<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE OF 1934 [No Fee Required] For the transition period
_________________ to ____________________
Commission File Number 0-18842
-------
FIRST SEISMIC CORPORATION
--------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 76-0062729
------------------------------ ----------------------
State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2470 Gray Falls
Suite 190
Houston, Texas 77077-6513
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
(281) 556-5656
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Yes / / No /X/
Class Outstanding as of December 31, 1999
---------------------------------------------------------------------------
Common Stock, $0.01 per share 9,046,867 shares
<PAGE>
FIRST SEISMIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.....................................5
Condensed Consolidated Statements of Operations...........................6
Condensed Consolidated Statements of Cash Flows...........................7
Notes to Condensed Consolidated Financial Statements......................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........14
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................15
Item 2. Changes in Securities and Use of Proceeds..........................15
Item 5. Other Information..................................................17
Item 6. Exhibits and Reports on Form 8-K...................................17
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST SEISMIC Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
9/30/99 12/31/98
(unaudited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,260 $ 169,487
Accounts receivable, net 495,058 385,568
Due from Fortesa - 25,304
------------ ------------
TOTAL CURRENT ASSETS 497,318 580,359
Data library, net 1,652,888 2,462,964
Data and agency use position, net 21,310 23,185
Property and equipment, net 75,476 52,983
Investment in oil and gas prospects, at cost 171,210 170,710
Deferred tax asset, net of valuation allowance of $4,868,830 150,000 -
Other assets 73,762 40,384
------------ ------------
TOTAL ASSETS $ 2,641,964 $ 3,330,585
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $ 100,000 $ -
Current portion of long-term debt 1,085 -
Accounts payable, trade 661,908 1,083,581
Accrued liabilities 294,016 148,431
Accrued compensation 69,062 17,408
Deferred revenue 29,500 -
------------ ------------
TOTAL CURRENT LIABILITIES 1,155,571 1,249,420
Long-term debt 6,838 1,442,674
Data use payables, net 40,432 73,810
TOTAL LIABILITIES 1,202,841 2,765,904
============ ============
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $1.00 par value, 1,000,000 shares
authorized; 50,000 (1999) and 0 shares outstanding (1998) 50,000 -
Common stock, voting, $.01 par value, 10,000,000 shares authorized;
9,054,922 (1999) and 5,776,865 (1998) issued 91,773 57,769
Additional paid-in capital 11,397,813 9,531,278
Retained earnings (deficit) (10,012,379) (8,947,083)
Foreign currency translation adjustments (14,418) (11,929)
Less treasury stock, 138,855 (1999) 43,855 (1998) shares at cost (73,666) (65,354)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,439,123 564,681
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,641,964 $ 3,330,585
============ ============
</TABLE>
See accompanying notes.
<PAGE>
FIRST SEISMIC Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
-----------------------------------------------------------
9/30/99 9/30/98 9/30/99 9/30/98
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Company owned geophysical $ 263,738 $ 37,864 $ 447,328 $ 105,130
Company owned geological 165,492 361,432 280,692 1,003,527
Third party geophysical 10,494 271,995 17,800 755,203
Third party geological 25,411 117,146 43,100 325,260
Commissions 4,826 15,872 8,186 44,069
Geoscientific services 115,723 63,750 196,279 177,005
Reproduction and other 29,296 36,736 49,686 101,998
------------ ----------- ----------- -----------
614,980 904,795 1,043,071 2,512,192
COST OF SALES 146,306 490,424 364,407 1,376,750
------------ ----------- ----------- -----------
EXPENSES
Selling, general and administrative expenses 147,000 233,120 600,256 680,476
Amortization and depreciation 255,148 58,140 472,312 281,787
Impairment of seismic data and publication liabraries 840,792 - 840,792 -
Interest expense 2,866 1,081 6,867 3,277
Interest income (11) (569) (477) (3,807)
Other (income) expense (25,790) (7,654) (25,790) (50,404)
------------ ----------- ----------- -----------
Total Expenses 1,220,005 84,118 1,893,960 911,330
------------ ----------- ----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES (751,331) 130,253 (1,215,296) 224,111
INCOME TAX EXPENSE (BENEFIT) - - (150,000) -
NET INCOME (LOSS) $ (751,331) $ 130,253 $(1,065,296) $ 224,111
=========== =========== =========== ===========
Earnings (Loss) per Share: Basic and Diluted $ (0.08) $ 0.02 $ (0.13) $ 0.04
(all common stock equivalents are antidilutive)
WEIGHTED NUMBER OF COMMON SHARES USED IN
COMPUTING NET INCOME (LOSS) PER SHARE 8,863,045 5,575,126 7,917,951 5,477,383
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
FIRST SEISMIC Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
9/30/99 9/30/98
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $(1,065,296) $ 224,111
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (Note 1) 472,312 281,787
Extraordinary Amortization 840,792 -
Change in allowance for doubtful accounts (116,018) -
Settlements/liability extinguishments (Note 1) (51,766)
Reserve for potential liabilities (Note 1) - -
Reduction in carrying value of oil & gas investment -
Deferred tax asset (150,000) -
Stock issued as compensation 10,969 -
Changes in operating assets and liabilities:
