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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 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
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FIRST SEISMIC CORPORATION
(Exact name of registrant as specified in charter)
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DELAWARE 76-0062729
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(State or other jurisdiction of Incorporation or organization) (I.R.S. Employer Identification Number)
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2470 GRAY FALLS SUITE 190, HOUSTON, TEXAS 77077-6513
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(Address of principal executive offices)
(281) 556-5656
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $0.01 per share
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 /X/ NO / /
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The Common Stock of the Registrant is not currently listed on any Exchange,
however the Registrant's Common Stock has traded from time to time on NASD "Pink
Sheets". On June 6th, 2000 a stock transaction reported on the OTC bulletin
board indicated a stock trade at $0.06 per share. This activity may not
represent market value; however, the aggregate market value obtained by using
this valuation on the 5,549,932 shares of the voting stock held by
non-affiliates of the Registrant as of June 2000 would be approximately
$332,996. For these purposes, the term "affiliate" is deemed to mean officers
and directors of the Registrant.
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FIRST SEISMIC CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
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Item 1. Business ................................................................................. 3
Item 2. Properties ............................................................................... 15
Item 3 Legal Proceedings ........................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................ 16
Item 6. Selected Consolidated Financial Data ..................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................... 20
Item 8. Financial Statements and Supplementary Data .............................................. 20
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ..... 21
PART III
Item 10. Directors and Executive Officers of the Registrant ....................................... 21
Item 11. Executive Compensation ................................................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................... 25
Item 13. Certain Relationships and Related Transactions ........................................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K ........................ 27
SIGNATURES ............................................................................... 28
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PART I
ITEM 1. BUSINESS
GENERAL
Through our subsidiaries, we provide to our customers various geo-scientific and
complementary services that are used to develop opportunities in the oil and gas
business worldwide. We own and broker seismic data and a wide range of
geo-scientific information primarily used by our customers in upstream oil and
gas exploration and production efforts. We market these intangible assets by
issuing use licenses for our own seismic data and geologic information as well
as information owned by third parties under brokerage and agency arrangements
with oil and gas companies and governments. We use portions of this geological
and seismic information to geo-technically identify and promote exploration
projects to oil company investors that we then seek to have license our
information. We also occasionally take an ownership position in some of these
upstream oil and natural gas production opportunities ourselves through our
wholly-owned subsidiary FORTESA International, Inc.
We were originally incorporated in Delaware in July 1990. Our reporting entity
consists of FIRST SEISMIC Corporation and its two-wholly owned subsidiaries:
FIRST EXCHANGE Corporation, a Delaware corporation, and FORTESA International,
Inc., a Texas corporation. FIRST EXCHANGE Corporation has two wholly-owned
subsidiaries, FIRST EXCHANGE Limited, a United Kingdom company, and eSmartImage
Corporation, a Delaware corporation, formerly known as BLACKWELL SUPPLY, Inc.
FORTESA International, Inc. has a wholly-owned subsidiary FORTESA
International-Senegal, L.D.C., a Cayman Islands corporation which has a branch
qualified for operations in Senegal, West Africa.
Prior to 1993, license sales of seismic data recorded in two dimensions (2D),
had been the source of substantially all of our business. Our main source of
revenue since 1993 have been license sales, brokerage, packaging, publication,
and related services pertaining to a much more diverse geo-scientific
information and database that we seek to acquire, package, own or represent in
order to make these information available for licensing to oil and gas industry
exploration customers. In addition to seismic and other geophysical data, this
geo-scientific information is comprised of studies, research, measurements,
interpretations, information compilations, translations, special reports, well
data, correlations, graphical displays, databases of values, and geologic maps.
The scientific disciplines covered by these geo-scientific information packages
include geophysics, geology, geochemistry, engineering, environmental, and
regional synthesis of such information in various combinations, all oriented
towards providing exploration visibility in specific geographic areas to our
customers. We have copyright law protection for our completed published
materials in each geographic area of our endeavor, and our customers normally
license the use of this information via a formal license contract with us for
their own internal use.
Beginning in 2000, we have developed through our subsidiary eSmartImage
Corporation, a process which we believe will allow us to alternatively deliver
more of our products to our customers directly through the Internet, in addition
to paper copies delivered through salesmen and express mail services. This new
process allows us to convert into digital files the geo-scientific images used
by developers of oil and gas prospects, such as seismic data, maps, wells and
geologic reports. Our conversion process produces fully searchable files that
can be transmitted via e-mail or posted to our in-house FTP site on the
world-wide-web for electronic delivery over the Internet. Currently, we are
providing this process to one primary major oil company customer for service
fees. We will continue to develop and expand this process and apply it to our
website. We intend to also use this technology to convert our geo-technical
database and portions of those that we represent on a brokerage basis into
digital form for transmission delivery to licensed customers directly through
our website at www.first-exchange.com. Due to the widely disbursed and worldwide
presence of the international oil and gas exploration community, we are focusing
on improving marketing the cost effective distribution of our geo-scientific
database more through e-Commerce.
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During 1999, our capital expenditures for processing and the packaging of
geo-scientific information were $260,000, and were primarily comprised of
approximately 4,500 kilometers of additions to our seismic library for newly
reconditioned 2D seismic data for regional reconnaissance in the West African
country of Senegal. Our expenditures for oil and gas prospect development
were $470,000, and were primarily spent on advancing our THIES Permit farm-in
the Republic of Senegal. We are actively pursuing the licensing of our
Company-owned database of studies and geo-scientific services, as well as the
advancement of our oil and gas properties, which are primarily composed of
the THIES Permit.
In addition to our geo-scientific information business, we are both promoting
or pursuing select opportunities in the oil and gas exploration and
production business through existing relationships with our suppliers,
customers and co-venturers. We plan to devote a greater percentage of our
financial and other resources in the future to the promotion and investment
in oil and gas production and development opportunities. Management believes
that a significant portion of our future revenues depend largely on the
success of these related oil and gas ventures. See "Oil and Gas Exploration
and Production Operations" below for a discussion of these oil and gas
ventures, and our business plan to advance such positions.
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 from 1981 to 1991. As of 1991 our seismic data
library consisted of over 11,000 miles of domestic 2D seismic line data. As
of December 31, 1999, our seismic data library consisted of approximately
8,500 miles of domestic, plus revenue interests in over 15,000 kilometers of
West African and other international 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. The 2D data in our library is
now primarily usable for geologic reconnaissance of an area to determine its
potential, but not for setting well drilling locations.
By 1992, the technology that enabled geo-scientists to obtain seismic data in
three dimensions ("3D") became much more cost effective and universally
available, and 3D seismic has superior ability to set well drilling and
development locations. 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 plus one vertical dimension. Thus this process
provides a substantially more accurate representation of the subsurface than
2D data and significantly enhances the ability to evaluate the probable
existence and location of 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. During 1999, we again successfully marketed 2D
seismic data with programs that detail portions of the West African coast in
the deep-water off of the Republic of Senegal. In this portion of the West
African coast where we now have interests in 2D seismic data, no commercial
offshore hydrocarbon production presently exists, so 2D data has proved to be
a cost effective tool for geologic reconnaissance and the initial exploration
reconnaissance efforts required to define the regional geology and potential
of this area. As a result of this West African data, our licensing revenues
for seismic data increased in 1999. During 1999, licensing of 2D seismic
information, primarily of new additions to our data library, accounted for
42% of our revenues, up from just over 27% in 1998. Approximately 23% of our
1999 revenues came from related services such as reproduction and data
handling services, up from 14% in 1998 for such related services.
GEO-TECHNICAL PUBLISHING AND SERVICES. Since 1993, cash flow from license
fees and service revenue generated by our geo-technical research reports and
services performed directly for our customers have become a more significant
factor in our business. However, revenues decreased substantially in our
sales of geologic reports in after mid 1998 and in 1999, due to the low oil
prices that resulted in uneconomic conditions for hydrocarbon exploration.
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As a result, we made no significant capital expenditures for database of
geologic studies in 1999 versus our $889,000 of such expenditures in 1998.
Our capital expenditures for new data library positions were primarily in the
area of the 2D West African seismic data reconditioning, as described above.
In the area of geo-technical publishing, we compete on the basis of expertise
in access to data, packaging, marketing, and supplying interrelated services
for a particular area of geologic interest. We perform these geo-technical
functions, by our synthesis of geo-technical information on an exclusive
basis for a 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 historically have developed and added seismic projects and geo-technical
publications to our data library that we use for multi-client sales. In 1999,
our margins on this product line were negative, and resulted in the
impairment asset database write-down we suffered as noted in our accompanying
statements and explanations. However, previously we had realized adequate
margins 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 an organized and useful format with pricing based on a
percentage of our costs for originating the information. Further licenses to
use these same reports are sold again for varying prices based on market
demand.
During 1999, with a major integrated oil company as an initial customer, we
developed new techniques for managing all types of geo-technical data using
digital technology from scanned images and processing those images for use
and retention by computer systems. We have consolidated these functions into
our restructured and renamed Blackwell Supply, Inc. subsidiary as our
`eSmartImage' product line. These new techniques allow us to convert any
image including color or large images such as seismic data, wells, and
geologic maps used by oil companies into digital files that can be
subsequently searched for and located based on their text content by regular
computer systems/technology. We are unique in this process amongst our
regular competitors, and are not aware of competition for this business
within the oil and gas industry, yet.
In conjunction with geo-technical services, we generate commission and
service revenue related to the compilation, interpretation, imaging and
marketing of geo-scientific data based on customer demand. These services
typically involve fees for performance arrangements with customers who own
data 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. With an impaired
exploration upstream business in 1999, our revenues from both geo-scientific
information from company-owned geologic library plus geo-technical services
accounted for 55% of total revenues in 1999, down from 68% in 1998.
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
that do not conflict with the business interests of our customers. Through
our subsidiary FORTESA International, Inc. we are currently pursuing several
oil and gas projects in the U.S. as well as our primary project in the THIES
Permit in the Republic of Senegal. We utilize the full cost method for
accounting for oil and gas properties. Our projects and prospects are in
various stages of development, however none are actively drilling or
presently producing.
The majority of these investments were accounted for at cost, as we held a
minority ownership interest until November 1999 in our Senegal project. Our
historic cost basis in all of these oil and gas positions totaled $1,241,000
as of December 31, 1999. During 1998, two wells in Kansas in which we now
hold an 18% interest began producing with cash distributions expected to
begin after the operator has recovered the drilling costs.
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RECENT DEVELOPMENTS
FORTESA ACQUISITION. Effective March 30, 1999, we purchased all of the
outstanding shares of FORTESA Corporation, a Texas corporation, from the Beall
Living Trust, its sole shareholder, the trustee for which is Rogers E. Beall.
Mr. Beall was at the time and continues to be, our Chairman and Chief Executive
Officer. These assets were acquired in exchange for 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 approximately
$171,000, a figure that represents the historical cost basis of FORTESA assets.
In February 2000, we changed the name of this new subsidiary to FORTESA
International, Inc., and also set up a new international subsidiary for
liability protection and for qualifying FORTESA to operate in the Republic of
Senegal. See ITEM 1. GENERAL for details.
FORTESA ASSETS. Mr. Rogers E. Beall, our Chairman and Chief Executive Officer
had formed FORTESA in May 1997 to pursue 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 Permit. The opportunity to
participate in the acreage could not be obtained by us at the time, as we were
in default of our senior debt and insolvent. The THIES Permit consists of
approximately 998,000 onshore acres adjacent to Dakar, the Capital of Senegal,
West Africa. In February 1997, Petrosen had 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 middle Campanian sand
interval in the Senonian, at 4,200 feet. We did not reimburse Petrosen for the
costs of this well, but have committed additional costs to earn into our share
of this new field and, with our acquisition in March 2000 of a further 10%
working interest herein from Petrosen under the terms of our Joint Operating
Agreement, we are required to fund 100% of the capital expenditures for the
initial development of the THIES Permit. We estimate that the initial
expenditures will be $6.0 million, and that we will ultimately spend at least
$12.0 million to develop the Gadiaga Gas Field to fill the pipeline that we are
in the process of installing to bring the discovery well into production.
To develop the THIES Permit, FORTESA had initially entered into a joint venture
in December 1997 with Benton Oil and Gas Company under which FORTESA retained 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 Permit 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 42
kilometers from the field. Through November 1999, Benton had spent $910,000 on
the THIES Permit, pursuant to this commitment. In late November 1999 we entered
into a gas sales agreement to sell our future production to the local power
plant. See "RECENT DEVELOPMENTS CONCERNING FORTESA", 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 Oil and Gas Company (Senegal)
Ltd. whereby FORTESA has assumed all obligations and rights of Benton Oil and
Gas Company under the joint venture in the THIES Permit. 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 to 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 Benton and ourselves 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. We believe that our dealings with Benton hereon
were on commercially objective terms similar to those we might have had with any
other arms-length co-venturer.
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A condition precedent to our October 23, 1999 Benton 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 pursuant to the Petrosen farm-out by November of 2000. As a
result, we are 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. Combined THIES permit expenditures by Benton until October
1999 plus ours to date are $2.2 million. We must therefore raise an additional
$3.8 million to complete the first phase of the project farm-out work
commitment. If we are unable to subsequently raise these funds, or otherwise
cause the work program to be completed, we may lose our investment in this
project.
Petrosen previously committed to pay for a 10% working interest ($600,000) for
the initial 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. Petrosen elected under our Joint
Operating Agreement not to pay their share of the development costs in March
2000, resulting in our obtaining a further 10% interest in the Gadiaga Gas
Field. We have been delayed by the government of Senegal in receiving permission
to install the pipeline and to produce the gas under our role as operator, due
to the change of government administration and ministerial officials resulting
from the February 2000 democratically held presidential election in the Republic
of Senegal. Therefore, we anticipate subsequently negotiating an extension of
time to expend this work commitment, due to governmental legal delays that we
have encountered since February 2000.
Our agreement with Benton required 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 Permit. FORTESA issued the required purchase order
for the pipe on November 24, 1999. FORTESA is also required to obtain and close
on interim project financing in the form of a construction loan of up to
$1,000,000 to complete installation of the pipeline. On June 26, 2000 FORTESA
received a favorable written communication committing intent to provide the
$1,000,000 revolving construction loan from a large Senegalese bank in Dakar,
Senegal. We are presently working to agree on final terms, and to prepare and
approve the documents necessary to close on that project funding. In 2000 we
also sold and issued to private, affiliated investors, including our Chairman, a
further $600,000 of the Series B Preferred Stock, meeting the October 1999
requirements of our agreement with Benton.
We obtained a secondary loan guarantee in 2000 from AfriCap, L.L.C., of Houston,
Texas for $500,000 to further secure the planned $1,000,000 construction project
loan from the Senegalese Bank that has issued the loan commitment letter to us
for the THIES Permit pipeline installation. AfriCap is privately held, and
partially owned by certain of our shareholders. Terms of this guarantee require
our payment to AfriCap of a 2% loan guarantee fee, plus the issuance to AfriCap
of warrants to purchase 50,000 shares of our common stock for $1.00 per share.
