<PAGE>
SECURITIES 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 MARCH 31, 1999.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT 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
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C>
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................................... 8
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 3/31/99 12/31/98
------- --------
<S> <C> <C>
CURRENT ASSETS
Cash $ 94,907 $ 169,679
Accounts receivable, net 148,392 418,435
--------------- ---------------
TOTAL CURRENT ASSETS 243,299 588,114
Data library, net 2,615,748 2,658,011
Data and agency use position, net 22,560 23,185
Property and equipment, net 60,951 82,493
Investment in oil and gas prospects, at cost 171,210 170,710
Deferred tax asset, net 150,000 -0-
Other assets 39,884 42,458
--------------- ---------------
TOTAL ASSETS 3,303,652 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 694,730 1,083,581
Accrued expenses 140,893 199,431
Accrued compensation 28,037 17,408
--------------- ---------------
TOTAL CURRENT LIABILITIES 964,745 1,300,420
Long-term debt 7,847 1,457,974
Data use payables, net 23,775 73,810
--------------- ---------------
TOTAL LIABILITIES 996,367 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;
9,074,265 (1999) and 5,455,365 (1998) issued respectively 90,743 57,769
Additional paid-in capital 11,328,585 9,531,278
Retained earnings (deficit) (9,068,610) (8,778,997)
Foreign currency translation adjustments (10,579) (11,929)
Less treasury stock, 243,855 (1999) 43,855 (1998) shares at cost (82,854) (65,354)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 2,307,285 732,767
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,303,652 $ 3,564,971
=============== ===============
</TABLE>
See accompanying notes.
3
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
ENDED
--------------------------------
3/31/99 3/31/98
------- -------
<S> <C> <C>
REVENUE
Company owned geophysical $ 6,715 $ 27,494
Company owned geological 94,895 237,755
Brokerage third party geophysical -0- 127,561
Brokerage third party geological 25,128 74,751
Commissions 9,347 9,909
Geo-scientific services 36,713 70,250
Reproduction and other 12,576 50,470
-------------- -------------
Total revenue 185,374 598,190
COST OF SALES 123,449 321,193
Gross Margin 61,925 276,997
-------------- -------------
OPERATING EXPENSES
Selling, general and administrative expenses 223,610 211,176
Amortization and depreciation 108,582 111,824
-------------- -------------
Total operating expenses 332,192 323,000
Net operating income (270,267) (46,003)
-------------- -------------
OTHER (INCOME) AND EXPENSES
Interest expense 1,382 38
Interest (income) (122) (1,427)
-------------- -------------
Total other (income) and expenses 1,260 (1,389)
NET INCOME (LOSS) BEFORE TAX (271,527) (44,614)
-------------- -------------
INCOME TAX (BENEFIT) (150,000) -0-
NET INCOME (LOSS) AFTER INCOME TAX BENEFIT (121,527) (44,614)
-------------- -------------
COMPREHENSIVE INCOME:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 1,350 -0-
COMPREHENSIVE INCOME: $ (120,177) $ (44,614)
============== =============
(all Common Stock equivalents are anti-dilutive) $ (0.02) $ 0.01
-------------- -------------
WEIGHTED NUMBER OF COMMON SHARES USED
IN COMPUTING NET INCOME (LOSS) PER SHARE $ 5,769,114 $ 5,386,365
============== =============
</TABLE>
See accompanying notes.