Accounts receivable, trade (net) (76,623) (367,842)
Other current assets (25,402) -
Accounts payable, trade (413,405) 482,760
Accrued expenses 145,585 143,916
Accrued compensation, officer (Note 5) 51,654 -
Unearned Income 29,500 (44,388)
----------- -----------
Total adjustments 769,364 444,467
----------- -----------
Net cash flows provided by operating activities (295,932) 668,578
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of other assets - -
Acquisition of gross assets of Fortesa Corporation 234,386 -
Disposition of other assets - 40,786
Acquisition of property and equipment (12,475) (19,444)
Acquisition of data library (292,515) (500,374)
Investment in oil and gas prospects (500) -
Acquisition of data and agency use positions - -
Dispositions of data library - -
Purchase of treasury stock (8,313) -
Increase/(Decrease) in data use payables (33,378) (142,739)
----------- -----------
Net cash used by investing activities (112,795) (621,771)
----------- -----------
</TABLE>
<PAGE>
FIRST SEISMIC Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1999 AND 1998
(unaudited) (continued)
<TABLE>
<CAPTION>
9/30/99 9/30/98
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted stock issued 192,500 60,000
Payments to FORTESA - (14,604)
Borrowings on line of credit 264,000 596,926
Payments on line of credit (165,000) (498,000)
Principal payments on long-term debt (50,000) (374,566)
--------- ---------
Net cash used by financing activities 241,500 (230,244)
--------- ---------
NET INCREASE (DECREASE) IN CASH (167,227) (183,437)
CASH AT BEGINNING OF YEAR 169,487 184,186
--------- ---------
CASH AT END OF YEAR $ 2,260 $ 749
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 6,867 $ 3,277
========= =========
</TABLE>
See accompanying notes
<PAGE>
NOTE 1 BASIS OF PRESENTATION
These condensed consolidated financial statements of FIRST SEISMIC
Corporation ("FIRST"), its wholly-owned subsidiaries: FIRST EXCHANGE Corporation
("FEC"), FIRST EXCHANGE Limited ("FEL"), Blackwell Supply, Inc., d.b.a.
Blackwell Trading, Inc. ("BTI") and FORTESA Corporation ("Fortesa") which we
collectively refer to as "the Company", have been prepared by us, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
we believe that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read
in conjunction with the financial statements and the notes thereto included in
our latest Annual Report to Shareholders and the Annual Report on Form 10-K for
the year ended December 31, 1998. In our opinion, all normal recurring
adjustments necessary to present fairly our financial position as of September
30, 1999, as well as the results of operations for the nine months ended
September 30, 1999 and 1998, and cash flows for the nine months ended September
30, 1999 and 1998 have been included. The foregoing interim results are not
necessarily indicative of the results of the operations for the full fiscal year
ending December 31, 1999.
NOTE 2 INCOME TAXES
We had potential future tax benefits of an estimated $5,018,830 at
December 31, 1998 resulting from net operating loss carry forwards. Based on our
current financial position and operating losses due to the reduced market for
2-D seismic data in our domestic markets, we elected to set up a valuation
allowance that fully offsets this asset. We have utilized, in each of the past
four years, these net operating loss carry forwards to offset our taxable
earnings reported on our federal income tax returns. With our acquisition of
FORTESA on March 30, 1999, we reduced the valuation allowance by $1,350,000 to
record our belief that a portion of this potential asset would be utilized in
the immediate periods, due to FORTESA's carried interests in the new gas
discovery in the Republic of Senegal. However, in August 1999 we offered to
acquire the entire farm-in interest from the partner we had promoted into this
project Benton Oil & Gas, subject to certain conditions that we believed would
improve our chances to benefit from this project. Those conditions were
satisfied in November 1999 (see Note 5 ---Subsequent Events) and Benton Oil will
no longer pay our share of the balance of the next $5.4 million dollars of
expenditures. Accordingly, we have increased the valuation allowance by
$1,200,000 as of September 30, 1999 as it is now our obligation to bring the gas
discovery well into production. As production from our Senegal holdings comes on
line and begins to produce taxable income, we will again adjust the valuation
allowance downward to a level that reflects the amount of future tax benefit we
expect to realize. The net balance of $150,000 in this account at September 30,
1999 represents our current estimate of the value of realizable future benefits
and is based on a review of our taxable earnings over the past four years
adjusted downward for losses from our operations sustained in 1999 due to the
poor business conditions for oil industry exploration projects we experienced
during this period. Changes in control of our Company using set
formulas/percentages established by IRS can permanently affect our ability to
utilize this asset against our future taxable earnings.
NOTE 3 RECLASSIFICATIONS
Certain 1998 amounts reported in previous filings have been
reclassified to conform to 1999 presentation.
NOTE 4 ASSET IMPAIRMENT
At September 30, 1999, based on our estimates of future net
realizable revenues associated with our balance sheet net costs of specific
portions of both our 2-D seismic data and publication libraries, we charged to
income approximately $841,000. Of this amount, approximately $606,000 was
attributable to impairment of our domestic 2-D seismic data library and
approximately $235,000 was attributable to our International Geotechnical
publications library.