We also own a minority interest in AfriCap, and also act as AfriCap's investment
advisor for African oil and gas opportunities being considered for investment by
AfriCap, thus AfriCap is an affiliated party to our company. We believe the
terms of our agreement with AfriCap for this secondary guarantee are reasonable,
and similar to those we might pay if we could obtain a secondary loan guarantee
from another guarantor in an arms-length transaction. Due to the impaired
performance of our database operations in 1999 caused by the worldwide collapse
in oil prices, our 1999 cash flow from operations would have been insufficient
to otherwise retire our Gadiaga pipeline loan without a secondary guarantee if
the discovery well does not deliver the reserves we anticipate.
On November 23, 1999 FORTESA executed a gas sales agreement to allow us to
commence supplying natural gas produced from the Gadiaga area within the THIES
Permit 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, and is partially owned and controlled and operated by
Hydro-Quebec (the Canadian electricity generator, and reportedly the number 2
supplier of electricity to the USA after CON ED). Our fixed price gas sales
agreement is for 100 CFA per cubic meter of gas, and has a two-year term, after
which we intend to negotiate an improved contract without a fixed delivery
price. There are several immediate markets near our field in Senegal for the
Gadiaga gas. The power plant that is the intended recipient of our gas currently
would like to purchase up to 17,000,000 cubic feet of gas per day.
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Under the terms of our gas sales agreement we have agreed to dedicate to this
main Senegalese power plant all of the natural gas to be produced from the
Gadiaga area for at least two years under this contract.
The CFA is directly convertible to the French franc with no restrictions.
Presently, our gas sales price of 100 CFA per cubic meter converts to a price of
approximately $4.00 per cubic feet. During the first two (2) years we may also
sell any production from the THIES Permit outside of its Gadiaga Field to the
same power plant, or other local energy users and industries. In late 1999, we
retained J. R. BUTLER and COMPANY, of Houston Texas, an independent, 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.
J. R. BUTLER and COMPANY's evaluation determined the effect of our farm-in
contract with our partner Petrosen, and our then 60% share of the hydrocarbon
reserves and future net revenues are estimated to be produced from our THIES
Permit discovery well in the Republic of Senegal. This firm has no direct or
indirect interest in FORTESA or our affiliates. They are an independent
consulting firm as provided in the STANDARDS PERTAINING TO THE ESTIMATING AND
AUDITING OF OIL AND GAS RESERVES INFORMATION promulgated by the Society of
Petroleum Engineers. Their compensation was not contingent upon the results of
their reserves estimates or cash flow analyses resulting from their review of
our interest in our Senegal property. FORTESA has paid J.R. BUTLER and COMPANY
for their independent engineering work. J. R. BUTLER and COMPANY has confirmed
to us that their report complies with SEC regulations, and has given to us their
permission to use their report and involvement in creating it, under the
condition that said report is released in its entirety.
This firm evaluated our net hydrocarbon reserves and future net revenues
expected from our then 60% net working interest in our Gadiaga gas discovery and
the immediate surrounding structure. Their estimated "proved reserves", both
developed and undeveloped, are 3.530 BCF of natural gas valued using a present
worth factor of 10% (PV10) at $7,249,500. Copies of the complete report are
filed are available upon request through the SEC exhibits procedure.
We plan to complete construction of the Gadiaga Field gas delivery pipeline in
the fourth 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 subsequently raise or otherwise promote from new co-venturers the
additional funds to drill at least two wells before November 2000, or obtain an
extension of time for this work program from the government of Senegal. 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 exploitation of the Gadiaga gas field, as well as other
exploration on the THIES Permit, 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 A CONVERTIBLE PREFERRED STOCK. The terms of the Series A
Convertible Preferred Stock provide for dividends at a rate of 6% times the
$1.00 per share liquidation value per annum, and dividends 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.
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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% of the liquidation value per annum from the date of issuance
until the date of such redemption.
EXCHANGE OF COMMON STOCK FOR 12% SENIOR NOTES. In October 1997, we entered into
agreements with the current holders of all of the Company's 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 payment of interest 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 the book value of the Company, in exchange
for most of the outstanding Senior Notes. We received debt reduction of $0.72
per share plus forgiveness of interest expense of approximately $0.68 per share
for a total debt and interest trade of $1.40 per share, and we received release
of the 60% lien that the Senior Noteholders had on our old domestic 2D seismic
library. We paid the remaining outstanding principal balance on the Senior Notes
of as of September 1999.
EXCHANGE OF COMMON STOCK FOR 6% NOTES, AND WARRANTS TRANSACTIONS. 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. 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 29,
1999. In connection with this transaction, the Noteholders, who were also the
warrant holders, agreed to exercise at least 80% of the outstanding $0.50
warrants, thereby purchasing shares of new common stock for cash. As an
inducement, we offered 150% of the number of shares of common stock called for
by the warrants as originally issued in 1993 for each warrant exercised. As of
October 1999 all of the Noteholders accepted the offer to exchange their Note
for common stock. Of these converting Noteholders, 92.5% also purchased an
aggregate 712,500 shares of common stock for $237,500 in cash. We received debt
reduction of $0.38 per share in return for the issuance of their common stock,
and the release of the lien these Noteholders had in 100% of the ownership of
the operating subsidiary, FIRST EXCHANGE Corporation. One holder of 25,000
warrants issued in 1993 at a strike price of $0.50 chose not to exercise his
warrants early. Those 25,000 warrants expired in June 2000.
CUSTOMERS
We market our geo-scientific products and services to major and independent oil
and gas companies. During 1999, two (2) customers, VANCO Energy Company and
Phillips Petroleum Company, each accounted for over 10% of our revenues. During
1998, four (4) customers; Anadarko Petroleum Corporation, BP Exploration
Operating Company Limited, Phillips Petroleum Company and Fina Neftegaz each
accounted for over 10% of our revenues. Each of those Companies is independent
and has an arms-length relationship with us. Although we believe that revenues
from our seismic and geo-scientific data library operations will maintain a
minimum level of activity sufficient to sustain and benefit from that effort, we
believe the majority of our future revenue growth will accrue from our oil and
gas exploration and promotion activities. We also believe that our oil and gas
reserve ownership activities will require more co-venturing and partnering with
our historical customers and others with whom we have relationships, than do
those of our geo-scientific information business.
9
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COMPETITION
The sale of seismic data and geo-scientific analysis, information and reports is
highly competitive in the United States and Western Europe where we earn most of
our revenues. We rely on supplier and owner relationships to obtain information,
data, analysis, and previously compiled studies to market to our customer base.
Our relationships and supplier contracts are with major and independent oil and
gas companies, national oil companies in the U.S. and Europe, independent
geological and geophysical data compilers that own proprietary equipment,
processes, and technologies, and technical institutes and agencies that employ
scientists to advance such research. Due to our supplier and owner
relationships, we are able to leverage expertise from our suppliers and realize
significant efficiencies in data gathering, processing and analysis activities.
We have successfully built these relationships in key areas of Western Europe,
the Caspian Sea, West Africa and South America. In addition, we use our
proprietary data library of geo-technical reports and seismic data to provide
information cost-effectively to our customer base compared to similar
alternative products offered by our competitors.
There are a number of other independent oil service companies and numerous oil
and gas companies that create and market seismic data, create research studies
and maintain their own seismic data libraries. Many of our competitors have
longer operating histories, greater financial resources and larger sales volumes
than we have. In 1999, there were approximately ten companies with operations
similar to our operations. Additionally, over one hundred service companies
create new information for sale to the upstream oil industry in competition with
us worldwide. We consider all of these entities to be significant competitors.
In the oil and gas exploration and production business there are many companies
competing for the acquisition of mineral properties. Many of these competitors
are better capitalized than we are. We seek to compete in the exploration for
and development of natural gas and crude oil reserves on the basis of our
contacts, relationships, understanding of the application and use of
geo-scientific technology and information in the location and extraction of
commercially producible hydrocarbons, and our expertise in geo-scientific
disciplines. No assurances can be made that we will have the resources necessary
to fully develop the properties that we currently own or to acquire new
properties for development.
SEASONALITY AND TIMING FACTORS
Our results of operations can fluctuate from quarter to quarter. The
fluctuations are caused by a number of factors.
Our seismic licensing, brokering, geo-technical publishing and service
activities are significantly influenced by oil and gas industry capital
expenditure budgets and spending patterns.
The timing of oil and gas industry capital expenditures can be irregular, since
spending patterns are affected by individual oil and gas company requirements as
well as industry-wide conditions. As a result, our geo-scientific data licensing
revenue does not necessarily flow evenly or progressively on a sequential
quarterly basis during the year.
No revenues have been realized from our oil and gas activities as of December
31, 1999. We may bring wells on-line in the future that may cause significant
fluctuations in our financial results. Our future oil and gas exploration and
production operations may be impacted by certain weather-related events as well
as by mechanical and equipment problems or shortages and other factors, which
may delay the hookup of successfully completed wells and delay the resultant
production revenue. Our planned installation of the Gadiaga gas delivery
pipeline may be delayed or run over our planned budget due to the approaching
rainy season in Senegal. Also, due to the seasonal variations in oil and gas
prices, our results from future oil and gas operations may be subject to
significant fluctuations due to variations in commodity prices.
EMPLOYEES
As of June 2000 and in all of our operations, we had 20 full-time employees and
several employees who devote part of their time to our business who are also
officers of other affiliated corporations. Of these full-time employees, 8 work
in geo-scientific information, 8 in corporate staff or administrative
operations, and 4 in oil and gas operations.
10
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None of our employees are covered under collective bargaining agreements, and
we believe we have a favorable relationship with our employees. We have
employment contracts with our Chief Executive Officer who also acts as the
President of our FIRST EXCHANGE subsidiary, and also with the President of
FORTESA, our oil and gas subsidiary. See ITEM 11, Executive Compensation, for
further details.
RISK FACTORS AND INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Any investment in our securities involves risk. Investors should carefully
consider, in addition to the other information contained in this report, risks
such as those described below before making any investment decision.
This Annual Report on Form 10-K includes forward-looking statements and
assumptions we have made. 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 or 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 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 and 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.
DECREASES IN ENERGY INDUSTRY SPENDING COULD ADVERSELY AFFECT OUR BUSINESS.
Overall demand for 2D seismic data, geo-scientific information, and the type
of related services that we provide depends primarily upon the level of
spending by oil and gas companies for exploration, production and development
activities.
Industry spending levels may follow increases and decreases in the commodity
prices for oil and gas, so that demand for our products and services may be
affected to some degree by market prices for natural gas and crude oil. These
prices have historically been very volatile due to the sensitivity of product
prices to market demand. As a result of the very significant weaknesses in oil
and gas commodity prices starting in mid-1998 and through mid-1999, the level
of overall oil and gas industry exploration activity and the market for our
services declined from levels in-place in recent years. This has resulted in a
significant consolidation in the number of major customers for our
geo-scientific products. Our customers' capital spending decreased
significantly in the period immediately after the 1998 annual report contained
herein, due to these recent industry trends, and the trend has not improved
with the recent increase in oil and gas commodity prices. We believe that most
of our remaining customers are spending their reduced capital budgets on less
risky development projects, instead of exploration projects where our historic
databases and services would be most needed. This resulted in a significant
adverse effect on our revenues in 1999 that continues presently as reduced
demand for our services and our resulting in our lower levels of operations
and cash flow. In addition, potential revenues to be generated in the future
by our oil and gas exploration and development business may fluctuate with
increases and decreases in the market prices of oil and gas.
Many factors beyond our control may affect such oil and gas operations. These
factors include financing activities, the level of worldwide supply of natural
gas and oil, the availability of adequate pipeline and other transportation
and processing facilities and the marketing of competitive fuels, and similar
worldwide factors.
11
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DATA LIBRARY INVESTMENT AND FUTURE LICENSING. Our method of selling
use-licenses for our data library allows us to sell the same information to
multiple buyers. However, data that we have developed and invested in may not
consistently continue to be of interest to customers in the future due to
changes in areas of interest, licensing of the underlying lands for
hydrocarbon exploration by companies, product pricing factors, political risk
changes and perceptions, and changes in financial and other conditions that
can reduce the viability of hydrocarbon extraction in areas for which we own
data. Low oil prices from mid-1998 and in 1999 resulted in unacceptably low
level of product licensing revenues for our database of seismic data and also
our geo-scientific reports. These products are oriented towards the upstream
end of the oil and gas industry, i.e. the customers that are interested in oil
and gas exploration actions. In such cases, as in 1999, we did not and in the
future we may not fully recover our costs in acquiring and developing
geophysical and other geo-scientific data through future licenses of that
data. We utilize the full cost method for accounting. As a result, we would
have to expense costs of that data library asset without having corresponding
revenues, thereby causing a loss in those periods affected.
AMORTIZATION OF OUR DATA LIBRARY. Our methods for accounting for investment in
our data library can have a significant effect on the results of our
operations for any given period of time. We amortize our data library based in
part on our estimates of future sales of licenses to our data or over a
regular minimum period, whichever is greater. Estimates are inherently
imprecise and may vary from period to period depending on market developments
and our expectations. If we see that the values in our data library are not
being recovered through revenues at any point in time, we may increase the
amortization rates. This may result in impairments of our data library assets
in periods of low exploration industry interest, and such impairments can have
a significant effect on our reported results of operations. Such an occurrence
caused the relatively large write-down of our historic 2D domestic USA data
library costs and certain geo-scientific reports database in our 1999
financial results, and additional write-downs in the future may be required if
the industry again does not license a sufficient quantity of our databases to
meet our investment criteria and expectations.
INTERNATIONAL EXPOSURE AND RISKS. As we increase our investment in countries
outside of the U.S., we increase our exposure to risks that we cannot always
anticipate or control by the rule of law or compliance with standards normal
for our business. In the future, we believe that an increasing amount of our
revenue will come from sales of information and natural resources originating
in Senegal and other countries outside of the U.S., and these revenues will be
subject to risks that are inherent in doing business abroad.
These risks include the possibilities of expropriation of our assets and
investments, changes in tax and other laws, currency exchange rate
fluctuations and devaluations, labor and political disturbances, insurrection
or war, disruptions or delays of licensing, permitting, or leasing activities,
and the requirements of partial local ownership of our operations.
INSURANCE LIMITATIONS. We attempt to insure against normal liabilities, and to
protect our assets and investments against losses. However, we cannot always
obtain insurance for our operating risks. In addition, sometimes insurance is
not available at cost-effective rates. We will periodically review the
insurance coverage we have in effect, and try to insure against possible
losses when coverage is available at rates that do not make our projects
non-commercial.
DRILLING HAZARDS AND DRY HOLES COULD AFFECT OUR OIL AND GAS ACTIVITIES. Our
oil and gas operations will be subject to hazards incident to the drilling of
oil and gas wells, such as cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution, or other environmental risks, as well as
to the risk that we may not encounter commercially productive natural gas or
oil reserves. Some of these hazards can cause personal injury and loss of
life, severe damage to and destruction of property and equipment,
environmental damage and suspension of operations. However, since we sometimes
may not act as operator in our oil and gas drilling business, these factors
may be dependent upon our petroleum company co-venturers to conduct operations
in a manner so as to minimize these operating risks. In accordance with
industry practice, we will maintain insurance against some, but not all, of
these operating risks.
