,469,000 or 58% compared to the same 1998 period. This large
decrease was due primarily to the significant reduction in oil prices the world
experienced from mid-1998 through mid-1999. As a result, the oil industry
suffered a major rationalization that resulted in our loss of a number of good
historic customers, such as Amoco, ARCO, Union Texas, Mobil, Monument & FINA, as
well as other companies such as Elf Aquitaine and ORYX Maxus. We believe that
all of our regular customers reacted by suspending expenditures to some degree,
reducing commitments for exploration, and revising their internal organizations
and methods of doing business. We believe that this significant product price
reduction to the oil industry was the primary reason for our revenue declines
during this period, and that some of this business may never return under the
former competitive arrangement and multitude of regular customers that existed
prior to mid-1998.
OIL AND GAS
Our investments in oil and gas properties have produced no operational
revenue as of the April 2000 filing date of this report. The natural gas
reserves held by FORTESA are not yet on line. Revenue associated with these
reserves is subject to certain risks and capital expenditures for which we are
obligated and which have yet to be financed and made. See "Liquidity and Capital
Resources", and also ITEM 3, "Recent Developments Concerning FORTESA" for a
description of our proven reserves.
COST OF SALES
Cost of sales for our seismic and geo-scientific data are composed of
employee and administrative costs directly associated with a specific project or
sale, and of partner and data owner payments for licensed and brokered data.
These costs typically average approximately 50% of sales and do not include the
amortization of our investment in the associated data. For the nine months ended
September 30, 1999 however cost of sales was approximately 35% of sales as the
product sales mix during the period contained a greater proportion of higher
margin seismic data and shelf products as opposed to brokerage of non-owned data
and publication revenues.
CORPORATE AND OTHER
Selling and General and Administrative expenses decreased approximately 12%
or $80,000 for the nine months ended September 30, 1999 as compared to the same
1998 period primarily as the result of reduction in staffing levels, temporarily
reduced salary levels of four key employees, including the Chairman, and an
effort to eliminate all discretionary marketing and administrative expenditures.
9
<PAGE>
Depreciation and amortization expense, which consists primarily of
amortization of our data library, increased approximately 68% or $191,000 for
the nine months ended September 30, 1999 as compared to the same 1998 period.
This increase was due primarily to increased level of capital expenditures for
new geo-scientific reports in the Caspian Sea region that were developed during
1998. These reports are normally amortized over approximately three years.
At September 30, 1999, based on a detailed review and estimates of future
net realizable revenues associated with specific elements of our seismic data
and publication libraries, we charged approximately $841,000 in addition to
normal amortization against ordinary income for this period. Of this amount,
approximately $606,000 was attributable to impairment of our seismic data
library and approximately $235,000 was attributable to our international
geotechnical publications library.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by (used in) operations was $(569,000) and $669,000 for
the nine-month periods ended September 30, 1999 and September 30, 1998,
respectively. Our line of credit with our bank for $100,000 is secured by
accounts receivable. As of September 30, 1999, this credit facility was fully
drawn and we had no availability on it. These borrowing proceeds were used to
finance our reprocessing program in the Senegalese deepwater project and our
marketing operations. Our Chairman was requested by our bank to personally
guarantee our line of credit, in order for our bank to have granted this line of
credit to us. We had a working capital deficit at September 30, 1999 of
approximately $658,000.
We effected a settlement of substantially all of our long term debt in the
first quarter of 1999 through the issuance of additional equity to the holders
of our Senior 12% Notes and our 6% Notes. See Part II--ITEM 2. "Changes in
Securities and Use of Proceeds".
Expenditures on data library acquisitions during the nine months ended
September 30, 1999 totaled $293,000 as compared to expenditures of $500,000
during the same 1998 period. This was due primarily to decreased demand
resulting from industry conditions and the fact that we had made a record level
of capital additions to our geo-scientific data library the 1998 period. Our
1999 expenditures were 70% composed of the "company-owned geophysical" 2D
seismic project in the Deep Water of Senegal. This project accounted for over
30% of our revenues to date in 1999. We presently require that ongoing Capital
expenditures be funded by pre-commitments to any approved new projects by
industry licensee pre-subscribers, prior to Capital Expenditures exceeding
$25,000 on any single project.