<PAGE>
NOTE 5 SUBSEQUENT EVENTS
In November 1999 we entered into a series of transactions to enhance
the value of our holdings in the Republic of Senegal. Specifically, the
following projects/actions were undertaken or completed:
FORTESA was appointed `Operator' of our farm-in with PETROSEN, the
national oil company of the Republic of Senegal, and we executed a gas supply
contract with Senelec, the national electric utility of the Republic of Senegal.
Senelec is managed, controlled and partially owned by Canada's Hydro Quebec. The
government of Senegal remains the majority shareholder of Senelec. Our venture
with PETROSEN will construct a pipeline of up to 42 kilometers in length to
deliver gas from its discovery well in the THEIS Block to Senelec's electric
plant in Dakar. The gas sales contract requires Senelec to purchase all of the
gas produced from the THEIS Block at a fixed rate for two years from the
execution date. Thereafter, our gas sales will be renegotiated or placed at a
floating rate tied to the price of the refined liquid products that the
Senegalese power plant is presently using in its turbines. The contract contains
covenants allowing re-negotiation by the joint venture if currency fluctuations,
devaluations, and political risks affect our selling price significantly during
the term of this fixed price gas sales contract.
The national oil company of the Republic of Senegal as well as the
Government of Senegal agreed to transfer responsibility for development of the
THEIS Block to Fortesa and concurrently released Benton Oil and Gas Company from
its obligation to invest $5,400,000 to develop the THEIS Block. In connection
with this transaction, Fortesa released Benton from its obligation to pay the
first $1,350,000 of development costs attributable to our 25% working interest.
In addition, we assumed Benton's privileges and obligations under the Farm-out
Agreement dated December 27, 1997 to develop the THEIS Block, including
ownership of up to 70% of the venture's equity and the responsibility for
$5,400,000 of the venture's future development expenditures.
Accordingly, we added $1,350,000 of new capital to the balance sheet
through the sale of 135,000 Series B Preferred shares ($10.00 per share
liquidation preference) to Benton. Issuance of the 75,000 of these Series B
Preferred shares brought in $750,000 of cash. We compensated Benton for their
pre-development sunk project costs that were in excess of $800,000 with the
issuance of the remaining ($600,000) 60,000 Series B Preferred shares. We
consummated this capital financing in November 1999.
We are negotiating to add $610,000 of additional new capital through a
series of transactions with an asset management firm that represents some of our
large shareholders via the placement of an additional 61,000 Series B Preferred
shares. The transactions, when concluded, would add $500,000 in cash and certain
oil and gas related assets valued at $110,000 owned by our affiliate, Seisco
Ltd., to our equity base. As referenced, 21,000 Series B Preferred shares for
this funding would be issued to Seisco Ltd. of which our Chairman is the
Managing General Partner. The Seisco Ltd. purchase of our Preference B shares
would result in our acquisition of three oil and gas related assets valued at
$110,000 and approximately $100,000 in cash. We have no assurance that these
additional financings will be consummated.
In connection with our responsibility to develop the THEIS Block we
placed an order in November 1999 to manufacture enough 4" pipe to connect our
Gadiaga discovery well to Senegal's main power plant at a cost of $ 600,000. Our
cost to complete the pipeline is estimated to be $2,250,000 and will be financed
by the above detailed proceeds of the Series B Preferred stock and by an interim
bank construction loan. Discussions are on-going with OPIC (the Overseas Private
Investment Corporation), a U.S. Treasury Department agency to provide the
permanent project financing. We are negotiating with Citibank's local office in
Dakar, Senegal to provide the interim loan during the construction period.
Citibank has notified us that they may require a secondary guarantor to approve
the loan.
In December 1999 we initiated discussions with AFRICAP, L.L.C., a
Delaware Limited Liability Company to act as guarantor of the proposed Citibank
pipeline interim construction loan. AFRICAP has indicated a willingness to
guarantee up to $1,000,000 of the loan proceeds in exchange for (i) our purchase
of a $60,000 investment equity interest (representing a 1% ownership interest)
in AFRICAP L.L.C (ii) a 2% fee (i.e. $20,000) due at closing fee and (iii)
warrants to purchase 50,000 shares of our common stock at $1.00 per share. We
have no assurance that this arrangement will be consummated.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-Q includes forward-looking statements
and assumptions we have made within the meaning of Section 27A of the Securities
Act of 1933 and Section 21 E of the Securities Exchange Act of 1934. 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, geoscientific studies and related services. Some
additional factors will be actual customer demand for our seismic data,
geoscientific studies and related services, the extent of our success in
acquiring and funding oil and gas properties and in discovering, developing
and producing reserves, the timing and extent of changes in commodity prices
for natural gas, crude oil and condensate 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. Some of the risk factors that we believe our business is
subject to are listed in our annual Form 10-K report, which is incorporated
herein by reference.
SEISMIC OPERATIONS
Historically, we had engaged in the development of a proprietary
seismic data library. Our seismic data library consists exclusively of
two-dimensional (2D data), and was developed over a period of approximately
ten years. As of 1991 our seismic data library consisted of over 11,000 miles
of domestic 2D seismic line data. As of December 31, 1998, our seismic data
library consisted of approximately 8,500 miles of domestic and foreign 2D
seismic line data. Our library is marketed to major and independent oil and
gas companies under use-license arrangements. Additionally, we have been
involved in the sale of licenses for seismic data owned by others, under
brokerage and agency agreements. Seismic surveys and the analysis of seismic
data for the identification and definition of underground geological features
and structures are principal techniques used in oil and gas exploration and
development to determine possible locations of subsurface hydrocarbons.