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There can be no assurance that adequate insurance will be available in the
future, or that we will be able to maintain adequate insurance on terms and
conditions acceptable to management. As a result of the risks inherent in oil
and gas operations, the success of our oil and gas exploration, development
and production activities is uncertain.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS. Our operations are
dependent upon a relatively small group of management and technical personnel.
The loss of one or more of these individuals could have a material adverse
effect on our operations and future results. Equity ownership and other
incentives are offered to attract and retain our key employees. In addition,
we have employment agreements with our Chairman and Chief Executive Officer,
Rogers E. Beall, who also acts as the President of our FIRST EXCHANGE
subsidiary, and also with FORTESA International President, Hayne S. Blakely.
OUR ABILITY TO OBTAIN ADDITIONAL FINANCING COULD IMPAIR OUR FUTURE OIL AND GAS
ACTIVITIES. The success of our oil and gas development activities depends
substantially on our ability to obtain additional financing. In particular,
our activities in Senegal require us to make significant capital expenditures
to continue the development of that project, which will depend upon our
ability to obtain additional financing. SEE "OIL AND GAS EXPLORATION AND
PRODUCTION OPERATIONS" - "RECENT DEVELOPMENTS". Although discussions with
potential equity and debt investors and lenders are ongoing, we have no firm
commitments for such additional financing, and no assurances can be made that
additional financing will be obtained.
REGIONAL EVENTS MAY AFFECT OUR GEOGRAPHICALLY CONCENTRATED OPERATIONS. Most of
the seismic data in our library is 2D data covering lands located in the Rocky
Mountains, Michigan Basin, other onshore areas of the U.S, and West Africa in
the vicinity of Senegal. The majority of our compiled geo-scientific data and
studies cover areas in the Caspian Sea, South America and West Africa. Our
interests in oil and gas properties are concentrated in East Texas and The
Republic of Senegal in Western Africa. Any regional events that increase
costs, reduce availability of equipment or supplies, reduce demand or limit
production will impact us adversely in these specific areas.
GOVERNMENTAL REGULATIONS. When we conduct geo-technical field operations, we
are affected by a variety of laws and regulations, including laws relating to
the use of information, the environment, taxes, exports and imports, safety,
permitting operations, and investment in certain countries that may become out
of favor with the U.S. or other governments.
We invest in financial and management resources in order to comply with such
regulations and laws, but we cannot always anticipate changes in the laws and
politics, and errors in compliance by operatives of our company. Such
modifications and non-compliance can cause us to lose our investment or become
liable for errors in judgment or actions that will result in losses.
Further, when we conduct oil and gas operations, we are subject to extensive
governmental regulation, which changes from time to time in response to
economic or political conditions. In particular, oil and gas exploration and
production are subject to international and U.S. Federal and State regulations
governing environmental quality and pollution control, state limits on
allowable rates of production by well or proration unit, and other similar
regulations. These regulations generally are intended to prevent waste of
natural gas and oil, protect rights to produce natural gas and oil between
owners in a common reservoir and control the amount of natural gas and oil
produced in order to avoid waste and reservoir damage, by assigning allowable
rates of production and control contamination of the environment.
Environmental regulations will affect our operations on a daily basis. Also,
we believe that the trend toward more expansive and stricter environmental
laws and regulations will continue. At present, we do not yet expend material
amounts to comply with such regulations. The implementation of new or changing
of existing laws or regulations affecting the oil and gas industry could have
a material adverse impact on us in the future.
13
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The following organization chart gives an overview of our structure,
organization and operations as of February 2000.
[CHART]
14
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ITEM 2. PROPERTIES
We lease office space under non-cancelable operating leases. Our lease for our
corporate and operating offices in Houston, Texas amounts to 7,650 square feet
and expires in January 2001. Our lease for our U.K. operations amounts to 500
square feet for our facilities just south of London, England, and has a 30-day
cancellation clause. Our offices in Baku, Azerbaijan are in the facilities of
one of our publication co-venturers and the space is made available to us at
no charge.
We hold rights to a natural gas discovery known as the Gadiaga Field that is
located in the THIES Permit in the Republic of Senegal through our wholly
owned FORTESA International subsidiary.
In late 1999, we hired an independent outside, non-related engineering firm.
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 that we hold a 60% working interest in.
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. Our net share of the estimated "proved reserves", both
developed and undeveloped of 3.530 BCF of natural gas, valued using a present
worth (PV10) factor that discounted our expected reserves valuation at the
rate of 10% per annum, resulting in an estimated present worth of $7,249,500.
In order to exploit our rights under our agreement with Petrosen, we are
obligated to make expenditures in the amount of $5,400,000 to fund the
construction of a delivery pipeline and then the drilling of two new wells in
the Gadiaga gas field. See "Liquidity and Capital Resources" and "Oil and Gas
Exploration and Production Operations - Recent Developments".
We also hold various mineral lease rights on certain speculative oil and gas
acreage located in East Texas. Expenditures made to secure these rights are
recorded at historical cost in the accompanying financial statements. We
periodically evaluate the expected future value of these rights in order to
determine if they have become impaired or reduced in value. As of December
1999 the valuation at our cost of these rights was approximately $1,241,500.
(See Note 1 - Summary of Accounting Policies, Oil and Gas Properties in the
Accompanying Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
We are 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 up to 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 reported to us that they 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. In March 2000, the United States
District Court for the Northern District of Oklahoma awarded to us a Summary
Judgment dismissing all claims made by the Plaintiffs. The Plaintiff's are
appealing the Summary Judgement and IMC Global (McMoRan) and Santa Fe Energy
Resources still have not honored their indemnity to us, nor paid any of the
legal fees we incurred on our successful defense. Seitel still owns our data
underlying this issue having bought it from us in June of 1994, and Seitel has
refused to pay to us our share of the data license sales that they are making
on our behalf since 1997. Accordingly, we have accrued expenses for our legal
defense costs, and not included revenues earned from our share of data sales
on this data, as Seitel has refused to give an accounting to us of our sales
for the past year.
Our attorneys are presently working to defend us from the plaintiff's appeal
of the summary judgement dismissing all claims.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock was formerly traded on the NASDAQ NMS system. In March of
1993 our common stock was de-listed from the NASDAQ and any trading activity
since that time has taken place through the OTC Bulletin Board System (Pink
Sheets). Sales of shares of our common stock have been sporadic and there is
currently no established public trading market.
DIVIDEND POLICY
We have not paid cash dividends since 1990, and we intend to retain future
earnings from the next several years to provide funds for use in the expansion
of our business. We do not intend to pay dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
As part of our November 1999 transaction with Benton Oil and Gas, we issued
135,000 shares of our new Series B Convertible Preferred Stock, liquidation
value $10.00, for $750,000 in cash and in consideration for the $910,000 of
Benton's prior development expenditures on the Senegal THIES Permit. Each
share of Series B Convertible Preferred Stock is convertible into 10 shares of
common stock. In addition, in March of 2000, we sold a further 60,000 shares
of this same issue of Series B Preferred Stock to a private investor group for
$500,000 in cash and $100,000 in oil and gas properties and other intangible
assets complementary to our FIRST EXCHANGE business interests. The investor
group individually purchasing these additional new Series B Preferred shares
included a personal trust controlled by, plus a limited partnership affiliated
with our Chairman, Mr. Rogers Beall. In November 1999, our outside Board of
Directors had authorized the issuance of a total of 250,000 Series B Preferred
shares for funding our project in the Republic of Senegal, and with these
actions we had sold and issued 195,000 of such shares as of March 2000. The
issuance of these shares was exempt from registration under Section 4(2) of
the Securities and Exchange Act of 1933. See "RECENT DEVELOPMENTS CONCERNING
FORTESA" in ITEM 1 for a discussion of this transaction.
16
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial data
for the periods indicated as restated for the FORTESA pooling.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
STATEMENT OF INCOME DATA 1999 1998 1997 1996 1995
------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUE $ 1,595,809 $ 3,131,360 $ 2,420,372 $ 2,231,194 $ 2,744,967
GROSS MARGIN 983,788 1,709,461 1,300,254 1,212,486 1,288,014
NET OPERATING INCOME (LOSS) (1,507,281) 120,937 54,832 (494,802) (977,315)
OTHER INCOME AND (EXPENSES) 13,120 237,096 153,987 882,423 1,741,445
NET INCOME (LOSS) (1,344,161) 358,033 208,819 387,621 764,130
-------------- -------------- -------------- ------------- --------------
PER SHARE OF COMMON STOCK
COMPREHENSIVE INCOME (LOSS) $ (0.16) $ 0.06 $ 0.04 $ 0.08 $ 0.16
WEIGHTED NUMBER OF COMMON STOCK
OUTSTANDING 8,242,487 5,560,924 5,259,702 5,071,510 4,817,720
============= ============== ============== ============= ==============
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
BALANCE SHEET DATA 1999 1998 1997 1996 1995
------------- -------------- -------------- ------------- --------------
TOTAL ASSETS $ 3,614,733 $ 3,564,971 $ 3,117,309 $ 3,145,544 $ 4,180,741
LONG TERM DEBT 72,192 1,531,784 1,876,658 1,862,353 2,117,006
STOCKHOLDERS' EQUITY $ 2,561,568 $ 783,767 $ 266,957 $ 11,845 $ (634,642)
============= ============== ============== ============= ==============
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES OF SEISMIC AND GEO-SCIENTIFIC DATA. Total revenue for the year ended
December 31, 1999 decreased approximately $1,536,000 or 49% compared to the
same period in 1998. Revenues by category fluctuated but the primary net
decrease was due to decreased licensing and brokerage of company owned and
third-party geological products related to the Caspian Sea region. Declines in
revenue from our commission income are primarily attributable to a decrease in
oil and gas exploration activity in East Texas and a resultant decrease in
demand for our domestic sales of geophysical information related to our
contract with CGG that expired in 1998. In 1999 success in the Deep-Water
areas of northern Senegal, West Africa accounted for 28% of our total sales
for the year. We experienced an increase in sales of company-owned geophysical
products as a result of our promotion
OIL AND GAS. Our investments in oil and gas properties have produced no
operational revenue as of this filing. The natural gas reserves held by our
subsidiary FORTESA are not yet producing. Revenue associated with these
reserves is subject to certain capital expenditures for which we are obligated
and which have yet to be made. See "Liquidity and Capital Resources" for a
discussion of these capital expenditure requirements.
COST OF SALES. Cost of sales is composed of employee and administrative costs
directly associated with specific projects or sales, and of partner and data
owner payments for licensed and brokered data. These costs do not include the
amortization of the associated data library that is included in Expenses after
Gross Margin. Costs of sales have normally averaged approximately 54% of
revenues during the period covered herein, in spite of product mix
fluctuations.
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CORPORATE AND OTHER. Selling and General and Administrative expenses decreased
approximately 7% or $83,600 for the year ended December 31, 1999 as compared
to the year ended December 31, 1998 primarily as the result of a reduction in
staff and decreased bad debt expense.
Depreciation and amortization expense, which consists primarily of
amortization of our data libraries, increased approximately 217% or $986,000
for the year ended December 31, 1999 as compared to the year ended December
31, 1998. This was due to the increased level of capital expenditures for new
geo-scientific reports in the Caspian Sea region that were completed and
placed on the market during 1998. A full year of amortization was recognized
on this data in 1999. 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 2D
domestic seismic data library and approximately $235,000 was attributable to
our international geo-technical publication library.
No income arose from settlement and liability extinguishments in 1999. During
the years ended December 31, 1998 and 1997, we recognized income of $305,000
and $177,000 in connection with settlements and statutory extinguishments of
debt with certain trade creditors. This non-cash income occurred in connection
with the decline of our 2D former seismic brokerage activities, and was
substantially offset by the associated product-line final regular amortization
costs of the 2D data library. These amortization costs were shown as operating
costs. We do not believe significant income or compromised amounts of this
nature are likely to be realized in the future, as these amounts resulted from
the substantial elimination at the end of 1993 of our operations in the
domestic seismic brokerage business.
Interest expense decreased $28,000 or 66% in 1999 as compared to 1998 in
connection with the settlement of our 12% Senior and 6% Notes.
LIQUIDITY AND CAPITAL RESOURCES. Our cash flow from operations was $158,939
and $1,190,718 for each of the two years ended 1999 and 1998 respectively. We
had a working capital deficit at December 31, 1999 and 1998 of approximately
$282,000 and $661,000. Of this, we expect to be able to settle liabilities
included in the current section of the accompanying balance sheet in the
amount of approximately $200,000 from non-cash transactions in the form of
services or trades of information.
Expenditures on acquisition of new data library for resale were approximately
$261,000 and $890,000 in 1999 and 1998 respectively. We expect to fund capital
expenditures in the next 12 months through customer pre-commitments to any
approved new projects, prior to capital expenditures exceeding $25,000 on any
single project. Customer pre-commitments are pre-sale agreements that are made
by customers who have expressed an interest in the development of a specific
project that has not been yet developed. The pre-commitment allows us to
minimize our financial risk in developing projects.
Cash expenditures for development of oil and gas prospects totaled $470,000 in
1999. The majority of these expenditures were in conjunction with the THIES
Permit in the Republic of Senegal. FORTESA's capital expenditures required by
our contract for the THIES Permit in phase one of the Petrosen farm-out are
$6.0 million for installation of a pipeline and additional drilling in the
Gadiaga Field. The timing for FORTESA's expenditures was to be in the first
three quarters of 2000, but due to permit delays by the new administration in
Senegal for infrastructure installation, we expect to subsequently receive an
extension of time to make these expenditures. As operator of this project, we
are expending all of these funds into the Gadiaga Field. If we do not
subsequently receive such extensions, we could lose our investment and
exploration rights in the THIES Permit.
FORTESA is preparing to negotiate with the Ministry of Energy in Senegal to
extend the time period for the second phase of the THIES Permit farm-out, and
the new Ministry's officials have now been installed as of the second quarter,
2000.
18
<PAGE>
We plan to complete construction of the gas delivery pipeline by the fourth
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 plan to
use a combination of cash flow from the production of the first well as
discussed above, new capital from private or other sources, project financing
or capital from future co-venturers to fund the additional required wells and
the $1,000,000 bank loan from the Senegalese bank to complete the local
Senegalese installation costs of the pipe that we have on standby in Senegal
to connect the Gadiaga gas field to the power plant. We intend to fund further
development of the Gadiaga gas field, as well as other exploration on the
THIES Permit, in the same manner, subject to receiving an extension of time to
perform these actions from the newly installed administration in the Republic
of Senegal.
We have no assurance that we will be able to successfully obtain this
financing on terms acceptable to us or 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.
A line of credit with our bank for $100,000 is secured by our Accounts
Receivable, and has an available amount of $99,000 as of December 31, 1999.