4
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
3/31/99 3/31/98
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (121,527) $ (44,614)
------------- -------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Amortization and Depreciation 108,582 111,824
Change in allowance for doubtful accounts (116,018) -0-
Reserve for potential liabilities -0- (1,865)
Deferred income taxes (150,000) -0-
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable, trade 386,061 (235,038)
Other current assets 22,500 -0-
Accounts payable, trade (321,839) 82,587
Accrued expenses (35,747) 38,931
Accrued compensation, officer 10,629 -0-
Deferred Revenue -0- (56,388)
------------- -------------
Total adjustments (95,832) (60,449)
------------- -------------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES (217,359) (105,063)
------------= -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Disposition of marketable securities -0- 26,138
Acquisition of property and equipment -0- (19,064)
Acquisition in data library (61,789) (33,658)
Increase/(Decrease) in data use payables (32,124) (6,118)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (93,913) (32,702)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted stock issued 187,500 -0-
Borrowings on line of credit 129,000 150,000
Payments on line of credit (30,000) (75,000)
Principal payments on long-term debt (50,000) -0-
------------- -------------
NET CASH USED BY FINANCING ACTIVITIES 236,500 75,000
------------- -------------
NET INCREASE (DECREASE) IN CASH (74,772) (62,765)
CASH AT BEGINNING OF THE YEAR 169,679 193,281
------------- -------------
CASH AT END OF YEAR $ 94,907 $ 130,516
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 1,382 $ 38
============= =============
</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 March 31,
1999, as well as the results of operations for the three months ended March 31,
1999 and 1998, and cash flows for the three months ended March 31, 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 March 31, 1999 current liabilities exceeded
current assets by $721,446.
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 Sengal 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 for the computation of basic earnings per share
at March 31, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
NUMERATOR 3/31/99 3/31/98
--------- ------- -------
<S> <C> <C>
NET INCOME $ (121,527) $ (44,614)
============= ==============
DENOMINATOR FOR BASIC EARNINGS PER SHARE
WEIGHTED NUMBER OF SHARES USED IN
COMPUTING NET INCOME (LOSS) PER SHARE $ 5,769,114 $ 5,386,365
NET INCOME PER SHARE $ (0.02) $ 0.01
============= ==============
</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 March 31, 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 Geo-technical 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.
8
<PAGE>
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. 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.
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 three months ended March 31, 1999 decreased
approximately $413,000 or 69% 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 the current period. 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 three months
ended March 31, 1999 however cost of sales was approximately 67% of sales as the
product sales mix during the period contained a greater proportion of lower
margin seismic data and brokerage of non-owned data and publication revenues.
CORPORATE AND OTHER
Selling and General and Administrative expenses increased
approximately 6% or $12,000 for the three months ended March 31, 1999 as
compared to the same 1998 period primarily as the result of increased legal and
accounting fees connected with the settlement of our debt with our 6% and 12%
Noteholders.
9
<PAGE>
Depreciation and amortization expense, which consists primarily of
amortization of our data library, decreased approximately 3% or $3,000 for the
three months ended March 31, 1999 as compared to the same 1998 period. This
decrease was due primarily to a decline in sales volume resulting in minimum
rates of amortization. These reports are normally amortized over approximately
three years.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by (used in) operations was $(217,000) and
$(105,000) for the three-month periods ended March 31, 1999 and March 31, 1998,
respectively. Our line of credit with our bank for $100,000 is secured by
accounts receivable. As of March 31, 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
$721,000.
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 three months
ended March 31, 1999 totaled $62,000 as compared to expenditures of $34,000
during the same 1998 period. This was due to the completion of projects in
process at December 31,1998. 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 31, 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.
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.
10
<PAGE>
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. 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.
11
<PAGE>
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.
13
<PAGE>
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 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.
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.
15
<PAGE>
FIRST SEISMIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
AS OF MARCH 31, 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 94,907
<SECURITIES> 0
<RECEIVABLES> 156,854
<ALLOWANCES> 8,462
<INVENTORY> 0
<CURRENT-ASSETS> 243,299
<PP&E> 144,538
<DEPRECIATION> 83,587
<TOTAL-ASSETS> 3,303,652
<CURRENT-LIABILITIES> 964,745
<BONDS> 0
0
50,000
<COMMON> 90,743
<OTHER-SE> 11,328,585
<TOTAL-LIABILITY-AND-EQUITY> 3,303,652
<SALES> 185,374
<TOTAL-REVENUES> 185,496
<CGS> 123,449
<TOTAL-COSTS> 123,449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,382
<INCOME-PRETAX> (271,527)
<INCOME-TAX> (150,000)
<INCOME-CONTINUING> (121,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (121,527)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