Beginning in 1992, technology that enabled geoscientists to obtain
seismic data in three dimensions ("3D") became much more cost effective and
universally available. 3D seismic data makes possible a graphic geophysical
depiction of the substrata geology from one vertical dimension and two (instead
of just one, as in 2D seismic) horizontal dimensions. This process provides a
substantially more accurate representation than 2D data and significantly
enhances the ability to evaluate the probable existence and location of
subsurface hydrocarbons.
Accordingly, 3D seismic data became the information of choice among
our historical customers, and as a result, the demand for and the relative
value of our extensive 2D library decreased significantly. Both the volume of
2D seismic licenses sold and the prices which customers were willing to pay
for such information suffered severe downturns beginning in late 1991. While
a market remains for this information and we continue to engage in this
business, we believe that future prospects for growth in ownership and
marketing of 2D information are below a critical mass necessary to be of
significant commercial value to us. During the first nine months of 1999
however, sales of 2D seismic information accounted for approximately 42% of
our revenues much of which was related to West Africa. We believe, our
abilities in 2-D seismic data management were able to more significantly
contribute to our year to date 1999 revenue base in a poor year for sales.
GEO-TECHNICAL PUBLISHING AND SERVICES
Cash flow from our operations since 1993 has increasingly come from
license fee and service revenue generated by our exploration and geoscientific
research, as well as geo-technical services performed directly for our
customers. In these areas, we compete on the basis of expertise in packaging,
marketing, and supplying interrelated data for a particular area of geologic
interest. We perform these functions exclusively for oil companies, either by
our preparation of direct information on an exclusive basis for the customer, or
as multi-client studies on which (i) we attempt to retain an ownership interest
in the resulting study for on-going income, and (ii) our customer receives the
right to use the compiled information for internal use under a licensing
agreement.
We have developed and added geotechnical publications used for
multi-client sales into our data library. Typically we realize a better margin
in these products due to our partial or full ownership position in them, as
compared to information brokerage and commission revenue from data that we do
not own. Potential customers may inspect abstracts of information and
<PAGE>
data types and determine their usefulness for a particular project via our
website at www.first-exchange.com. Our geotechnical publication products and
services tend to be more cost effective for customers than those which they
develop at their own expense as we provide the needed exploration information
in a useful form with pricing based on a percentage of our costs for
originating the information. Further licenses for these same reports are
sold/resold for varying prices based on market demand.
In conjunction with these services, we generate commission and service
revenue related to the compilation, interpretation, imaging and marketing of
geoscientific data. These services typically involve fees for performance
arrangements with customers who own or desire to obtain mineral rights and are
seeking to determine viability for drilling programs. We seek to compete in this
area by exploiting our upstream relationships, data sources, and experience in
emerging areas such as Africa, South America and Eurasia. Revenue from
geoscientific information and services accounted for approximately 50% of our
revenue in the first nine months of 1999, down from 60% for the first 9 months
of 1998. This was due to the very poor business climate for sales of licenses to
our existing GeoTechnical reports from our data library during the period,
offset to a degree by increases in geoscientific services we performed directly
for key customers, in order to constructively utilize our staff during this
period of low oil product prices.
OIL AND GAS EXPLORATION AND PRODUCTION OPERATIONS
We intend to utilize our expertise in the application of geoscientific
technology, as well as our relationships with suppliers and owners of
information and our customers to participate in oil and gas exploration and
production in selected situations which do not conflict with the business
interests of our customers. Through our subsidiary FORTESA, we are currently
pursuing several oil & gas prospects in West Africa as well as in the U.S. These
prospects are in various stages of development, however none are actively
drilling as of January 2000. The majority of these investments were accounted
for at cost as we still held a minority ownership interest as of September 30,
1999 in the West African opportunity. At December 31, 1998, we wrote down a
prospect in East Texas by $34,920 due to a decline in fair market value. Our
cost basis in all of these oil & gas positions totaled approximately $171,000.
During 1998, two wells in Kansas began producing with cash distributions
expected to begin after the operator has recovered the drilling costs.
RESULTS OF OPERATIONS
SALES OF SEISMIC AND GEOSCIENTIFIC DATA
Total revenue for the nine months ended September 30, 1999 decreased
approximately $1,469,000 or 58% compared to the same 1998 period. This large
decrease was due primarily to the significant reduction in oil prices the world
experienced from mid-1998 through mid-1999. As a result, the oil industry
suffered a major rationalization that resulted in our loss of a number of good
historic customers, such as Amoco, ARCO, Union Texas, Mobil, Monument & FINA, as
well as other companies such as Elf Aquitaine and ORYX Maxus. We believe that
all of our regular customers reacted by suspending expenditures to some degree,
reducing commitments for exploration, and revising their internal organizations
and methods of doing business. We believe that this significant product price
reduction to the oil industry was the primary reason for our revenue declines
during this period, and that some of this business may never return under the
former competitive arrangement and multitude of regular customers that existed
prior to mid-1998.