Our Chairman had personally guaranteed this line of credit, pending completion
of our restructuring.
During 1999, we generated cash flow from investing activities through the sale
of stock of $941,000. This consisted primarily of the sale of common stock
through the exercise of warrants by our 6% Noteholders who purchased 562,500
shares for $187,500 and the sale of Class B Preferred to Benton that generated
cash of $750,000.
We believe that cash flows from operations will be sufficient to fund our
working capital needs for the next 12 months, except for required expenditures
in conjunction with Oil and Gas development in the Republic of Senegal, which
will require additional financing. We are required to make these expenditures
in the balance of the year 2000, or receive the extension of time necessary to
complete these actions, as previously discussed. At the present time, we do
not have the funding secured to complete the pipeline installation project in
Senegal, but we will seek to complete and close on that financing as soon as
we receive our requested infrastructure installation permits from the new
Ministry of Energy. We are negotiating with banks, guarantors, potential
co-venturing partners and new investors to secure funds necessary to install
the pipeline and start the cash flow from the Gadiaga gas discovery well.
Thereafter, we will seek funding for drilling confirmation wells in the
Gadiaga Field. See "FORTESA ACQUISITION" and "RECENT DEVELOPMENTS" in ITEM 1
for possible future impacts to Liquidity and Capital Resources.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. Statement 133 is effective for fiscal years beginning after
June 15, 1999 and cannot be applied retroactively. Statement 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at our election, before January 1
1998). We have not, and we are not engaging in hedging activities, and we do
not buy or sell derivative instruments. Therefore we do not believe that
application of this recent statement will have any effect on our consolidated
financial statements.
YEAR 2000
There were no adverse consequences or excess expenses to our business or
Company after December 31, 1999 from computer programs, systems, or other
unexpected or unusual items.
19
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The general levels of exploration activity in the oil and gas industry
directly affect the cost of acquiring, processing and reselling geo-scientific
data and exploration and development costs of advancing our gas projects. The
pricing of our products and services and of the costs we must pay for
hydrocarbon development is primarily a function of these factors. For these
reasons, we do not believe inflationary trends have had any significant impact
on its financial operating results during the three years ended December 31,
1999. But management believes the large fluctuations in the worldwide
hydrocarbon product pricing during this period, and excesses and shortages of
oil field services resulted in cost fluctuations that presented significant
challenges to us for planning the development of the Senegalese project, and
our cash flow management
ITEM 7A. 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 June 2000 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 per MCF in our gas
supply agreement over the next two years with the power plant that is party to
such agreement. We have a gas sales agreement provision in our signed sales
contract that allows us to re-open for negotiation the contract due to
significant currency exchange rate fluctuations. We are presently considering
such actions, as the U.S. dollar has strengthened significantly against the
French franc since November 1999 when we signed our fixed price contract, and
the strengthening has decreased our expected cash flow in dollars by 14% to
approximately $4.00 per MCF, verses the $4.63 per MCF that we expected when we
executed the fixed price sales contract. In May 2000, the French franc has
recovered slightly from the earlier levels, and we are considering our options
regarding this contract price provision as we await legal permits and bank
financing to complete the pipeline installation in the Republic of Senegal.
Fluctuations in hydrocarbon commodity prices could also 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 some of our business in British "pounds 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 the
Company's functional currency is the CFA, and in the United Kingdom, where the
Company's 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 license sales
and gas sales transactions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules required by this
item are set forth on pages F1 through F32 hereof.
20
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
ROGERS E. BEALL, CHAIRMAN -- 52 years old. FIRST SEISMIC and our predecessors
have employed Mr. Rogers Beall continuously since February 1974 (26 years). Mr.
Rogers E. Beall has been on the Board of Directors continuously since April 1983
with terms of three years, or serving until replaced. Previously Mr. Beall was
employed for 3 years as the Comptroller of the National Aeronautical and Space
Administration's Slidell, Louisiana Computer Center during the Skylab program.
Prior to that time, Arthur Andersen & Co employed him in their audit and tax
divisions in Cleveland Ohio for approximately 4 years. Mr. Beall received his
CPA certification in Ohio and Louisiana, and a Bachelor of Arts degree in
Business Administration, with a concentration in Accounting and a minor in
Economics from Baldwin-Wallace College in Berea, Ohio in 1969.
ALEXANDER E. BENTON, DIRECTOR -- 57 years old. Mr. Alexander E. Benton has
served on our Board of Directors since September 1990 for a term of three years,
or serving until replaced. In 1988, he was a founder, and is presently a member
of the Board of Directors of Benton Oil and Gas Company. Mr. Benton is an
Executive Officer of an international affiliate of Benton Oil and Company, of
Carpinteria, California, a NYSE listed, international oil and gas operator.
Previously he served as the President of Benton Petroleum Company from 1985 to
1988. He began his career at Amoco Production Company and ultimately became a
`Director of Applied Geophysical Research' at Amoco's research center in Tulsa
Oklahoma. Mr. Benton also was employed in senior positions with TransOcean Oil
Co., May Petroleum and also with MOBIL Oil Company. Mr. Benton has a Bachelor of
Science degree in Geophysics from California State University, and served the
American Association of Geologists as one of their AAPG Distinguished Lecturers
in 1998. In 1999, Mr. Benton filed for personal bankruptcy protection under the
Federal bankruptcy laws. Management does not believe that this proceeding has or
will materially affect Mr. Benton's ability to serve as director of our company.
EDWARD M. TRAPP, DIRECTOR -- 70 years old. Mr. Edward Trapp serves on the Audit
and Compensation Committees of the Company and was appointed to the Board of
Directors in October 1997 for a term of three years. Mr. Trapp worked as a
geophysical consultant from 1989 to present, and assists the Company in this
regard, as requested. From 1953 to 1989, Mr. Trapp was employed by AMOCO
Production in Europe and the USA, in varying responsible positions in
Geophysical Operations, ending his career at Amoco as the Regional Geophysicist
for the Europe, Latin America, and Far East Region. Mr. Trapp has a Bachelor of
Science degree in geophysics from St. Louis University, and is a veteran of the
U.S. Army from the Korean War era.
ARTHUR O. BEALL, PH.D., DIRECTOR -- 63 years old. Dr. Arthur O. Beall (no
relation to Mr. Rogers E. Beall) was appointed to the Board of Directors in
October 1997 for a term of three years, and serves on the Audit and Compensation
Committees. Since 1994, Dr. Beall has worked as an international Oil and Gas
Consultant, and advisor to J. Ray McDermott Co., and to others. Since 1997, ELF
Exploration, Inc., of France has retained Dr. Beall as their International
Business Development Advisor in Houston. From 1989 to 1994, Dr. Beall was the
President/General Manager of British Gas (Americas) (formerly Tenneco
International) running an international exploration program with 450 employees
and working in Africa, Latin America, and the USA. Prior to 1989, Dr. Beall ran
international exploration programs for Tenneco Int'l, Hamilton Int'l Oil Co.
(VP) and CONOCO. Dr. Beall received his Ph.D. in Geology from Stanford
University (1964), Master of Science degree in Management from M.I.T. (1976),
and his Master of Science degree and Bachelor of Science degree in Geology from
Baylor University where he completed his studies in 1961.
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<PAGE>
All directors of the board serve a three-year term, or serving until they are
replaced or resign.
EXECUTIVE OFFICERS
The current executive officers of the Company are:
ROGERS E. BEALL, CEO and Acting Chief Accounting Officer of FIRST SEISMIC and
President of FIRST EXCHANGE Corporation. Biographical information regarding
Rogers E. Beall is set forth above, under the Directors' section.
The following biographies describe the business experience of the remaining
executive officers:
HAYNE S. BLAKELY, PRESIDENT OF FORTESA -- 49 years old. Mr. Blakely joined
FORTESA on January 1, 1998. Previously he was the President of Quintana Minerals
(Peru), and served as Vice President of Operations and as a consultant for
Quintana Minerals Corporation in Houston for a total of eleven years. He began
his career in oil and gas industry in 1974 with Schlumberger, and then worked in
various engineering positions for AMOCO and Terra Resources. Later he served as
Vice President and partner of Pure Energy Production Company, and President and
owner of Blakely Engineering and Associates providing consulting services. Mr.
Blakely has a Bachelor of Science degree in Industrial Engineering from the
University of Tennessee and is a registered engineer in the state of Texas and
Kansas.
NICHOLAS E. ROCKECHARLIE, VICE PRESIDENT OF FINANCE -- 53 years old. Mr.
Rockecharlie is the Managing Director of Rockecharlie and Company, a
merchant-banking firm he founded in 1979. Rockecharlie and Company has sponsored
and/or arranged a variety of transactions including leveraged buyouts,
re-capitalizations, mergers, acquisitions and private equity placements. From
1984 - 1993 Mr. Rockecharlie organized and served as managing general partner of
Elisa Research Ltd., a Texas limited partnership engaged in medical diagnostic
research performed by leading virologists from the Baylor College of Medicine.
From 1977 - 1979, he was Vice President of Charter New York Leasing Corporation
(a unit of Irving Trust Company). Mr. Rockecharlie was Vice President of
Commercial Credit Capital Corporation responsible for institutional placement of
equity interests in leveraged leases arranged by the firm. In 1968 - 1971, Mr.
Rockecharlie served in the U.S. Army, graduated from the Infantry Officer
Candidate School at Ft. Benning, GA, and served in the Republic of Viet Nam as a
company commander. He holds a Bachelor of Science Degree in Mathematics from
Loyola College in Baltimore and a Master of Administrative Science degree from
Johns Hopkins University.
WALTER H. WALNE, III, SECRETARY -- 52 years old. Mr. Walne is an attorney in
private practice. From 1980 to 1986, Mr. Walne was an officer and founding
director of Blackstone Oil Company, an exploration company. Mr. Walne's practice
is focused on energy industry related matters, including reserve based loan
document preparation for commercial banks; providing counsel to various
independent oil and gas producers engaged in domestic onshore and offshore
exploration and production operations regarding issues arising out of
acquisitions, operations, financing, administrative compliance, and operating
agreements. Mr. Walne holds a Bachelor of Arts degree in English from Princeton
University (1969), and a law degree from the University of Texas (1973). He
served in the United States Marine Corps Reserve from 1969 to 1975, obtaining
the rank of captain.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") requires the directors, executive officers and persons who own more than
ten percent of the outstanding shares of common stock of the Company to file
initial reports of ownership and reports of changes in ownership (Forms 3, 4,
and 5) of common stock with the Securities and Exchange Commission Directors,
executive officers and greater than ten percent stockholders are required by the
Securities and Exchange Commission regulation to furnish the Company with copies
of all such forms that they file.
22
<PAGE>
To the Company's, knowledge based solely on its review of the copies of such
reports received by it and on written representations by certain reporting
persons that no reports on Forms 3,4 and 5 were required, the Company believes
that during the fiscal year ending December 31, 1998, all Section 16(a) filing
requirements applicable to its directors, executive officers and ten percent
stockholders were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes, with respect to the cash compensation paid by
our subsidiary FIRST EXCHANGE Corporation to the Chief Executive Officer. No
other executive officer received cash compensation in excess of $100,000 in
years 1997 through 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM ALL OTHER
(1) COMPENSATION COMPENSATION
---------------------------- ------------ ------------
SECURITIES
UNDERLYING
FISCAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (NUMBER)
<S> <C> <C> <C> <C> <C>
ROGERS E. BEALL, CEO OF FIRST SEISMIC 1999 $ 74,175(3) -0- -0- $ 9,000(2)
CORP, PRESIDENT OF FIRST EXCHANGE 1998 $105,000 -0- 300,000 $ 167
CORPORATION 1997 $ 93,500 -0- 50,000 $ 951
HAYNE S. BLAKELY 1999 $ 90,000 -0- 105,000 $42,415(4)
PRESIDENT OF FORTESA CORP 1998 $ 90,000 -0- 100,000 -0-
</TABLE>
(1) During the years ending December 31, 1997, 1998 and 1999, perquisites
for the individual named in the Summary Compensation Table aggregated
less than 10% of the total annual salary and bonus reported for such
individual in the Summary Compensation Table. Accordingly, no such
amounts are included in the Summary Compensation Table.
(2) Consists of amounts paid under certain insurance plans and a
transportation allowance.
(3) Our Chief Executive/Chairman has an annually renewable employment
contract that was executed in June 1990, calling for a base salary of
$125,000 per year, plus discretionary bonuses. The Company has not paid
the full amounts due to Mr. Beall in any year since 1992, and no
bonuses have been paid.
(4) The President of FORTESA has a contract that provides for an annual
compensation of a minimum base salary of $90,000 plus an additional
amount of up to $78,000 per year based on our net cash flow from
petroleum operations, and his professional services for which we are
able to invoice third parties. Mr. Blakely's contract is for three
years until December 31, 2001. There are provisions for discretionary
bonuses, plus earning 205,000 shares of the Company stock over the
first two years of the contract.
23
<PAGE>
STOCK OPTION GRANTS
Stock option grants were made to the named Executive Officers during 1999 under
the Company's Stock Option Plan, (the "Stock Option Plan").
1999 OPTION EXERCISES
There were no stock options held by the named Executive Officers as of December
31, 1999, and no options were exercised by these individuals during 1999.
COMMITTEES OF THE BOARD
The Board has two standing committees the identities, memberships and functions
of which are described below:
AUDIT COMMITTEE. The members of the Audit Committee of the Board are Edward M.
Trapp and Arthur O. Beall, and both are outside Director's. The Audit
Committee's functions include making recommendations concerning the engagement
of independent auditors, reviewing with the independent auditors the plan and
results of the auditing engagement, approving professional services provided by
the independent auditors, and reviewing the adequacy of the Company's internal
accounting controls and reviewing our refinancing plans and strategies.
COMPENSATION COMMITTEE. All of the outside directors are members of the
Compensation Committee. They are Edward M. Trapp, Alexander E. Benton and Arthur
O. Beall. The Compensation Committee's functions include a general review of the
Company's compensation and benefit plans to ensure that they meet corporate
objectives. The Compensation Committee reviews the Chief Executive Officer's
recommendations on (a) compensation of the senior executive officers of the
Company, (b) granting of awards under the Company's Stock Option and other
benefit plans and (c) adopting and changing major Company compensation policies
and practices. In addition to reviewing the compensation for the Chief Executive
Officer, the Compensation Committee reports its recommendations to the whole
Board for approval. The Compensation Committee had no special meetings during
1999, but actions under their directives were made in regular Board of Directors
meetings.
INFORMATION REGARDING MEETINGS
The Board of Directors held three formal meetings during 1999, in addition, one
telephone meeting resulting in a written consent of action for the FORTESA
merger in 1999. The Audit Committee held two meetings, and the Compensation
Committee issues were also discussed at each Board meeting. Each director
attended all of the meetings of the Board, except one of the Board meetings that
one outside Director was unable to attend.