We believe that cash flows from operations will be sufficient to fund our
working capital needs for the next 12 months, except for expenditures connected
with the THIES Block as discussed below, which require additional capital and
financing.
RECENT DEVELOPMENTS
FORTESA ACQUISITION. Effective March 30, 1999, we purchased all of the
outstanding shares of stock of FORTESA Corporation, a Texas corporation, from
the Beall Living Trust, its sole shareholder, the trustee for which is Rogers E.
Beall, our Chairman and Chief Executive officer for FORTESA, we paid 50,000
shares of our Series A Convertible Preferred Stock plus 8,055 shares of Common
Stock. At the time of the acquisition, FORTESA's assets consisted of oil and gas
interests located in East Texas and the Republic of Senegal and were valued as
FORTESA's historic costs for these properties of $171,000.
TERMS OF THE SERIES A CONVERTIBLE PREFERRED STOCK
The terms of the Series A Convertible Preferred Stock provide for dividends
at a rate of 6% per annum which will accrue and accumulate beginning March 31,
2001. We may not pay dividends on our Common Stock unless and until all accrued
and unpaid dividends on the Series A Convertible Preferred Stock are paid.
Shares of the Series A Convertible Preferred Stock are convertible into shares
of Common Stock at the holders' option after March 31, 2001 at a conversion
ratio that varies proportionally with an increase in value of the assets of
FORTESA. Initially the Series A Convertible Preferred Stock will be convertible
at a ratio of 10 shares of Common Stock for each share of Series A Convertible
Preferred Stock. On each of December 31, 2001, 2002 and 2003, the conversion
ratio shall be adjusted in proportion to the increase in value of the assets of
FORTESA, if any, as determined by an annual PV10 valuation of the assets
performed by an independent engineer. In any event, the conversion ratio shall
not exceed a maximum of 40 shares of Common Stock for each share of Series A
Convertible Preferred Stock. The maximum ratio would correspond to an increase
in value for the FORTESA assets acquired on March 30, 1999 to $2,925,000 - as
determined by the independent valuation.
10
<PAGE>
FORTESA ASSETS. Mr. Rogers E. Beall, our Chairman and Chief Executive
Officer formed FORTESA in May 1997 to secure an opportunity to develop natural
gas reserves in an onshore block owned by PETROSEN, the national oil company of
the Republic of Senegal and referred to as the THIES Block. Such opportunity was
not available to us at the time due to our financial condition. The THIES Block
consists of approximately 998,000 onshore acres adjacent to Dakar, the Capital
of Senegal. In February 1997, PETROSEN drilled an exploratory well on the
acreage that was tested successfully in two zones, including a flow of 4.3
million cubic feet per day from one of the intervals, a Campanian sand interval,
at 4,200 feet. We estimate that the required expenditures for the initial
development of the THIES Block will be approximately $6.0 million. See "Recent
Developments", concerning FORTESA for details of the costs we have committed to
for developing this property.
To develop the THIES Block, FORTESA entered into a joint venture in
December 1997 with Benton under which FORTESA retained up to 25% interest in the
farm-in with PETROSEN, which was a 15% gross working interest in the project.
The terms of the joint venture required Benton to act as the operator of the
venture and to commit the first $5.4 million required to develop the interest.
FORTESA was required to fund its share of capital requirements after Benton's
committed expenditures were made. We estimated that the development of the THIES
Block will require drilling two to five additional wells and the construction of
a pipeline to deliver the natural gas produced to the local power generating
facility approximately 32 kilometers from the field. See "Recent Developments"
below.
FORTESA also holds a small position in exploration acreage in East Texas
that we believe is prospective for gas exploration. This acreage is adjacent to
known productive areas that have exhibited commercial production in the 1990's.