OIL AND GAS
Our investments in oil & gas properties have produced no operational
revenue as of the January 2000 filing date of this report. The natural gas
reserves held by FORTESA are not yet on line. Revenue associated with these
reserves is subject to certain risks and capital expenditures for which we are
obligated and which have yet to be financed and made.
See Liquidity and Capital Resources.
COST OF SALES
Cost of sales for our seismic and geoscientific data are composed of
employee and administrative costs directly associated with a specific project or
sale, and of partner and data owner payments for licensed and brokered data.
These costs typically average approximately 50% of sales and do not include the
amortization of our investment in the associated data. For the nine months ended
September 30, 1999 however cost of sales was approximately 35% of sales as the
product sales mix during the period contained a greater proportion of higher
margin seismic data and shelf products as opposed to brokerage of non-owned data
and publication revenues.
<PAGE>
CORPORATE AND OTHER
Selling and General and Administrative expenses decreased approximately
12% or $80,000 for the nine months ended September 30, 1999 as compared to the
same 1998 period primarily as the result of reduction in staffing levels,
temporarily reduced salary levels of four key employees, including the Chairman,
and an effort to eliminate all discretionary marketing and administrative
expenditures.
Depreciation and amortization expense, which consists primarily of
amortization of our data library, increased approximately 68% or $191,000 for
the nine months ended September 30, 1999 as compared to the same 1998 period.
This increase was due primarily to increased level of capital expenditures for
new geoscientific reports in the Caspian Sea region that were developed during
1998. These reports are normally amortized over approximately three years.
At September 30, 1999, based on a detailed review and estimates of
future net realizable revenues associated with specific elements of our seismic
data and publication libraries, we charged approximately $841,000 in addition to
normal amortization against ordinary income for this period. Of this amount,
approximately $606,000 was attributable to impairment of our seismic data
library and approximately $235,000 was attributable to our international
geotechnical publications library.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by (used in) operations was $(569,000) and $669,000
for the nine-month periods ended September 30, 1999 and September 30, 1998,
respectively. Our line of credit with our bank for $100,000 is secured by
accounts receivable. As of September 30, 1999, this credit facility was fully
drawn and we had no availability on it. These borrowing proceeds were used to
finance our reprocessing program in the Senegalese deepwater project and our
marketing operations. Our Chairman was requested by our bank to personally
guarantee our line of credit, in order for our bank to have granted this line of
credit to us.
We had a working capital deficit at September 30, 1999 of approximately
$658,000. Current liabilities include approximately $253,000 of accruals related
to estimated restructuring costs, which consist primarily of accounting and
reporting compliance costs. We believe these accruals to be proper estimates of
the remaining costs required to complete our restructuring.
We effected a settlement of substantially all of our long term debt in
the first quarter of 1999 through the issuance of additional equity to the
holders of our Senior 12% Notes and our 6% Notes. See Part II - Item 2. Changes
in Securities and Use of Proceeds.
Expenditures on data library acquisitions during the nine months ended
September 30, 1999 totaled $293,000 as compared to expenditures of $500,000
during the same 1998 period. This was due primarily to decreased demand
resulting from industry conditions and the fact that we had made a record level
of capital additions to our geoscientific data library the 1998 period. Our 1999
expenditures were 70% composed of the `company-owned geophysical' 2-D seismic
project in the Deep Water of Senegal. This project accounted for over 30% of our
revenues to the date in 1999. We presently require that ongoing Capital
expenditures be funded by pre-commitments to any approved new projects by
industry licensee pre-subscribers, prior to Capital Expenditures exceeding
$25,000 on any single project.
We believe that cash flows from operations will be sufficient to fund
our working capital needs for the next 12 months, except for expenditures
connected with the THIES Block as discussed below, which require additional
capital and financing.
RECENT DEVELOPMENTS
FORTESA ACQUISITION
Effective March 30, 1999, we purchased all of the outstanding shares of
stock of FORTESA Corporation, a Texas corporation, from the Beall Living Trust,
its sole shareholder, the trustee for which is Rogers E. Beall, our chairman and
chief executive officer for Fortesa, we paid 50,000 shares of our Series A
Convertible Preferred Stock plus 8,055 shares of Common stock. At the time of
the acquisition, FORTESA's assets consisted of oil and gas interests located in
East Texas and the Republic of Senegal and were valued at approximately
$171,000, a figure that represents the book value at cost of the assets to
FORTESA.
TERMS OF THE SERIES A CONVERTIBLE PREFERRED STOCK
<PAGE>
The terms of the Series A Convertible Preferred Stock provide for
dividends at a rate of 6% per annum which will accrue and accumulate beginning
March 31, 2001. We may not pay dividends on our Common Stock unless and until
all accrued and unpaid dividends on the Series A Convertible Preferred Stock are
paid. Shares of the Series A Convertible Preferred Stock are convertible into
shares of Common Stock at the holders' option after March 31, 2001 at a
conversion ratio that varies proportionally with an increase in value of the
assets of FORTESA. Initially the Series A Convertible Preferred Stock will be
convertible at a ratio of 10 shares of Common Stock for each share of Series A
Convertible Preferred Stock. On each of December 31, 2001, 2002 and 2003, the
conversion ratio shall be adjusted in proportion to the increase in value of the
assets of FORTESA, if any, as determined by an annual PV10 valuation of the
assets performed by an independent engineer. In any event, the conversion ratio
shall not exceed a maximum of 40 shares of Common Stock for each share of Series
A Convertible Preferred Stock. The maximum ratio would correspond to an increase
in value for the FORTESA assets acquired on March 30, 1999, to $2,925,000 - as
determined by the independent valuation.