EMPLOYEE STOCK OPTION PLAN
In July 1990, the Company reserved 500,000 shares of common stock for issuance
under its Employee Stock Option Plan. All Incentive Stock Options ("ISO's") will
be granted to employees at an exercise price of not less than the fair market
value of the stock on the date of grant. All Non-incentive Stock Options
("NSO's") will be granted at an exercise price of not less than 85% of the fair
market value of the stock on the date of grant. 70,000 options to purchase
common shares were reallocated to current employees during the month of December
1999 from employees no longer with us. Presently, 130,000 options are
outstanding to various key employees, under the original stock option plan, and
available for exercise at a strike price of $0.20 per common share.
DIRECTOR STOCK OPTIONS
In July 1990, we also reserved 150,000 shares of common stock for issuance under
our Directors' Stock Option Plan. All options were granted to non-employee
directors at an exercise price of not less than the fair market value on the
date of grant. No options were granted during 1999.
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<PAGE>
DIRECTOR COMPENSATION
In addition to the stock options discussed above, the directors were paid 10,000
shares of common stock as compensation for their services through 1998. The
directors are reimbursed for all out of pocket expenses incurred in attending
any meeting of the Board or any committee thereof.
ITEM 12. SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information, as of March 2000, with respect
to the common shares beneficially owned by (a) each person known by the Company
to own beneficially five percent or more of the outstanding shares of common
stock, (b) each director and nominee for director, (c) each of the executive
officers and (d) all directors, nominees for director and executive officers as
a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK OF PERCENTAGE OF OUTSTANDING
NAME OF BENEFICIAL OWNER (1) FIRST SEISMIC BENEFICIALLY OWNED SHARES OF COMMON STOCK
---------------------------- -------------------------------- -------------------------
<S> <C> <C>
Rogers E. Beall,
Chairman and CEO, and President of
FIRST EXCHANGE Corp 3,022,026(2)(5)(6) 32.16%
Hayne S. Blakely, President of
FORTESA International 220,000 2.36%
Edward M. Trapp, Director 160,000(3) 1.71%
Alexander E. Benton, Director 75,000(4) *
Arthur O. Beall, Ph.D. 60,000(3) *
W. Daniel Raper, President of
eSmartImage Corporation 66,819(7) *
All directors and executive officers as a group
(8 persons) 3,783,845 40.54%
</TABLE>
* Represents less than 1%.
(1) Unless otherwise indicated, each person has sole voting power and
investment power with respect to the shares of common stock listed.
(2) Includes 100,000 shares underlying warrants exercisable at $0.30 per
share. The Beall Living Trust owns the remaining shares, the trustees
of which are Rogers E. Beall and his spouse.
(3) Includes 15,000 shares underlying Stock Options exercisable at a strike
price of $0.20 per share.
(4) Includes 30,000 shares underlying Stock Options exercisable at a strike
price of $0.20 per share.
(5) Excludes the possible conversion to common stock of 50,000 shares of
our Series A Preferred Stock that Rogers E. Beall is the beneficial
owner of and has future convertibility provisions into common stock as
of March 31st, 200l. See ITEM 1, "Recent Developments, for TERMS OF THE
SERIES A CONVERTIBLE PREFERRED STOCK".
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<PAGE>
(6) Excludes any common stock effect of 10,000 shares of Series B Preferred
stock that Mr. Rogers E. Beall is the beneficial owner of which has
convertibility provision into 100,000 shares of common stock. See ITEM
I, "Recent Developments, TERMS OF THE SERIES B CONVERTIBLE PREFERRED
STOCK".
(7) Includes options for 35,000 shares at $0.20 per share under the 1990
employee Stock Option Plan grant, as reassigned.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a description of certain transactions entered into between
the Company and certain of its directors, nominees for director and
stockholders. We believe each of these below listed transactions were at least
as favorable to us as others that might have been secured in similar arms-length
transactions.
We entered into a series of transactions in March 1999 with the holders of our
6% Notes and 12% Notes. Please refer to the section of this report entitled
"Recent Transactions" for a detailed discussion of these transactions.
In March of 1999, we acquired all of the shares of stock of F0RTESA Corporation,
a Texas Corporation ("FORTESA"), from its sole shareholder, Rogers E. Beall who
is our Chairman/Chief Executive Officer. Mr. Beall formed FORTESA in May of 1997
for the purpose of acquiring certain oil and gas interests in the country of
Senegal. Prior to forming FORTESA, Mr. Beall presented this development
opportunity to our Board of Directors. After considering the opportunity, we
asked for a right of first refusal but were unable to invest in the opportunity
due to our deficit financial position at the time. Subsequent to its formation,
FORTESA entered into a joint venture with Benton Oil and Gas, a Delaware
corporation, ("BENTON") to develop these interests after having spent
considerable time and effort presenting the opportunity to over sixty (60) other
potential co-venturers. In February 1999, Mr. Beall again presented our Board
the opportunity to participate in the Senegal joint venture through the purchase
of FORTESA stock. Upon consideration of the prospects of the venture and the
potential return of the investment, the members of the Board, other than Mr.
Beall who did not take part in the meeting, voted to acquire all of the
outstanding shares of FORTESA in exchange for 50,000 shares of the Company's
Series A Preferred Stock and 8,055 shares of our common stock. We valued the
shares of the Company's Series A Preferred Stock at its liquidation value of
$1.00 per share and the shares of the Company's common stock at $0.02 per share,
the latest trade value on the OTC pink sheets of the bid price of our stock. The
value of the consideration at the time of the transaction was therefore equal to
$51,161. At the time, based on a market value of our common stock of $0.02 per
share and the initial conversion ratio of the Series A Preferred Stock of 10
shares of common stock to one share of Preferred Stock, the market value of the
transaction was $10,161. The members of the Board of Directors negotiated the
terms of this transaction directly with Mr. Beall and debated the individual
terms of the transaction outside of the presence of Mr. Beall.
We believe each of these above listed transactions were at least as favorable to
us as others that might have been secured in similar arms-length transactions.
26
<PAGE>
ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) EXHIBITS
2.1 * Stock Purchase Agreement amongst FIRST SEISMIC Corporation
and The Beall Living Trust, dated as of March 29, 1999
3.1 * Certificate of Incorporation of FIRST SEISMIC Corporation, as
amended
3.2 * Bylaws of FIRST SEISMIC Corporation, as amended
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 Gas Sales Contract
10.5 AfriCap Loan Guarantee
10.6 * Management Contract with Rogers Beall
10.6 * Directors' 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
10.10 Revolving Loan from Senegal Bank
11.0 * Statement Regarding Computation of Earnings Per Share
21.0 * List of Subsidiaries of the Company
27.1 * Financial Data Schedule
* Filed with the Company's annual report on Form 10-K for
fiscal year ended December 31, 1999
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<PAGE>
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-K to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on the 17th of July 2000.
FIRST SEISMIC CORPORATION
By:
-------------------------------------
ROGERS E BEALL
President, Chief Executive Officer
Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, the following
persons in their official capacities and on the date indicated have signed this
Report on Form 10-K below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
------------------------------ Chairman July 17th, 2000
ROGERS E. BEALL
------------------------------ Director July 17th, 2000
ALEXANDER E. BENTON
------------------------------ Director July 17th, 2000
EDWARD M. TRAPP
------------------------------ Director July 17th, 2000
ARTHUR O. BEALL
</TABLE>
28
<PAGE>
FIRST SEISMIC Corporation and Subsidiaries
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<S> <C>
Independent Auditors Reports ............................................................... F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998 ............................................................... F-4
Consolidated Statements of Operations and Comprehensive Operations for the years ended
December 31, 1999, 1998 and 1997 ......................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 ......................................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ......................................................... F-9
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997 ......................................................... F-10
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
FIRST SEISMIC Corporation and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheet of FIRST SEISMIC
Corporation and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations and comprehensive operations,
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated balance sheet of First Seismic
Corporation and subsidiaries as of December 31, 1998 and the related
consolidated statements of operations and comprehensive operations, stockholders
equity and cash flow for each of the two years in the period ended December 31,
1998, were audited by other auditors whose report dated October 22, 1999
expressed an unqualified opinion on those statements. As discussed in Note 5,
the Company has restated its 1998 and 1997 financial statements during the
current year to account for the FORTESA acquisition as a pooling-of-interests,
in conformity with generally accepted accounting principles. The other auditors
reported on the 1998 and 1997 financial statements before the restatement.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FIRST
SEISMIC Corporation and Subsidiaries at December 31, 1999, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
We also audited the adjustments described in Note 5 that were applied to restate
the 1998 and 1997 financial statements. In our opinion, such adjustments are
appropriate and have been properly applied.
/s/ Mann Frankfort Stein & Lipp, P.C.
Houston, Texas
February 22, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
FIRST SEISMIC Corporation and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of FIRST SEISMIC
Corporation and Subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the years ended December 31, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
These consolidated financials have been restated to reflect the pooling of
interests with FORTESA Corporation as described in Note 5 to the consolidated
financial statements. We did not audit the 1998 and 1997 financial statements
of FORTESA Corporation, which statements reflect total assets of $234,386 as
of December 31, 1998, and total revenues of $166,930 and $50,000 for the years
ended December 31, 1998 and 1997, respectively. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for FORTESA Corporation, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FIRST
SEISMIC Corporation and Subsidiaries at December 31, 1998 and the results of
their operations and their cash flows for the years ended December 31, 1998
and 1997 in conformity with generally accepted accounting principles.
/s/ Harper & Pearson Company
Houston, Texas
October 22, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 & 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1999 1998
----------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 448,665 $ 169,679
Accounts receivable, trade, net (Note 1) 250,659 418,435
----------- ----------
TOTAL CURRENT ASSETS 699,324 588,114
Data Library, net (Notes 1 and 2) 1,387,248 2,658,011
Data and agency use positions, net (Notes 1 and 2) 29,949 23,185
Property and equipment, net (Notes 1 and 2) 73,242 82,493
Oil and gas properties, full cost method (Note 1) 1,241,516 170,710
Deferred tax asset (Note 7) 150,000 -0-
Other assets 33,454 42,458
----------- ----------
TOTAL ASSETS $ 3,614,733 $3,564,971
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt (Note 3) $ 2,085 $ -0-
Short-term debt (Note 3) 1,000 -0-
Accounts payable, trade 637,441 1,083,581
Accrued expenses 223,394 148,431
Accrued compensation 117,053 17,408
----------- ----------
TOTAL CURRENT LIABILITIES 980,973 1,249,420
Long-term debt (Note 3) 6,332 1,457,974
Data use payables, net 65,860 73,810
----------- ----------
TOTAL LIABILITIES 1,053,165 2,781,204
----------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 6 & 12)
STOCKHOLDERS' EQUITY (NOTE 4)
Class A preferred stock, $1.00 par value, $1.00 liquidation value,
200,000 shares authorized; 50,000 shares issued and outstanding 50,000 50,000
in 1999 and 1998
Class B preferred stock, $1.00 par value, $10.00 liquidation value,
250,000 shares authorized, 135,000 shares issued and outstanding 135,000 -0-
in 1999
Common stock, voting, $0.01 par value, 10,000,000 shares authorized;
9,238,777, and 5,784,920 shares issued and outstanding at December
31, 1999 and 1998, respectively 92,388 57,850
Additional paid-in capital 12,418,256 9,532,197
Accumulated deficit (10,123,158) (8,778,997)
Accumulated other comprehensive loss (10,918) (11,929)
Less treasury stock, at cost, -0- and 43,855 shares in 1999 and 1998,
respectively -0- (65,354)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY 2,561,568 783,767
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,614,733 $3,564,971
============ ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
DECEMBER 31, 1999 & 1998 & 1997
---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
REVENUE
Company owned geophysical $ 657,752 $ 149,751 $ 236,244
Company owned geological 383,399 1,294,646 699,732
Net revenue interest 2,897 89,889 216,870
Brokerage of third party geophysical 17,800 694,474 378,009
Brokerage of third party geological 133,212 406,981 449,882
Commissions 32,287 54,002 270,064
Geo-scientific services 305,578 166,930 50,000
Reproduction and other 62,884 274,687 119,571
------------- ------------ ------------
1,595,809 3,131,360 2,420,372
------------- ------------ ------------
TOTAL REVENUE
COST OF SALES 612,021 1,421,899 1,120,118
------------- ------------ ------------
GROSS MARGIN 983,788 1,709,461 1,300,254
------------- ------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses 1,049,711 1,133,334 950,182
Depreciation and amortization (Note 1) 1,441,358 455,190 295,240
-------------- ------------ -----------
TOTAL OPERATING EXPENSES 2,491,069 1,588,524 1,245,422
-------------- ------------ ------------
NET OPERATING INCOME (LOSS) (1,507,281) 120,937 54,832
-------------- ------------ ------------
OTHER (INCOME) AND EXPENSES
Interest expense (Note 3) 14,477 42,315 25,458
Interest income (479) (3,933) (2,121)
Other income (27,118) (4,909) -0-
Settlements/Liability extinguishments (Note 1) -0- (305,489) (177,324)
Other expense -0- 34,920 -0-
-------------- ------------ ------------
TOTAL OTHER (INCOME) AND EXPENSES (13,120) (237,096) (153,987)
-------------- ------------ ------------
NET INCOME (LOSS) BEFORE TAX BENEFIT (1,494,161) 358,033 208,819
DEFERRED INCOME TAX BENEFIT (NOTE 7) 150,000 -0- -0-
-------------- ------------ ------------
NET INCOME (LOSS) (1,344,161) 358,033 208,819
-------------- ------------ ------------
ITEMS OF OTHER COMPREHENSIVE
INCOME (LOSS)
Foreign currency translation adjustments 1,011 (6,509) (5,420)
-------------- ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (1,343,150) $ 351,524 $ 203,399
============== ============ ============
NET INCOME (LOSS) PER COMMON
SHARE BASIC AND DILUTED (NOTE 13) $ (0.16) $ 0.06 $ 0.04
============== ============ ============
WEIGHTED NUMBER OF COMMON SHARES
USED IN COMPUTING NET INCOME (LOSS)
PER SHARE, BASIC AND DILUTED (NOTE 13) 8,242,487 5,560,924 5,259,702
============== ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 & 1997
-------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL
----------------- --------------------- ---------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT
------ --------- ------ ---------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
DECEMBER 31, 1996 5,115,365 $ 51,154 -0- $ -0- -0- $ -0- $9,371,893 $ (9,345,848)
STOCK ISSUE IN
FORTESA
POOLING 8,055 81 50,000 50,000 -0- -0- 919 -0-
STOCK ISSUE IN