RECENT DEVELOPMENTS CONCERNING FORTESA. On October 23, 1999, our subsidiary
FORTESA entered into a new agreement with Benton whereby FORTESA has assumed all
obligations and rights of Benton under the joint venture in the THIES Block. In
addition, Benton purchased 135,000 shares of the Company's Series B Convertible
Preferred Stock, liquidation value $10.00, for $750,000 in cash, with the
balance in consideration for Benton's prior development expenditures on the
THIES Block. In connection with the issuance of Series B Convertible Preferred
Stock, we also granted Benton registration rights for Common Stock underlying
Benton's shares of Preferred Stock. We were not affiliated with, and no
substantial business activities existed between our Company and Benton prior to
the promotion by FORTESA of Benton into the THIES project in 1997. Mr. Alexander
E. Benton was Chairman of the Board of Benton from 1987 until August 1999, and
has served as an outside Director of our Company from September 1990 to the
present time. Mr. Benton resigned as Chairman and Chief Executive Officer of
Benton in late August 1999, but has remained on both Boards since that time.
A condition precedent to this agreement was the granting of a release from
Petrosen to Benton of the latter's obligations under the prior joint venture
agreement. On November 16, 1999, we obtained that release for Benton from our
other partner, Petrosen. Under this agreement, we also released Benton on our
behalf from Benton's above obligation to spend $5,400,000 of the funds required
to initially develop the Gadiaga Field by February 2001, of which we have spent
approximately $2.0 million to date. As a result, we are now obligated to develop
the Gadiaga Field without Benton, and we have assumed the role of "operator" of
this project from Benton, with the consent of Petrosen. We must therefore raise
an additional $3.4 million to complete the first phase of the project. Petrosen
previously committed to pay for a 10% working interest ($600,000) for the
development costs, which amount is the difference between our estimated $6.0
million budget for the first phase of the project and the $5.4 million that our
group is committed to.
Our agreement with Benton requires FORTESA to obtain additional equity
financing of at least $500,000 on terms equivalent to those of the Series B
Convertible Preferred Stock. Upon obtaining a letter of intent to fund the
additional equity, FORTESA was required to issue a purchase order for pipe to be
used in our construction of the pipeline that will transport gas produced from
the Gadiaga Field in the THIES Block. FORTESA issued the required purchase order
for the pipe on November 24, 1999. FORTESA is also required promptly to commence
efforts to obtain additional financing in the form of a construction loan of up
to $1,000,000 to complete installation of the pipeline. As of the date of this
filing FORTESA is engaged in discussions to secure the required additional
equity financing from third-party investors and the required construction
financing from an international bank with offices in Senegal.
On November 23, 1999 FORTESA executed a gas sales agreement to supply
natural gas produced from the THIES Block to the main Senegalese power plant at
Cap Des Biches, Senegal. This main power plant is owned by the now privatized,
former Senegalese national power company Senelec, that is partially owned (34%)
and controlled and operated by Hydro-Quebec (Canadian electricity generator, and
reportedly the #2 supplier of electricity to the USA after CONED). The Company's
fixed price gas sales agreement is for 100 CFA per cubic meter of gas. The
contract has a two-year term. The power plant intended recipient of our gas
needs up to 17,000,000 cubic feet of gas per day. Under the terms of this
agreement we have agreed to dedicate to the main power plant, and the power
plant has agreed to purchase all of the natural gas to be produced from the
Gadiaga Field for at least two years at a fixed price of 100 CFA per cubic meter
of gas. The CFA is directly convertible to the French franc with no
restrictions.
11
<PAGE>
As of the date of execution of this agreement, 100 CFA would have
converted to a price of $4.53 under exchange rates in effect at the time. Due to
fluctuations in the exchange rate, as of April 2000, this equates to a price of
approximate USD$4.00 mcf. The Company may also sell any production from the
THIES Block, outside of its Gadiaga Field, to the same power plant or other
local energy users and industries. In late 1999, we hired an independent,
outside, non-related engineering firm that had never worked for us before. This
consulting firm reviewed our production test data, our geologic, geophysical and
engineering calculations, and our bids for service work in Senegal to develop
the discovery well, in which we hold a 60% working interest. As a result, on
January 1, 2000 this firm documented the evaluation of our net hydrocarbon
reserves and future net revenues expected there-from for our 60% net working
interest in our Gadiaga gas discovery and the immediate surrounding structure.