<PAGE>
FORTESA ASSETS
Mr. Rogers E. Beall, our chairman and chief executive officer formed
FORTESA in May 1997 to secure an opportunity to develop natural gas reserves in
an onshore block owned by PETROSEN, the national oil company of the Republic of
Senegal and referred to as the THIES Block. Such opportunity was not available
to us at the time due to our financial condition. The THIES Block consists of
approximately 998,000 onshore acres adjacent to Dakar, the Capital of Senegal.
In February 1997, PETROSEN drilled an exploratory well on the acreage that was
tested successfully in two zones, including a flow of 4.3 million cubic feet per
day from one of the intervals, a Campanian sand interval, at 4,200 feet. We
estimate that the required expenditures for the initial development of the THIES
Block will be approximately $6.0 million.
To develop the THIES Block, FORTESA entered into a joint venture in
December 1997 with Benton Oil and Gas Company under which FORTESA retained a up
to 25% interest in the farm-in with PETROSEN, which was a 15% gross working
interest in the project. The terms of the joint venture required Benton Oil 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 Oil's committed expenditures were made. We estimated
that the development of the THIES Block will require drilling two to five
additional wells and the construction of a pipeline to deliver the natural gas
produced to the local power generating facility approximately 42 kilometers from
the field. See Recent Developments below.
FORTESA also holds a small position in exploration acreage in east Texas
that we believe is prospective for gas exploration. This acreage is adjacent to
known productive areas that have exhibited commercial production in the 1990's.
RECENT DEVELOPMENTS CONCERNING FORTESA.
On October 23, 1999, our subsidiary FORTESA entered into a new agreement
with Benton Oil and Gas Company (Senegal) Ltd. by which FORTESA has assumed all
obligations and rights of Benton Oil and Gas Company under our joint venture in
the THIES Block. In addition, Benton Oil purchased 135,000 shares of new Series
B Convertible Preferred Stock from us with a liquidation value $10.00, for
$750,000 in cash. The balance of the stock we issued was in consideration for
services rendered in the form of Benton Oil's prior actual development
expenditures on the THIES Block. In connection with the issuance of this
$1,350,000 of Series B Convertible Preferred Stock, we also granted to Benton
Oil registration rights for our common stock that is underlying Benton Oil's
shares of the preferred stock.
A condition precedent to this agreement was the granting of a release
from PETROSEN to Benton Oil of their obligations under the prior joint venture
agreement. On November 16, 1999, we obtained that release for Benton Oil from
our primary partner in this venture, PETROSEN. Under this agreement, we also
released Benton Oil on our behalf from the balance of Benton Oil's above
obligation to spend $5,400,000 to develop the Gadiaga Field. As a result, we are
now obligated to develop the Gadiaga Field without Benton Oil, and we have
assumed the role of `operator' of this project from Benton Oil with the consent
of PETROSEN and the government of the Republic of Senegal.
Our agreement with Benton Oil requires FORTESA to obtain additional
equity financing of at least $500,000 on terms equivalent to those of the Series
B Convertible Preferred Stock. Upon obtaining a letter of intent to fund the
additional equity, FORTESA was required to issue a purchase order for pipe to be
used in our construction of the pipeline that will transport gas produced from
the Gadiaga Field in the THIES Block. FORTESA issued the required purchase order
for the pipe on November 24, 1999. FORTESA is also required promptly to commence
efforts to obtain additional financing in the form of a construction loan of up
to $1,000,000 to complete installation of the pipeline. As of the date of this
filing FORTESA is engaged in discussions to secure the required additional
equity financing from third-party investors and the required construction
financing from an international bank with offices in Senegal.
On November 23, 1999 FORTESA executed a gas sales agreement to supply
natural gas produced from the THIES Block to the main Senegalese power plant at
Cap des Biches, Senegal. Under the terms of this agreement we have agreed to
dedicate to the main power plant, and the power plant has agreed to take, all of
the natural gas to be produced from the Gadiaga field for at least two years, at
a fixed price. 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.
We plan to complete construction of the gas delivery pipeline in the
second quarter of 2000, and realize cash flow from gas sales within 90 days of
the first gas transmission. Concurrent with the commencement of this cash flow,
we plan the drilling of two to five additional wells in 2000 and 2001. In order
to satisfy our obligations under the contract with Benton, we must raise or
otherwise promote from new co-venturers the additional funds to drill at least
two wells before February 2001. We plan to use a combination of cash flow from
the production of the first well discussed above, new capital from private or
other sources, project financing or capital from future co-venturers to fund the
additional required wells. We intend to fund further development of the Gadiaga
gas field, as well as other exploration on the THIES Block, in the same manner.
We have
<PAGE>
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.
See Note 5 - Subsequent Events in the accompanying Condensed Consolidated
Financial Statements
TERMS OF THE SERIES B CONVERTIBLE PREFERRED STOCK.