SETTLEMENT
OF DEBT 100,000 1,000 -0- -0- -0- -0- 99,000 -0-
STOCK ISSUE TO
PURCHASE
BLACKWELL 150,000 1,500 -0- -0- -0- -0- -0- -0-
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT -0- -0- -0- -0- -0- -0- -0- -0-
NET INCOME -0- -0- -0- -0- -0- -0- -0- 208,819
--------- --------- ------ ---------- ------ ---------- --------- -----------
BALANCES,
DECEMBER 31, 1997 5,373,420 57,735 50,000 50,000 -0- -0- 9,471,812 (9,137,030)
STOCK ISSUE TO
OFFICER FOR
SERVICES 300,000 3,000 -0- -0- -0- -0- 57,000 -0-
STOCK ISSUE
FOR SERVICES 111,500 1,115 -0- -0- -0- -0- 3,385 -0-
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT -0- -0- -0- -0- -0- -0- -0- -0-
<CAPTION>
ACCUMULATED
OTHER TREASURY STOCK
COMPREHENSIVE -------------------- TOTAL
LOSS SHARES COST EQUITY
----- ------- ----- ------
<S> <C> <C> <C> <C>
BALANCES,
DECEMBER 31, 1996 $ -0- 43,855 $ (65,354) $ 11,845
STOCK ISSUE IN
FORTESA
POOLING -0- -0- -0- 51,000
STOCK ISSUE IN
SETTLEMENT
OF DEBT -0- -0- -0- 100,000
STOCK ISSUE TO
PURCHASE
BLACKWELL -0- -0- -0- 1,500
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT (5,420) -0- -0- (5,420)
NET INCOME -0- -0- -0- 208,819
------- ------ -------- -------
BALANCES,
DECEMBER 31, 1997 (5,420) 43,855 (65,354) 367,744
STOCK ISSUE TO
OFFICER FOR
SERVICES -0- -0- -0- 60,000
STOCK ISSUE
FOR SERVICES -0- -0- -0- 4,500
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT (6,509) -0- -0- (6,509)
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL
----------------- --------------------- ---------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT
------ --------- ------ ---------- ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET INCOME -0- -0- -0- $ -0- -0- $ -0- $ -0- $ 358,033
--------- --------- ------ ---------- ------ ---------- --------- -----------
BALANCES,
DECEMBER 31, 1998 5,784,920 57,850 50,000 50,000 -0- -0- 9,532,197 (8,778,997)
STOCK ISSUE TO
6% NOTEHOLDERS
IN SETTLEMENT
OF DEBT 1,073,734 $ 10,737 -0- -0- -0- -0- 437,548 -0-
STOCK ISSUE
TO 12%
NOTEHOLDERS
IN SETTLEMENT
OF DEBT 1,363,111 13,631 -0- -0- -0- -0- 967,865 -0-
EXERCISE OF
WARRANTS BY
6% NOTEHOLDERS 712,500 7,125 -0- -0- -0- -0- 230,375 -0-
PURCHASE
OF TREASURY
SHARES -0- -0- -0- -0- -0- -0- -0- -0-
STOCK ISSUE
FOR SERVICES 304,512 3,045 -0- -0- -0- -0- 55,602 -0-
STOCK ISSUE TO
BENTON OIL &
GAS FOR SENEGAL
PROJECT -0- -0- -0- -0- 135,000 135,000 1,215,000 -0-
REISSUE OF
TREASURY
SHARES -0- -0- -0- -0- -0- -0- (20,331) -0-
<CAPTION>
ACCUMULATED
OTHER TREASURY STOCK
COMPREHENSIVE ------------------- TOTAL
LOSS SHARES COST EQUITY
----- ------- ----- --------
<S> <C> <C> <C> <C>
NET INCOME $ -0- -0- $ -0- $358,033
-------- ------- -------- --------
BALANCES,
DECEMBER 31, 1998 (11,929) 43,855 (65,354) 783,767
STOCK ISSUE TO
6% NOTEHOLDERS
IN SETTLEMENT
OF DEBT -0- -0- -0- 448,285
STOCK ISSUE
TO 12%
NOTEHOLDERS
IN SETTLEMENT
OF DEBT -0- -0- -0- 981,496
EXERCISE OF
WARRANTS BY
6% NOTEHOLDERS -0- -0- -0- 237,500
PURCHASE
OF TREASURY
SHARES -0- 200,000 (17,500) (17,500)
STOCK ISSUE
FOR SERVICES -0- (243,855) 62,523 121,170
STOCK ISSUE TO
BENTON OIL &
GAS FOR SENEGAL
PROJECT -0- -0- -0- 1,350,000
REISSUE OF
TREASURY
SHARES -0- -0- 20,331 -0-
</TABLE>
F-7
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 & 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK ADDITIONAL
---------------------- ---------------------- ------------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT
---------- --------- ------ ----------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT -0- -0- -0- -0- -0- -0- -0- -0-
NET LOSS -0- -0- -0- -0- -0- -0- -0- (1,344,161)
---------- --------- ------ ----------- -------- ----------- ----------- ------------
BALANCES,
DECEMBER 31, 1999 9,238,777 $ 92,388 50,000 $ 50,000 135,000 $ 135,000 $12,418,256 $(10,123,158)
========== ========= ====== =========== ======== =========== =========== ============
<CAPTION>
ACCUMULATED
OTHER TREASURY STOCK
COMPREHENSIVE -------------------- TOTAL
LOSS SHARES COST EQUITY
------------- ---------- ------ -----------
<S> <C> <C> <C> <C>
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT 1,011 -0- -0- 1,011
NET LOSS -0- -0- -0- (1,344,161)
------------- ---------- ------ -----------
BALANCES,
DECEMBER 31, 1999 $ (10,918) -0- $ -0- $ 2,561,568
============= ========== ====== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-8
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 & 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,344,161) $ 358,033 $ 208,819
------------- ---------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization (Note 1) 1,441,358 455,190 295,240
Change in allowance for doubtful accounts 13,898 124,481 -0-
Settlements/liability extinguishments (Note 1) -0- (155,489) (27,324)
Reserve for potential liabilities (Note 1) -0- (150,000) (150,000)
Provision for impairment -0- 34,920 -0-
Stock issued as compensation 106,448 4,500 -0-
Changes in operating assets and liabilities:
Accounts receivable, trade 153,878 (51,148) (41,733)
Accounts payable, trade (382,067) 531,479 236,707
Accrued expenses 69,940 88,232 20,982
Accrued compensation, (Note 5) 99,645 7,408 -0-
Unearned Income -0- (56,888) 56,888
------------- ---------- -----------
TOTAL ADJUSTMENTS 1,503,100 832,685 390,760
------------- ---------- -----------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 158,939 1,190,718 599,579
------------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of marketable securities -0- -0- (46,905)
Disposition of marketable securities -0- 46,905 -0-
Acquisition of other assets -0- (9,969) (4,784)
Disposition of other assets 9,003 15,786 -0-
Acquisition of property and equipment -0- (35,380) (31,720)
Disposition of property plant and equipment 2,768 -0- -0-
Acquisition of oil and gas properties (469,958) -0- (76,605)
Acquisition of data library (260,660) (889,775) (195,732)
Acquisition of data and agency use positions (14,000) -0- -0-
Decrease in data use payables (6,375) (70,794) (74,007)
------------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (739,222) (943,227) (429,753)
------------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted stock issued, common stock 191,000 60,000 51,000
Restricted stock issued, preferred stock, Class B 750,000 -0- -0-
Purchase of treasury stock (17,500) -0- -0-
Borrowings on line of credit 289,000 693,000 -0-
Payments on line of credit (288,000) (693,000) -0-
Principal payments on long-term debt (65,231) (331,093) (237,544)
------------- ---------- -----------
Net Cash Provided By (Used In) Financing Activities 859,269 (271,093) (186,544)
------------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 278,986 (23,602) (16,718)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 169,679 193,281 209,999
------------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 448,665 $ 169,679 $ 193,281
============= ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID FOR INTEREST $ 14,477 $ 43,315 $ 25,458
============= ========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-9
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
-------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The reporting entity consists of FIRST SEISMIC Corporation and its
two-wholly owned subsidiaries: FIRST EXCHANGE Corporation, a
Delaware corporation, and FORTESA International, Inc., a Texas
corporation. FIRST EXCHANGE Corporation has two wholly-owned
subsidiaries, FIRST EXCHANGE Limited, a United Kingdom company,
and eSmartImage Corporation, a Delaware corporation, formerly
known as BLACKWELL SUPPLY, Inc. FORTESA International, Inc. has a
wholly-owned subsidiary FORTESA International-Senegal, L.D.C., a
Cayman Islands corporation which has a branch qualified for
operations in Senegal, West Africa. The Company's customers are
primarily located in the United States and Western Europe, and its
suppliers are primarily major oil companies, national government
oil companies, or independent geo-scientific consulting firms and
oil service providers. The Company has an interest in proved
non-developed oil and gas properties in West Africa and East
Texas.
FIRST SEISMIC Corporation acquired 100% of the stock of its former
75% net revenue interest affiliate, BLACKWELL SUPPLY, Inc.,
effective January 1, 1997 for issuance of stock. (See NOTE 5.)
FIRST acquired 100% of the outstanding shares of stock of FORTESA
Corporation from the Beall Living Trust, the trustee for which is
Rogers E. Beall, the Chairman of FIRST SEISMIC Corporation, in
exchange for stock on March 30, 1999. The FORTESA acquisition has
been accounted for similar to a pooling-of-interests due to common
ownership and management, and therefore all prior period financial
statements have been restated as if the merger took place at the
beginning of such periods. (See NOTE 5.)
FIRST went public in September 1990, however no 10-K was filed
with the Securities and Exchange Commission for the years ended
December 31, 1992 through 1997. Forms 10-K have been filed for the
years-ended December 31, 1995-1998 as well as Forms 10-Q for the
three-quarters of 1999. The Company intends to complete all future
filings on a timely basis.
F-10
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
-------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
above mentioned companies. All material intercompany accounts and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior financial presentations
to conform to current period classifications.
ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk, consist principally of trade
receivables and cash. The Company places its cash with high credit
quality financial institutions. FIRST maintains deposits in banks
that, at times, may exceed the amount of federal deposit insurance
available. Management believes that any possible loss is minimal.
Generally, no collateral or other security is required to support
customer receivables. To reduce credit risk, a customer's credit
history is reviewed before extending credit. In addition, an
allowance for doubtful accounts is established as needed based
upon factors surrounding the credit risk of specific customers,
historical trends, and other information. Management has
established an allowance for doubtful accounts at December 31,
1999 and 1998 in the amount of $22,361 and $124,481, respectively.
During 1999, 38% of revenues were attributable to two customers.
In 1998, 48% of revenues were attributable to four customers.
CASH
In 1999 the Company closed an interest bearing account primarily
dedicated for payments to the 12% Senior Noteholders as this debt
was fully retired during 1999. Cash pledged for payment to the 12%
Senior Noteholders amounted to $11,786 at December 31,1998.
F-11
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
-------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
Cash and cash equivalents consist of demand deposits and money
market funds and other unrestricted liquid investments held at
depository institutions with maturities of three months or less.
DATA LIBRARY
The costs included in Data Library represent Company owned seismic
data, and geo-scientific reports. The Company capitalizes third
party costs plus internal direct costs, loaded with overhead,
relating to the acquisition of the Data Library. Amortization of
these costs commences as soon as a new project is completed.
Seismic costs are amortized over the greater of the estimated
volume of anticipated revenues that the Company expects to realize
from licensing of its Company owned seismic data or a five-year
period with a ten percent residual value using the 150% declining
balance method. Beginning in 1992, the Company elected to amortize
the residual balances on a straight-line basis over a fifteen-year
period. The residual value amortization amounted to $176,886 for
1999, 1998 and 1997. Impairment of $605,873 was recorded for the
year ended December 31, 1999 upon the determination that future
estimated cash flows were less than those necessary to recover
capitalized net Data Library costs. No impairment was recorded in
1998 or 1997.
Net revenue interest in seismic data previously owned and sold to
third parties is amortized over a five-year period with no
residual value, using the 150% declining balance method.
FIRST's ownership interest in geo-scientific reports is amortized
over three years to a ten-percent residual value. The amortization
during the three-year period is the greater of 4.5% per sale up to
20 licenses or 2.5% per month cumulative minimum. The residual
value is then amortized over 15 years on a straight-line basis.
Impairment of $234,919 was recorded in the consolidated statement
of operations for the year ended December 31, 1999 due to lower
than anticipated license fee revenues from portions of the
Company's Data Library. No impairment was recorded in 1998 or
1997.
DATA AND AGENCY POSITIONS
Data and agency positions include seismic data rights and agency
agreements with certain foreign governments. The Company
capitalizes third party costs plus an allocation of internal
overhead costs relating to the acquisition of data and agency
positions.
F-12
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
Data use rights represent the value of data that the Company has
to use or provide to others regarding the license of seismic data
relative to third parties. Such rights were obtained or are owned
primarily by trade of the use of seismic data or of services
provided by the Company.
Agency agreements represent the Company's costs of organizing
third parties' data and opportunities into marketable products or
promotion for fees to energy companies on a multi-client basis.
Such costs are amortized over five years, or written off earlier
if the Company concludes the relationship has no future earnings
value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of
property and equipment is provided using accelerated methods over
the estimated useful lives of three to five years.
OIL AND GAS PROPERTIES
In 1993, the Company initiated efforts and agreements to earn
interests in oil and gas reserves in both the domestic and the
international arena by organizing and promoting acreage and
opportunities, and by using its information to obtain rights for
hydrocarbon reserve ownership. As of December 31, 1999, the
Company had oil and gas interests in East Texas (See NOTE 5),
Kansas, Guinea-Bissau, and Senegal, West Africa. The Company
utilizes the full cost method for accounting of oil and gas
properties. Under this method of accounting, all costs, including
indirect costs related to exploration and development activities,
are capitalized as oil and gas property costs. These costs, and
estimated future development costs, are accumulated in a single
cost center by country and are amortized on an equivalent
unit-of-production basis using total estimated proved oil and gas
reserves. The Company accounts for workovers based on the nature
of the work performed. Workover costs incurred for the purpose of
restoring production in the same producing horizon are expensed.
Workover costs incurred to explore shallower or deeper horizons
to produce reserves from a new formation are capitalized. No
gains or losses are recognized on the sale or disposition of oil
and gas reserves, except for sales that include a significant
portion of the total remaining reserves. The cost of unevaluated
properties is excluded from the full-cost amortization base.
F-13
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
Capitalized costs of proved oil and gas properties are limited to
a ceiling amount calculated as the aggregate discounted future
cash flows from production of proved oil and gas reserves. As the
calculated ceiling exceeded the Company's capitalized costs at
December 31, 1999, no impairment provision was necessary. An
impairment of $34,920 was recorded for the year end December 31,
1998.
No depletion was recorded in 1999, 1998 or 1997 as there was no
production from the properties. As of December 31, 1999, all
capitalized cost for oil and gas properties represent proved,
non-producing properties.
INCOME TAXES
The Company uses the balance sheet approach for recording deferred
taxes. The balance sheet approach accounts for deferred income
taxes by applying statutory tax rates in effect at the balance
sheet date to differences between the book and tax basis of assets
and liabilities. The resulting deferred tax assets and liabilities
are adjusted to reflect changes in tax laws or rates.
FIRST and its wholly owned U.S. subsidiaries file a consolidated
federal income tax return.
OPERATIONS
The Company would have experienced losses for 1998 and 1997 had it
not successfully obtained settlements and liability
extinguishments from amounts originating from its former USA
domestic seismic brokerage operations. As of December 31, 1998,
current liabilities exceeded current assets by $661,306.