The estimated "proved reserves", both shut-in plus undeveloped, are 3.530 BCF of
natural gas valued using a PV10 factor at $7,249,500.
We plan to complete construction of the gas delivery pipeline in
the second quarter of 2000, and realize cash flow from gas sales within 90 days
of the first gas transmission. Concurrent with the commencement of this cash
flow, we plan the drilling of two to five additional wells in 2000 and 2001. We
must raise or otherwise promote from new co-venturers the additional funds to
drill at least two wells before February 2001. We plan to use a combination of
cash flow from the production of the first well discussed above, new capital
from private or other sources, project financing or capital from future
co-venturers to fund the additional required wells. We intend to fund further
development of the Gadiaga gas field, as well as other exploration on the THIES
Block, in the same manner. We have no assurance that we will be able to
successfully obtain this financing on terms acceptable to us, complete the
project and realize continuing revenues from the gas supply contracts. If we do
not subsequently obtain the financing, we may lose our investment in the project
and still be liable for our commitments.
TERMS OF THE SERIES B CONVERTIBLE PREFERRED STOCK.
The terms of the Series B Convertible Preferred Stock entitle the
holder(s) at any time to convert each share into 10 shares of Common Stock at
their option. In addition, we have the right to redeem all or part of the
outstanding shares of Series B Convertible Preferred Stock at the $10.00 per
share liquidation value. If the shares are redeemed prior to three years from
the date of issuance, we must also pay a premium equal to 6% per annum from the
date of issuance until the date of such redemption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk, including adverse changes in commodity
prices, interest rates and foreign currency exchange rates is discussed below.
COMMODITY PRICE RISK
We have not produced revenues as of December 1999 related to sales of
natural gas, crude oil, condensate and natural gas liquids. We have no program
in place to undertake to hedge our position with respect to these commodities
and does not originate or buy derivative type instruments. However, to initially
minimize price fluctuation risk factors of our gas development project in
Senegal, we agreed to a fixed price for gas sold under our gas sales agreement
over the next two years with the main power plant. Fluctuations in hydrocarbon
commodity prices could have a material impact on the level of revenues in future
periods.
INTEREST RATE RISK
We have no variable rate debt, and therefore we have no open
interest "rate swap" or interest rate "lock agreements".
CURRENCY EXCHANGE RATES
We conduct our business in British "pound sterling", and in "CFA"
in the Republic of Senegal (the CFA is directly tied monetarily to the French
franc which will be replaced by the "Euro" in the next year). Therefore we are
subject to foreign currency exchange rate risk on cash flows related to sales,
expenses, financing and investing transactions. Exposure from market rate
fluctuations related to activities in the Republic of Senegal, where our
functional currency is the CFA, and in the United Kingdom, where our functional
currency is British pound sterling, is not material at this time, but future
increases in the strength of the USA dollar could have a negative effect on our
revenues from international information sales and gas sales transactions.
12
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit filed on October 28, 1997
in the U.S. District Court for the Northern District of Oklahoma, brought by two
parties claiming to be the successors-in-interest to McKenzie Management Inc., a
minority owner of 1,200 miles of 2D seismic data acquired by us in September
1990 from McMoRan Oil and Gas Company and Adobe Resources Corporation. A portion
of this data was originally owned by a joint venture comprised of McMoRan, Adobe
and McKenzie Management Inc. At the time of our original purchase of this data,
McMoRan and Adobe could not locate McKenzie and indemnified us "against any and
all future claims, costs, expenses or causes of action that may be asserted by
the referenced minority owner....". In June 1994, we sold our interest in this
data to Seitel Corporation and indemnified Seitel against claims relating to the
seismic data being sold. The plaintiffs seek approximately $600,000 to
$1,500,000, plus punitive damages and attorney's fees.