The terms of the Series B Convertible Preferred Stock entitle the
holder(s) at any time to convert each share into 10 shares of Common Stock at
their option. In addition, we have the right to redeem all or part of the
outstanding shares of Series B Convertible Preferred Stock at the $10.00 per
share liquidation value. If the shares are redeemed prior to three years from
the date of issuance, we must also pay a premium equal to 6% per annum from the
date of issuance until the date of such redemption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk, including adverse changes in commodity
prices, interest rates and foreign currency exchange rates is discussed below.
COMMODITY PRICE RISK
We have not produced revenues as of December 1999 related to sales of
natural gas, crude oil, condensate and natural gas liquids. We have no
program in place to undertake to hedge our position with respect to these
commodities and we have not originated or bought derivative type instruments.
However, to initially minimize price fluctuation risk factors in our gas
development project in Senegal, we agreed to a fixed price for the gas to be
sold under our gas sales agreement over the next two years with the main
power plant.
Fluctuations in hydrocarbon commodity prices could have a material
impact on the level of revenues in future periods.
INTEREST RATE RISK
We have no variable rate debt, and therefore we have no open interest
`rate swap' or interest rate `lock agreements'.
CURRENCY EXCHANGE RATES
We conduct our business in British `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 our functional currency
is the CFA, and in the United Kingdom, where our functional currency is British
Pounds Sterling, is not material at this time, but future increases in the
strength of the USA `dollar' could have a negative effect on our Revenues from
international information sales and gas sales transactions.
PART II OTHER INFORMATION
ITEM 1. 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 1,200 miles of 2-D seismic data acquired by us in September
1990 from McMoran Oil & Gas Company and Adobe Resources Corporation. A portion
of this data was originally owned by a joint venture comprised of McMoran, Adobe
and McKenzie Management Inc. At the time of our original purchase of this data,
McMoran and Adobe could not locate McKenzie and indemnified us "against any and
all future claims, costs, expenses or causes of action that may be asserted by
the referenced minority owner...." In June 1994, we sold our interest in this
data to Seitel Corporation and indemnified Seitel against claims relating to the
ownership of the seismic data. 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.
This lawsuit is still in the early stages of discovery and we cannot predict the
extent of our liability, if any. No specific provision has been recorded in the
accompanying financial statements for any loss that may be realized from this
matter. We
<PAGE>
will actively defend ourselves from the claims asserted in this suit. In
early 1999 our attorneys filed with the Court for Summary Judgment to dismiss
the claims of the Plaintiffs. We believe we will prevail in these
proceedings, and that our financial statements provide adequately for the
financial implications of this issue.
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) In connection with the March 1999 restructuring of our long-term debt, we
issued stock to retire both classes of debt, our 6% Noteholders and our 12%
Senior Noteholders all agreed to receive common stock for their principal
balances. In addition, 6% Noteholders exercised common stock warrants early for
$237,500 of cash capital. These items affecting our balance sheet are all
discussed below in more detail.
EXCHANGE OF COMMON STOCK FOR SENIOR NOTES
In October 1997, we entered into agreements with the present holders of
all of our 12% Senior Notes due December 31, 1996 which modified the terms of
these Senior Notes. Prior to entering into these individual loan modification
agreements, we had been in non-compliance with various provisions including our
payment terms on these Senior Notes since September 30, 1993. The provisions of
the loan modification agreements reduced the balance due on the Senior Notes to
the outstanding principal amount only and forgave unpaid interest and suspended
other remedies available to the Noteholders. These modification agreements
required us to retire these Senior Notes prior to September 30, 1999. In March
of 1999, we were able to satisfy the balance of our obligations that were not
already paid in cash under the terms of the modification agreement by issuing
1,241,596 shares of Common Stock, valued at two times our net book value, in
exchange for most of the outstanding Senior Notes. The balance we were able to
complete paying off as of September 1999 in full.
In March 1999 we issued 977,508 shares of Common Stock, together with
new warrants to purchase an aggregate 475,000 additional shares of Common Stock
at a price of $0.30 per share, in exchange for retiring all of our outstanding
6% Secured Promissory Notes. These 6% Notes had an original principal amount of
$500,000, with an outstanding principal balance of $411,178 plus accrued
interest as of March 30 1999. We required the holders of at least 80% of the
1993 outstanding $0.50 warrants to exercise early and to purchase shares of
Common Stock at an exercise price of $0.50. As an incentive to exercise the $.50
warrants prior to the warrant's expiration date, we offered to issue 150% of the
number of shares of Common Stock called for by the warrants as originally issued
in 1993 to the holders of the 6% promissory notes. Holders of 92.5% of the
outstanding warrants accepted this offer and purchased an aggregate 712,500
shares of Common Stock for $237,500 in cash. One holder of 25,000 warrants
issued in 1993 at a strike price of $0.50 did not accept the above-described
offer. These 25,000 warrants expire in June of 2000.
Cash proceeds from these securities transactions were used for general
corporate purposes primarily connected with our restructuring, poor operating
results for 1999, and to partially fund the development of the Thies Block in
Senegal.