The Company's trade payables are reviewed periodically to
determine the requirement for payment. Due to the Company's
liquidity crisis since 1992 resulting from the loss of commercial
viability of the domestic 2D seismic licensing business, the
Company ended many related contracts and operations. Payables
relating to discontinued contracts over four years in age with no
correspondence, negotiations or payments involving the vendor
during the four year period exceed the Statute of Limitations
whereby such accounts payable may be enforceable and therefore
have been written off by the Company.
F-14
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
Formal settlements of liabilities resulting in reduced payment
requirements were also recorded in this settlements/gain account
and not against regular operations during 1998 and 1997. At
December 31, 1999, the Company anticipates no further settlement
gains resulting from trade payables for which the Statute of
Limitations will expire.
During 1995 the Company established a $300,000 reserve for
liabilities which had been written off in prior periods but which
could possibly have been subject to future collection efforts by
the creditors involved. Management subsequently determined that
this reserve was no longer required as no such liabilities have
become known, nor were any asserted over the passage of time.
Accordingly, the reserve was decreased to $150,000 at December 31,
1997 and eliminated at December 31, 1998.
REVENUE RECOGNITION
Gross revenues from sales of Company owned information (Data
Library) are recognized when the information is transmitted to
clients. Any related expenses incurred as results of data
licensing, such as commissions or revenue sharing arrangements,
are expensed at the time revenues are recognized. In instances
where the Company owns only a revenue interest in the seismic
data, only the Company's net proceeds are recorded as revenue. The
Company changed its accounting policy effective January 1, 1998 to
align itself with SEC policy. The effect was to allow the
recognition of revenues when the materials licensed were completed
products and available for delivery by the Company, but held
temporarily at the request of the customer. This new policy had no
impact on the 1997 financial statements. In 1998, $36,000 of
revenues were recognized for data available for delivery but not
picked up by the customer at year-end.
Third Party Data revenues are recognized when the information is
transmitted to the clients.
Commission revenues are generated when the Company serves only as
an agent for licensing geo-scientific information owned by another
company. Commission revenues are recognized on a pro rata basis as
the completion of such firm orders progress.
Reproduction and other revenues are recognized as the services are
completed.
F-15
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income
(loss) by the common and common equivalent shares considered
outstanding during each period. Equivalent shares issuable under
stock options are determined using the treasury stock method.
There is no difference between basic and, diluted earnings per
share for all periods presented.
NOTE 2. SELECTED FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
All intangible and tangible assets are recorded at cost 1999 1998
--------------- ---------------
<S> <C> <C>
DATA LIBRARY:
Company owned seismic data $ 26,548,276 $ 26,659,117
Net revenue interest 12,296,044 12,296,044
Geo-scientific reports 1,657,887 1,507,894
Less accumulated amortization (39,114,959) (37,805,044)
--------------- ---------------
DATA LIBRARY, NET $ 1,387,248 $ 2,658,011
=============== ===============
DATA AND AGENCY USE POSITIONS:
Agency agreements $ 311,038 $ 255,983
Less accumulated amortization agency agreements (281,089) (232,798)
--------------- ---------------
DATA AND AGENCY USE POSITIONS, NET $ 29,949 $ 23,185
=============== ===============
PROPERTY AND EQUIPMENT:
Office furniture and equipment $ 181,004 $ 155,648
Less accumulated depreciation (107,762) (73,155)
--------------- ---------------
$ 73,242 $ 82,493
=============== ===============
DATA USE PAYABLES/(RECEIVABLES) NET:
Data use payables $ 97,904 $ 233,854
Seismic data rights (648,317) (776,317)
Less valuation allowance, seismic data rights 616,273 616,273
--------------- ---------------
DATA USE PAYABLES/(RECEIVABLES), NET $ 65,860 $ 73,810
=============== ===============
</TABLE>
F-16
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 3. DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
LONG-TERM DEBT: 1999 1998
--------------- ---------------- --------------
<S> <C> <C>
Senior Noteholders $ -0- $ 1,031,496
Six percent Noteholders -0- 411,178
Vendor note payable 0.7% interest 8,417 15,300
---------------- -------------
TOTAL DEBT 8,417 1,457,974
Less current portion 2,085 -0-
---------------- -------------
LONG-TERM DEBT $ 6,332 $ 1,457,974
================ ==============
</TABLE>
Scheduled principal payments due for years subsequent to December
31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 2,085
2001 2,085
2002 2,085
2003 2,085
2004 77
------------------------------------------------------------------------------
Total $ 8,417
==========
</TABLE>
SHORT-TERM DEBT
The Company was granted a line of credit by its principal bank in
the amount of $100,000 on August 13, 1997. This line of credit is
currently available until November 16, 2000. It is secured by the
Company accounts receivable and was obtained through a personal
guaranty of the President of the Company. Interest at prime plus
1.5% is payable monthly. The balance payable on this line was
$1,000 as of December 31, 1999.
12% SENIOR NOTES
During 1991, FIRST issued $2,240,000 of 12% senior notes. These
notes are secured by FIRST's seismic data library. The outstanding
principal balances at December 31, 1999 and 1998, are $-0- and
$1,031,496, respectively. On October 7, 1997, FIRST offered a loan
modification agreement to the holders of the notes. All of these
notes were retired by payments or conversion to equity under this
plan in March 1999, upon the Company issuing 1,363,111 shares of
common stock.
F-17
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 3. DEBT (CONTINUED)
In addition to the loan modification agreement discussed above,
FORTESA signed an agreement with certain Noteholders whereby their
notes would be satisfied for a discounted amount. On such notes,
the Company recorded gains from extinguishments of $48,687 and are
included in the $305,489 settlements/liability extinguishments in
the Company's 1998 consolidated statement of operations. With the
intercession of FORTESA (See NOTE 10), all holders of the 12% or
senior notes accepted the loan modification agreement as of June
1998. Consequently, these amounts are classified as non-current in
the accompanying, consolidated balance sheet as of December 31,
1998.
6% NOTES
During 1993, FIRST issued $500,000 of 6% notes. The 6% notes
required quarterly payments of interest only with the principal
due in full, May 31, 1996. The 6% notes were secured by 100% of
the stock of the Company's operating subsidiary for international
information licensing, FEC. In addition, the 6% Noteholders
received 500,000 warrants to purchase the Company's common stock
at $0.50 per share expiring June 1, 2000. Total assets and equity
of FEC at December 31, 1998 were $1,117,300 and 474,069
respectively. The outstanding principal balance of these 6% notes
amounted to $-0- at December 31, 1999 and $411,178 at December 31,
1998.
On December 28, 1998 the Company offered to exchange the principal
and interest balances owed on the 6% notes for equity in the
Company contingent upon at least 80% of the warrants held by these
6% Noteholders being exercised early. All of the 6% Noteholders
accepted this offer.
In March 1999, the Company 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 outstanding 6% secured promissory notes.
The 6% Noteholders, who were also the warrant holders, agreed to
exercise at least 80% of the outstanding $0.50 warrants, thereby
purchasing shares of new common stock for cash. As an inducement,
the Company offered 150% of the number of shares of common stock
called for by the warrants as originally issued in 1993 for each
warrant exercised. Of these converting Noteholders, 92.5% also
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 chose not to exercise his warrants early. Those
25,000 warrants expire in June 2000.
F-18
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 4. STOCKHOLDERS' EQUITY
The Company is authorized to issue up to 10,000,000 shares of
common stock with a par value of $0.01 per share and up to
1,000,000 shares of preferred stock with a par value of $1.00 per
share. At a meeting held on January 7, 1999 the Board of Directors
recommended re-establishing the original 1990 authorized
capitalization, which were 20,000,000 common shares and 10,000,000
preferred shares. A majority of the shareholders is required to
approve this transaction.
STOCK RIGHTS OUTSTANDING
EMPLOYEE STOCK OPTION PLAN - In July 1990, the Company reserved
500,000 shares of its common stock for issuance under its Employee
Stock Option Plan. All I.C. stock options ("ISO's") will be
granted to employees at an exercise price of not less than the
fair market value of the stock on the date of grant. All
non-incentive stock options ("NSO's") will be granted at an
exercise price of not less than 85% of the fair market value of
the stock on the date of grant. The Company and the Board's
Compensation Committee, on February 3, 1998 re-assigned the entire
500,000 options from terminated employees to current employees of
the Company.
The strike price was set at $0.20 per share. The President
exercised his 300,000 employee stock options at $0.20 per share in
August 1998, and the remaining 200,000 0ptions are outstanding at
December 31, 1999.
DIRECTOR STOCK OPTIONS - In July 1990, the Company also reserved
150,000 shares of common stock for issuance under its Directors'
Stock Option Plan. All 0ptions will be granted to non-employee
directors at an exercise price of not less than the fair market
value on the date of grant.
NOTEHOLDERS WARRANTS - Warrants are outstanding to purchase
475,000 shares of the Company's common stock at $0.30 per share,
which expire October 2005.
EXCHANGE OF COMMON STOCK FOR 12% SENIOR NOTES. Between October
1997 and September 1998, the Company entered into agreements with
current holders of all of the Company's 12% senior notes past due
December 31, 1996 which modified the terms of these senior notes.
Prior to entering into these individual loan modification
agreements, the Company had been in non-compliance with various
provisions, including payment of interest 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.
F-19
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 4. STOCKHOLDERS' EQUITY (CONTINUED)
These modification agreements required the Company to retire these
senior notes prior to September 30, 1999. In March of 1999, the
Company was able to satisfy the balance of its obligations that
were not already paid in cash under the terms of the modification
agreement by issuing 1,363,111 shares of its common stock, valued
at two times the Company's book value, in exchange for most of the
outstanding senior notes.
The Company paid the remaining outstanding principal balance on
the senior notes whose holders did not accept this standard
modification as of September 30, 1999.
EXCHANGE OF COMMON STOCK FOR 6% NOTES, AND WARRANTS TRANSACTIONS.
In March 1999 the Company issued 1,073,734 shares of common stock,
in exchange for all the Company's 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 29, 1999. In connection with
this transaction, the Noteholders, who were also the warrant
holders, agreed to exercise at least 80% of the outstanding $0.50
warrants, thereby purchasing shares of new common stock for cash.
As an inducement, the Company offered 150% of the number of shares
of common stock called for by the warrants as originally issued in
1993 for each warrant exercised with new warrants to purchase an
aggregate 475,000 additional shares of common stock at a price of
$0.30 per share, 92.5% of the warrants that had been attached to
these notes were simultaneously exercised, and resulted in the
purchase of an aggregate of 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 chose not to exercise his warrants early.
Those 25,000 warrants expire in June 2000.
NOTE 5. TRANSACTIONS WITH RELATED PARTIES
In 1993, a limited partnership ("LTD") was established and the
Company's President agreed to act as the general partner of this
enterprise. LTD was founded to make investments in oil and gas
exploration and development activities and to generate financing
to facilitate portions of the Company's business plan that were
outside of the financing capabilities of the Company.
F-20
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 5. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The 15 owners of LTD are all shareholders of the Company. The
Company itself also owns a minority percentage of LTD. In February
2000, the Company used $100,000 shares of Series B preferred stock
to purchase back its seismic position in East Texas and an
additional interest in the two Kansas producing wells in which the
Company previously had an interest from LTD. This released LTD's
lien on the Company's international seismic data library. No
further related party factors or inter-locking assets exist from
past financing actions by LTD.
On January 1, 1997, the Company issued 150,000 shares of its
common stock at par value to its executive Vice President in
exchange for all of the shares of Blackwell Supply Inc. Blackwell
is used to conduct the domestic geophysical activity of the
Company, including airborne remote seismic surveys. (See NOTES 1
and 15.)
The Company acquired 100% of the outstanding shares of stock of
FORTESA Corporation from the Beall Living Trust, the trustee for
which is Rogers E. Beall (and his spouse), the Chairman of FIRST
SEISMIC Corporation, in exchange for 50,000 shares of Series A
preferred stock and 8,055 shares of common stock. The FORTESA
acquisition has been accounted for similar to a pooling of
interests due to common ownership and management and therefore all
prior period financial statements have been restated as if the
merger took place at the beginning of such periods.
Net sales and net income for the Company and FORTESA prior to the
combination are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998
--------------- -------------
<S> <C> <C>
NET SALES:
FIRST SEISMIC Corporation $ 2,370,372 $ 2,964,430
FORTESA Corporation 50,000 166,930
--------------- -------------
Combined $ 2,420,372 $ 3,131,360
=============== =============
NET INCOME (LOSS):
FIRST SEISMIC Corporation $ 159,032 $ 239,733
FORTESA Corporation 49,787 118,330
--------------- -------------
Combined $ 208,819 $ 358,033
=============== =============
</TABLE>
See NOTE 15 for additional disclosures of related party
transactions which occurred after December 31, 1999.
F-21
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 6. COMMITMENTS
The Company entered into an agreement with a major oil company to
use certain geo-scientific information to create a synthesized
study of current interest to the industry. Among other things, the
agreement requires the Company to make five annual payments, the
amount which depends on the level of sales, starting December 31,
1996 through December 31, 2000. In 1997, the agreement was amended
satisfying the December 31, 1997 payment of $75,000 through
performance of consulting services by the Company. In 1999, the
agreement was further amended satisfying the final $125,000 due
under this agreement by the Company's development of new
geo-scientific data scanning procedures for this major oil company
that allows such information to be digitized, found and retrieved
by computer access.
LEASES
The Company leases office space under non-cancelable operating
lease agreements. Rent expense for the years ended December
31,1999, 1998, and 1997 was $99,767, $118,602, and $67,136,
respectively. The Company leases office space until June 2000 for
FEL and January 2001 for FEC.
The future minimum rental commitments under these leases modified
to reflect the subsequent amendment/extension of lease agreements,
at December 31, 1999, is as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 82,477
2001 6,658
----------------
TOTAL $ 89,135
================
</TABLE>
F-22
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 7. INCOME TAXES
<TABLE>
<CAPTION>
Income tax expense (benefit) is comprised of the following:
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Current $ -0- $ -0- $ -0-
Deferred (150,000) -0- -0-
--------------- -------------- --------------
$ (150,000) $ -0- $ -0-
=============== =============== ==============
No income tax is expensed as the Company is in an NOL carry
forward position and has been charging income against prior losses
on its consolidated income tax return. The difference between the
effective rate of income tax expense and the amount which would be
determined by applying the statutory U.S. income tax rates to
income before income tax expense, is explained below according to
the tax implications of the various items of income or expense:
Federal income tax expense/
Benefit at statutory rate $ (457,015) $ 121,731 $ 70,998
Change in deferred tax
valuation allowance 307,015 (121,731) (70,988)
---------------- -------------- --------------
$ (150,000) $ -0- $ -0-
================ =============== ==============
The components of deferred income taxes are as follows:
1999 1998 1997
---------------- ---------------- ----------------
DEFERRED TAX ASSET:
Net operating loss carryover
(as amended at 34%) $ 6,361,980 $ 5,018,830 $ 5,100,339
Valuation allowance for net
deferred tax assets $ (6,211,980) $ (5,018,830) $ (5,100,339)
--------------- ---------------- ---------------
DEFERRED TAXES, NET $ 150,000 $ -0- $ -0-
=============== ================ ===============
</TABLE>
The Company had consolidated taxable income in four of the past
five years, and believes there is a greater than 50% possibility
that a portion of the deferred tax assets may be realized within
the next fiscal year. Therefore, the Company has recognized a
deferred tax benefit of $150,000 for the year ended December 31,
1999. A valuation allowance was earlier established and has been
maintained to offset the remaining deferred tax assets.