We believe we are indemnified against loss based on our purchase
contract with McMoRan and Adobe. We hired a defense counsel and made demand on
IMC Global (as successor the McMoRan) and Sata Fe Resources (as successor to
Adobe) to honor the indemnity running to FIRST SEISMIC, but so far they have
refused. We have been successful in our defense and have won a summary judgment
dismissing the claims against us. The plaintiffs are appealing the courts
decision. We are in the process of asserting our indemnification clauses against
the parties to the suit. No specific provision was recorded in the accompanying
financial statements for any loss that might have been realized from this
matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the March 1999 restructuring of our long-term
debt, we issued stock to retire both classes of debt, our 6% Noteholders and our
12% Senior Noteholders all agreed to receive Common Stock for their principal
balances. In addition, 6% Noteholders exercised Common Stock Warrants early for
$237,500 of cash capital. These items affecting our balance sheet are all
discussed below in more detail.
EXCHANGE OF COMMON STOCK FOR SENIOR NOTES
In October 1997, we entered into agreements with the present
holders of all of our 12% Senior Notes due December 31, 1996 which modified the
terms of these Senior Notes. Prior to entering into these individual loan
modification agreements, we had been in non-compliance with various provisions
including our payment terms on these Senior Notes since September 30, 1993. The
provisions of the loan modification agreements reduced the balance due on the
Senior Notes to the outstanding principal amount only and forgave unpaid
interest and suspended other remedies available to the Noteholders. These
modification agreements required us to retire these Senior Notes prior to
September 30, 1999. In March of 1999, we were able to satisfy the balance of our
obligations that were not already paid in cash under the terms of the
modification agreement by issuing 1,363,111 shares of Common Stock, valued at
two times our net book value, in exchange for most of the outstanding Senior
Notes. The balance we were able to complete paying off as of September 1999 in
full.
In March 1999 we issued 1,073,734 shares of Common Stock,
together with new Warrants to purchase an aggregate 475,000 additional shares
of Common Stock at a price of $0.30 per share, in exchange for retiring all
of our outstanding 6% Secured Promissory Notes. These 6% Notes had an
original principal amount of $500,000, with an outstanding principal balance
of $411,178 plus accrued interest as of March 30 1999. We required the
holders of at least 80% of the 1993 outstanding $0.50 warrants to exercise
early and to purchase shares of Common Stock at an exercise price of $0.50.
As an incentive to exercise the $0.50 Warrants prior to the Warrant's
expiration date, we offered to issue 150% of the number of shares of Common
Stock called for by the Warrants as originally issued in 1993 to the holders
of the 6 % Promissory Notes. Holders of 92.5% of the outstanding Warrants
accepted this offer and purchased an aggregate 712,500 shares of Common Stock
for $237,500 in cash. One holder of 25,000 Warrants issued in 1993 at a
strike price of $0.50 did not accept the above-described offer. These 25,000
Warrants expire in June of 2000.
Cash proceeds from these securities transactions were used for
general corporate purposes primarily connected with our restructuring, poor
operating results for 1999, and to partially fund the development of the THIES
Block in Senegal.
Effective March 30, 1999, we issued 50,000 shares of our Series A
Preferred Stock and 8,055 shares of our Common Stock in exchange for all of the
Common Stock of FORTESA. Shares of our Series A Preferred Stock are convertible
to shares of Common Stock at an initial ratio of 10 shares of Common Stock for
each share of Series A Preferred Stock. The
13
<PAGE>
conversion ratio is adjustable in proportion to an increase in value for the
FORTESA assets acquired on March 30, 1999.
In any event the conversion ratio shall not exceed a maximum of 40
shares of Common Stock for each share of Series A Convertible Preferred Stock.
The issuance of such shares was exempt from registration under Section 4(2) of
the Securities and Exchange Act of 1933.
In March 1999 we issued 1,073,734 shares of Common Stock, together
with new warrants to purchase an aggregate 475,000 additional shares of Common
Stock at a price of $0.30 per share, in exchange for all of our outstanding 6%
Secured Promissory Notes. The issuance of such shares and warrants was exempt
from registration under Section 3(a)(9) of the Securities and Exchange Act of
1933.
In March of 1999, we issued 1,363,111 shares of Common Stock,
valued at two times the book value of the Company, in exchange for outstanding
12% Senior Notes. The issuance of such shares was exempt from registration under
Section 3(a)(9) of the Securities and Exchange Act of 1933.