Effective March 30, 1999, we issued 50,000 shares of our Series A
Preferred Stock and 8,055 shares of our common stock in exchange for all of the
common stock of Fortesa. Shares of our Series A Preferred Stock are convertible
to shares of common stock at an initial ratio of 10 shares of common stock for
each share of Series A Preferred Stock. The conversion ratio is adjustable in
proportion to an increase in value for the FORTESA assets acquired on March 30,
1999. In any event the conversion ratio shall not exceed a maximum of 40 shares
of common stock for each share of Series A Convertible Preferred Stock. The
issuance of such shares was exempt from registration under Section 4(2) of the
Securities and Exchange Act of 1933.
In March 1999 we issued 977,508 shares of common stock, together with
new warrants to purchase an aggregate 475,000 additional shares of common stock
at a price of $0.30 per share, in exchange for all of our outstanding 6% Secured
Promissory Notes. The issuance of such shares and warrants was exempt from
registration under Section 3(a)(9) of the Securities and Exchange Act of 1933.
In March of 1999, we issued 1,241,596 shares of common stock, valued at
two times the book value of the Company, in exchange for outstanding 12% Senior
Notes. The issuance of such shares was exempt from registration under Section
3(a)(9) of the Securities and Exchange Act of 1933.
As part of our transaction with Benton, we issued 135,000 shares of the
Company's Series B Convertible Preferred Stock, liquidation value $10.00, for
$750,000 in cash and in consideration for the prior expenditures of Benton to
develop our interest in the Senegal gas prospect. Each share of Series B
Convertible Preferred Stock is convertible into 10 shares of common stock. The
issuance of such shares was exempt from registration under Section 4(2) of the
Securities and Exchange Act of 1933. See "Recent Developments-RECENT
DEVELOPMENTS CONCERNING FORTESA" in Item 1 for a discussion of this transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
<PAGE>
ITEM 5. OTHER INFORMATION: None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS-all of the below listed exhibits other than exhibits 27.1 and 27.2
were filed with our 1998 Form 10-K.
2.1 Stock Purchase Agreement amongst First Seismic Corporation and
the Beall Living Trust, dated as of March 29, 1999. (Filed as
Exhibit 2.1 to the Annual Report of the Company on Form 10-K
for the year ended December 31, 1998.)
3.1 Certificate of Incorporation of First Seismic Corporation, as
amended. (Filed as Exhibit 3.1 to the Annual Report of the
Company on Form 10-K for the year ended December 31, 1998.)
3.2 Bylaws of First Seismic Corporation, as amended. (Filed as
Exhibit 3.2 to the Annual Report of the Company on Form 10-K
for the year ended December 31, 1998.)
4.1 Form of common stock certificate.
4.2 Series A Convertible Preferred Stock, Certificate of
Designation.
4.3 Series B Convertible Preferred Stock, Certificate of
Designation
4.4 Form of Warrant - 1993 $0.50 per share
4.5 Form of Warrant - 1999 $0.30 per share
4.6 6% Notes purchase Agreement
4.7 Loan Modification Agreement
10.1 Senegal pre-1999 Contract with Benton
10.2 Revolving Credit Agreement
10.3 Management Contract with Hayne Blakely
10.4 Management Contract with Rogers Beall
10.5 Directors' Stock Option Plan
10.6 Employees' Stock Option Plan
10.7 October 1999 Agreement with Benton
10.8 Assignment and Release with Benton
10.9 Registration Rights Agreement for Benton
11 Statement Regarding Computation of Earnings per Share
27.1 Financial Data Schedule (Three months for period ended
September 30, 1999)
27.2 Financial Data Schedule (Nine months for period ended
September 30, 1999)
No reports on Form 8K were filed during this period.
FIRST SEISMIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
AS OF SEPTEMBER 30, 1999
<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-Q to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on the 27th day of January 2000.
FIRST SEISMIC Corporation
By: /s/ Rogers E. Beall
--------------------------------------
Rogers E. Beall
Chairman, Chief Executive Officer
& Principle Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,260
<SECURITIES> 0
<RECEIVABLES> 495,058
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 497,318
<PP&E> 162,222
<DEPRECIATION> 86,746
<TOTAL-ASSETS> 2,641,964
<CURRENT-LIABILITIES> 1,155,572
<BONDS> 0
0
50,000
<COMMON> 91,773
<OTHER-SE> 11,397,813
<TOTAL-LIABILITY-AND-EQUITY> 2,641,964
<SALES> 614,980
<TOTAL-REVENUES> 614,980
<CGS> 146,306
<TOTAL-COSTS> 146,306
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,866
<INCOME-PRETAX> (751,332)
<INCOME-TAX> 0
<INCOME-CONTINUING> (751,332)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (751,332)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,260
<SECURITIES> 0
<RECEIVABLES> 495,058
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 497,318
<PP&E> 162,222
<DEPRECIATION> 86,746
<TOTAL-ASSETS> 2,641,964
<CURRENT-LIABILITIES> 1,155,572
<BONDS> 0
0
50,000
<COMMON> 91,773
<OTHER-SE> 11,397,813
<TOTAL-LIABILITY-AND-EQUITY> 2,641,964
<SALES> 1,043,071
<TOTAL-REVENUES> 1,043,071
<CGS> 364,407
<TOTAL-COSTS> 364,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,867
<INCOME-PRETAX> (1,065,296)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,065,296)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,065,296)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