F-23
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 7. INCOME TAXES (CONTINUED)
Tax basis net operating loss carry forwards at December 31, 1999
and their respective expiration dates are as follows:
<TABLE>
<CAPTION>
<S> <C>
2006 $ 1,269,471
2007 5,256,991
2008 355,091
2009 7,879,712
2014 3,950,441
---------------
TOTAL $ 18,711,706
===============
</TABLE>
The amount of these net operating loss carryovers have been
revised for recent amendments to the Company's federal income tax
returns. These carryovers could be revised upon IRS audit or
restricted as to the Company's ability to utilize them to offset
future taxable income.
NOTE 8. FAIR VALUES
The estimated fair values of the Company's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1999 1998 1998
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 448,665 $ 448,665 $ 169,487 $ 169,487
LIABILITIES
Senior Noteholders Convertible -0- -0- 1,031,496 933,504
Six percent Noteholders -0- -0- 411,178 397,273
Vendor note payable 8,417 6,776 -0- -0-
------------ ----------- ----------- -----------
$ 8,417 $ 6,776 $ 1,442,674 $ 1,330,777
============ =========== =========== ===========
</TABLE>
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practical to estimate fair value.
Cash and cash equivalents - the carrying amount approximates fair
value because of the short maturity of these instruments.
Long-term debt - The fair value is based upon discounting the debt
such that the effective interest rate is prime plus 1% (9.5%)
utilizing actual and intended repayments.
F-24
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 9. GEOGRAPHIC AREAS
The Company's geographic data for the years ended December 31, are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
<S> <C> <C> <C>
REVENUE:
United States: $ 1,364,584 $ 2,163,645 $ 1,735,112
Foreign Subsidiary 231,225 967,715 685,260
------------- ------------- ------------
REVENUE: $ 1,595,809 $ 3,131,360 $ 2,420,372
============= ============= ============
NET OPERATING INCOME (LOSS)
United States $ (1,484,353) $ 145,706 $ 59,324
Foreign Subsidiary (22,928) (24,769) (4,492)
------------- ------------- ------------
NET INCOME/(LOSS) BEFORE OPERATIONS $ (1,507,281) $ 120,937 $ 54,832
============= ============= ============
TOTAL ASSETS:
United States $ 3,551,006 $ 3,515,410 $ 3,117,309
Foreign Subsidiary 63,727 49,061 72,896
------------- ------------- ------------
TOTAL ASSETS: $ 3,614,733 $ 3,564,971 $ 3,227,144
============= ============= ============
</TABLE>
NOTE 10. OIL AND GAS OPERATIONS
FORTESA ACQUISITION. On March 30, 1999, the Company purchased all
of the outstanding shares of stock in FORTESA Corporation, a Texas
corporation, from the Beall Living Trust, through its trustee
Rogers E. Beall, who was also its Chairman and Chief Executive
Officer at the time of this acquisition. In exchange for the
FORTESA stock, the Company issued 50,000 shares of the Company's
Series A Convertible preferred stock plus 8,055 shares in common
stock.
At the time of the acquisition, FORTESA's assets consisted of
non-producing oil and gas interests located in East Texas and the
Republic of Senegal and were recorded at their historical cost of
$171,000. The Company accounted for this acquisition as a pooling
of interests, due to common ownership and management.
FORTESA ASSETS. Mr. Rogers E. Beall, the Company's Chairman and
Chief Executive Officer, founded FORTESA in May 1997 to pursue an
opportunity to develop natural gas reserves in an onshore block
owned by Petrosen, the national oil company of the Republic of
Senegal, referred to as the THIES Block.
To develop the THIES Block, FORTESA entered into a joint venture
in December 1997 with Benton Oil and Gas (Senegal) Limited under
which FORTESA retained a 15% working interest in the project.
F-25
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 10. OIL AND GAS OPERATIONS (CONTINUED)
The terms of the joint venture appointed Benton to act as the
"operator" of the venture and to commit the first $5.4 million
required to develop the interest. FORTESA was only required to
fund its share of capital requirements after Benton's committed
expenditures were made. The initial development of the THIES Block
requires drilling two additional wells and the construction of a
pipeline to deliver natural gas to the local power generating
facility approximately 32 kilometers from the field.
On October 23, 1999, FORTESA entered into a new agreement with
Benton whereby FORTESA 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, and in consideration for transferring to the
Company Benton's prior development expenditures on the THIES Block
valued at $600,000 based on historical cost. In connection with
the issuance of Series B Convertible preferred stock, the Company
also granted Benton "piggy-back" and registration rights for
common stock underlying Benton's shares of preferred stock.
The Company's minimum required expenditure for the initial
development of the THIES Block is $5.4 million of the $6.0 million
Phase I development costs, which will be spent on a pipeline,
geologic evaluation, and the balance on drilling additional
well(s).
Under this agreement, Benton was released from their obligation to
spend $5,400,000 to develop the Gadiaga Field. The Company has
assumed the role of "operator" of this project from Benton, with
the consent of Petrosen.
FORTESA issued a purchase order for pipe to connect the gas
discovery well to the local market on November 24, 1999. FORTESA
is also seeking to obtain additional financing in the form of a
construction loan of up to $1,000,000 to complete installation of
the pipeline. See NOTE 15 for additional disclosure.
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. Under the terms
of this agreement, the Company has agreed to dedicate all
production to the main power plant, and the power plant has agreed
to take all of the natural gas produced from the Gadiaga Field for
at least two years, at a fixed price that amounts to more than
$4.00 per MCF, depending on the strength of the U.S. dollar verses
the French franc (euro). 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.
F-26
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 10. OIL AND GAS OPERATIONS (CONTINUED)
Under the agreement, the Company must raise or otherwise promote
from new co-venturers' additional funds to drill at least two
wells before February 2001. The Company plans to use a combination
of cash flow from the production of the first well as discussed
above, new capital from private or other sources, project
financing or capital from future co-venturers' to fund the
additional required wells. The Company intends to fund further
development of the Gadiaga Gas Field, as well as other exploration
on the THIES Block, in the same manner. The Company has no
assurance that it will be able to successfully obtain this
financing on acceptable terms, complete the project and realize
continuing revenues from the gas supply contracts.
NOTE 11. PREFERRED STOCK
TERMS OF THE SERIES A CONVERTIBLE PREFERRED STOCK. To finance the
acquisition of FORTESA in March 1999, the Company created a new
series of preferred stock and designated it; "Series A". The
Company authorized and issued 50,000 shares at $1.00 per share
liquidation value, with a convertibility option to the holder(s).
The terms of the Series A Convertible preferred stock provide for
dividends at a rate of 6% of the liquidation value per annum which
will accrue and accumulate beginning March 31, 2001. The Company
may not pay dividends on its 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 December 31, 2001, 2002 and 2003 the conversion ratio
shall be adjusted in proportion to the increase in value of the
assets the Company acquired when the Company bought FORTESA, if
any, as determined by an annual PV10 valuation of reserves
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.
F-27
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 11. PREFERRED STOCK (CONTINUED)
TERMS OF THE SERIES B CONVERTIBLE PREFERRED STOCK. To finance the
purchase of Benton's 45% working interest in the THIES block of
Senegal, the Company created a new class of preferred stock and
designed it to be "Series B". The Company authorized 250,000
shares and issued 135,000 at a $10.00 per share liquidation value,
and a common stock convertibility option.
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, the Company has 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, the Company must also pay a premium equal to 6%
of the liquidation value per annum from the date of issuance until
the date of such redemption.
NOTE 12. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit brought by two parties
claiming to be the successors-in-interest to McKenzie Management
Inc., a minority owner of certain seismic data acquired by the
Company in September 1990 from McMoRan Oil and Gas Company and
Adobe Resources Corporation.
This data was originally owned by a joint venture comprised of
McMoRan, Adobe and McKenzie Management Inc. At the time of its
assignment to the Company, McMoRan and Adobe could not locate
McKenzie and indemnified the Company "against any and all future
claims, costs, expenses or causes of action that may be asserted
by the referenced minority owner....".
In June 1994, the Company resold its interests in this seismic
data to Seitel Corporation and indemnified Seitel against claims
relating to the seismic data being sold. The plaintiffs were
seeking approximately $600,000 to $1,500,000, plus punitive
damages and attorney's fees.
The Company believes it is indemnified against loss in this matter
based on its original purchase contract with McMoRan and Adobe.
The Company hired defense counsel and made demand on IMC Global
(as successor to McMoRan) and Santa Fe Resources (as successor to
Adobe) to honor the indemnity running to FIRST SEISMIC, but so far
they have refused. The Company has been successful in its defense
and has won a summary judgment dismissing the claims against it.
The plaintiffs are appealing the courts' decision. The Company is
in the process of asserting its indemnification clauses against
the parties to the suit. While the ultimate results of the matter
described above cannot be determined, management does not believe
the above litigation will have a material adverse effect on the
Company's results of operations or financial position.
F-28
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 13. EARNINGS PER SHARE
The following sets forth the computation of basic earnings per
share at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
NUMERATOR 1999 1998 1997
--------- ------------ ------------- -------------
<S> <C> <C> <C>
NET INCOME (LOSS) $(1,344,161) $ 358,033 $ 208,819
============ ============= =============
DENOMINATOR FOR BASIC EARNINGS PER SHARE
Weighted number of hares used in computing net
Income (Loss) per Share $ 8,242,487 $ 5,560,924 $ 5,259,702
NET INCOME (LOSS) PER SHARE $ (0.16) $ 0.06 $ 0.04
============ ============= =============
</TABLE>
Based on estimated fair market values, outstanding options and
warrants are considered antidilutive for all years presented.
NOTE 14. STOCK OPTIONS AND WARRANTS
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", (APB
25) and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of employee
stock options is equal to the estimated market price of the
underlying stock on the date of grant, no compensation expense is
recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation". The value of options and warrants
granted during 1999 and 1998 as computed under SFAS 123, is deemed
insignificant.
The following summarizes the option and warrant activity and
balances for the year ended December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
---------------- -------------- ---------------
<S> <C> <C> <C>
Outstanding options 200,000 $0.20 July 16, 2000
Outstanding warrants 500,000 $0.50 June 1, 2000
</TABLE>
All warrants are currently exercisable.
All outstanding options were non-qualified options. No compensation
expense related to stock option grants was recorded, as the option
exercise prices were equal to the estimated fair market value on
the date of the grant.
F-29
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 15. SUBSEQUENT EVENTS
In April 2000 the Company applied to the state of Delaware to
change the name of BLACKWELL SUPPLY, Inc. to eSMART IMAGE
Corporation.
As of the date of this filing, FORTESA is engaged in discussions
to secure the required additional equity financing from
third-party investors and construction financing from an
international bank with offices in Senegal.
NOTE 16. UNAUDITED SUPPLEMENTAL RESERVE INFORMATION
STANDARD MEASURE
Standardized measure of discounted future net cash flows relate to
proved oil and gas reserves. The accompanying table presents a
standardized measure of discounted future net cash flows relating
to the production of the Company's estimated proved oil and gas
reserves at the end of 1999. The method of calculating the
standardized measure of discounted future net cash flows is as
follows:
(1) Future cash inflows are computed by applying year-end
prices for oil and gas to the Company's year-end
quantities of proved oil and gas reserves. Future price
changes are considered only to the extent provided by
contractual arrangements in existence at year-end.
(2) Future development and production costs are estimates of
expenditures to be incurred in developing and producing
the proved oil and gas reserves at year-end based on
year-end costs, and summing continuation of existing
economic conditions.
(3) Future income tax expenses are calculated by applying the
applicable statutory Federal income tax rate to future
pretax net cash flows. The Company anticipates no expense
due to a substantial NOL carry forward.
(4) The discount, calculated at ten percent per year, reflects
an estimate of the timing of future net cash flows to give
effect to the time value of money.
F-30
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 16. UNAUDITED SUPPLEMENTAL RESERVE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES DECEMBER 31, 1999
-------------------------------------------------- -----------------
(In Thousands)
<S> <C>
Future cash inflows from proved shut-in reserves $ 8,190
Future cash inflows from proved undeveloped reserves 8,192
----------------
TOTAL FUTURE IN CASH IN FLOWS 16,382
Future production costs 2,117
Future development costs 4,518
Future income tax expenses [see (3) above] -0-
----------------
FUTURE NET CASH OUT FLOWS 9,747
10% annual discount for estimated timing of cash flows 2,498
----------------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS RELATING TO PROVED OIL AND GAS RESERVES $ 7,249
================
</TABLE>
The following table presents costs incurred by the Company in the
United States, Guinea-Bissau and Senegal, West Africa in oil and
gas property acquisition, exploration and development activities:
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
UNITED STATES:
Property Acquisition $ -0- $ -0- $ -0-
Exploration -0- -0- -0-
Development 40,000 (7,920) -0-
WEST AFRICA:
Property Acquisition $ -0- $ -0- $ -0-
Exploration -0- -0- -0-
Development 1,030,805 -0- 76,605
</TABLE>
NOTE 17. ADDITIONAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
During 1998 the Company received consulting services from FORTESA
totaling $40,500, which were capitalized. This amount is included
in investment in oil and gas prospects on the balance sheet and
is a reduction in the amount due from FORTESA.
During 1998 the Company financed the purchase of an automobile
with an $11,940 note payable. Effective March 30, 1999, the
Company issued 50,000 shares of its Series A preferred stock and
8,055 shares of its common stock in exchange for all of the
common stock of FORTESA. (See NOTE 5)
F-31
<PAGE>
FIRST SEISMIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 & 1997
--------------------------------------------------------------------------------
NOTE 17. ADDITIONAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES (CONTINUED)
In March 1999 the Company 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 its outstanding 6% secured
promissory notes. The Company received debt reduction of $448,785
in return for the issuance of this common stock. (NOTES 3 & 4)
In March 1999, the Company issued 1,363,111 shares of its common
stock valued at $0.72 per share in exchange for its 12% senior
notes. This transaction benefited the Company by principle debt
reduction of $981,496. (NOTES 3 & 4)
As part of its November 1999 transaction with Benton Oil and Gas,
the Company issued 135,000 shares of its Series B Convertible
preferred stock, liquidation value $10.00, for $750,000 in cash
and in consideration for the $910,000 of Benton Oil and Gas's
prior development on the Senegal THIES block, which was reduced
by a reserve of $310,000 to a net value of $600,000. (See NOTE
10)
F-32