As part of our transaction with Benton, we issued 135,000 shares of
the Company's Series B Convertible Preferred Stock, liquidation value $10.00,
for $750,000 in cash and in consideration for the prior expenditures of Benton
to develop our interest in the Senegal gas prospect. Each share of Series B
Convertible Preferred Stock is convertible into 10 shares of Common Stock. The
issuance of such shares was exempt from registration under Section 4(2) of the
Securities and Exchange Act of 1933. See "Recent Developments-RECENT
DEVELOPMENTS CONCERNING FORTESA"--Item 1 for a discussion of this transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS--all of the below listed exhibits other than exhibit 27.1
were filed with our 1998 Form 10-K.
<TABLE>
<S> <C>
2.1 Stock Purchase Agreement amongst FIRST SEISMIC Corporation and
the Beall Living Trust, dated as of March 29, 1999. (Filed as
Exhibit 2.1 to the Annual Report of the Company on Form 10-K
for the year ended December 31, 1998.)
3.1 Certificate of Incorporation of FIRST SEISMIC Corporation, as
amended. (Filed as Exhibit 3.1 to the Annual Report of the
Company on Form 10-K for the year ended December 31, 1998.)
3.2 Bylaws of FIRST SEISMIC Corporation, as amended. (Filed as
Exhibit 3.2 to the Annual Report of the Company on Form 10-K
for the year ended December 31, 1998).
4.1 Form of Common Stock Certificate.
4.2 Series A Convertible Preferred Stock, Certificate of Designation.
4.3 Series B Convertible Preferred Stock, Certificate of Designation
4.4 Form of Warrant - 1993, $0.50 per share
4.5 Form of Warrant - 1999, $0.30 per share
4.6 6% Notes Purchase Agreement
4.7 Loan Modification Agreement
10.1 Senegal pre-1999 Contract with Benton Oil and Gas (Senegal) Ltd.
10.2 Revolving Credit Agreement
10.3 Management Contract with Hayne Blakely
10.4 Management Contract with Rogers Beall
10.5 Directors' Stock Option Plan
10.6 Employees' Stock Option Plan
10.7 October 1999 Agreement with Benton Oil and Gas (Senegal) Ltd.
10.8 Assignment and Release with Benton Oil and Gas (Senegal) Ltd.
10.9 Registration Rights Agreement for Benton Oil and Gas (Senegal) Ltd.
11.0 Statement Regarding Computation of Earnings per Share
27.1 Financial Data Schedule
No reports on Form 8K were filed during this period.
</TABLE>
15
<PAGE>
FIRST SEISMIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
AS OF SEPTEMBER 30, 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Act of 1934, the Registrant has duly caused this report on Form 10-Q to
be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Houston, State of Texas, on the 13th day of April, 2000.
FIRST SEISMIC CORPORATION
By: /s/ ROGERS E. BEALL
---------------------------
ROGERS E. BEALL
Chairman, Chief Executive Officer
& Principal Accounting Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 2,260 2,260
<SECURITIES> 0 0
<RECEIVABLES> 503,518 503,518
<ALLOWANCES> 8,460 8,460
<INVENTORY> 0 0
<CURRENT-ASSETS> 497,318 497,318
<PP&E> 151,112 151,112
<DEPRECIATION> 86,746 86,746
<TOTAL-ASSETS> 2,590,964 2,590,964
<CURRENT-LIABILITIES> 1,157,182 1,157,182
<BONDS> 0 0
0 0
50,000 50,000
<COMMON> 90,988 90,988
<OTHER-SE> 11,345,987 11,345,987
<TOTAL-LIABILITY-AND-EQUITY> 2,590,964 2,590,964
<SALES> 614,980 1,043,071
<TOTAL-REVENUES> 640,780 1,072,338
<CGS> 467,063 678,664
<TOTAL-COSTS> 467,063 678,664
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,866 6,867
<INCOME-PRETAX> (752,942) (1,215,296)
<INCOME-TAX> 0 (150,000)
<INCOME-CONTINUING> (752,942) (1,065,296)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (752,942) (1,065,296)
<EPS-BASIC> (0.08) (0.13)
<EPS-DILUTED> (0.08) (0.13)
</TABLE>
