1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______ to ______. Commission file
number 0-6540.
OCEANIC EXPLORATION COMPANY
(Exact name of small business issuer as specified in its charter)
DELAWARE 84-0591071
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 East Dorado Place, Suite 250, Englewood, CO 80111
(Address of principal executive offices)
(303) 220-8330
(Issuer's Telephone number)
5000 South Quebec Street, Suite 450, Denver, CO 80237
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
Shares outstanding at Common $.0625 Par Value
November 14, 2000
9,916,154
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, 2000 December 31, 1999
------------------ -----------------
Cash and cash equivalents (note 2) $ 5,594,344 66,462
Receivables:
Trade 322,715 --
Affiliates 15,331 8,662
Other 9,627 1,780
------------ ------------
347,673 10,442
Prepaid expenses (note 3) 182,665 2,205
------------ ------------
Total current assets 6,124,682 79,109
------------ ------------
Oil and gas proved property interests, full-cost
method of accounting (note 2) 39,000,000 39,000,000
Oil and gas unproved property interests (note 3) 33,600 --
------------ ------------
39,033,600 39,000,000
Less accumulated amortization, depreciation
and valuation allowance (39,000,000) (39,000,000)
------------ ------------
33,600 --
Furniture, fixtures and equipment 142,562 23,413
Less accumulated depreciation (37,388) (21,973)
------------ ------------
105,174 1,440
Goodwill net of accumulated amortization of
$46,010 (note 4) 524,183 --
------------ ------------
$ 6,787,639 80,549
============ ============
(Continued)
2
3
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, 2000 December 31, 1999
------------------ -----------------
Current liabilities:
Note payable to shareholder (note 5) $ -- 1,202,636
Note payable to affiliate (note 5) -- 155,000
Accounts payable 228,534 162,131
Accounts payable to affiliate 60,000 60,000
United Kingdom taxes payable, including
accrued interest 477,536 507,249
Accrued expenses 206,856 299,419
---------- ----------
Total current liabilities 972,926 2,386,435
Deferred income taxes 12,533 12,533
---------- ----------
Total liabilities 985,459 2,398,968
---------- ----------
Stockholders' equity (deficit):
Preferred stock, $10 par value. Authorized
600,000 shares; none issued -- --
Common stock, $.0625 par value. Authorized
12,000,000 shares; 9,916,154 shares issued and
outstanding 619,759 619,759
Capital in excess of par value 155,696 155,696
Retained earnings (deficit) 5,026,725 (3,093,874)
---------- ----------
Total stockholders' equity (deficit) 5,802,180 (2,318,419)
---------- ----------
Contingencies (note 2)
$6,787,639 80,549
========== ==========
See accompanying notes to consolidated financial statements.
3
4
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues:
Net profits interest proceeds (note 2) $ -- -- 6,739,342 --
Staffing revenue 957,632 -- 1,853,122 --
Interest income 89,973 496 2,215,091 979
Other 153,618 134,780 577,115 423,867
----------- ----------- ----------- -----------
1,201,223 135,276 11,384,670 424,846
----------- ----------- ----------- -----------
Costs and expenses:
Interest and financing costs 4,526 32,015 24,140 87,402
Exploration expenses 3,015 3,026 10,085 9,695
Staffing direct costs 790,475 -- 1,531,152 --
Amortization and depreciation 30,939 160 61,845 47,980
General and administrative 597,726 239,097 1,382,327 697,618
----------- ----------- ----------- -----------
1,426,681 274,298 3,009,549 842,695
----------- ----------- ----------- -----------
Income (loss) before income taxes (225,458) (139,022) 8,375,121 (417,849)
Income tax (expense) benefit (6,780) -- (254,522) 23,713
----------- ----------- ----------- -----------
Net income (loss) $ (232,238) (139,022) 8,120,599 (394,136)
=========== =========== =========== ===========
Income (loss) per common share $ (.02) (.01) .82 (.04)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
5
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 8,120,599 (394,136)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization and depreciation 61,845 47,980
Loss on disposal of fixed assets 2,101 --
Deferred income tax benefit -- (23,713)
(Increase) decrease in accounts receivable and due from
affiliates (337,231) 5,171
Increase in prepaid expenses and other assets (169,462) (4,294)
Increase in accounts payable and accounts payable
to affiliate 66,403 2,124
(Decrease) increase in United Kingdom taxes payable,
including accrued interest payable, and accrued expenses (122,276) 79,233
----------- -----------
Net cash provided by (used in) operating activities 7,621,979 (287,635)
Cash flows from investing activities:
Purchase of operations and certain assets of Alliance (682,232) --
Purchase of oil and gas property interests (33,600) --
Purchase of fixed assets (20,629) --
----------- -----------
Net cash used in investing activities (736,461) --
Cash flows from financing activities:
(Repayments to) advances from notes payable to shareholder
and affiliate (1,357,636) 290,000
----------- -----------
Net increase (decrease) in cash 5,527,882 2,365
----------- -----------
Cash at beginning of period 66,462 29,718
----------- -----------
Cash at end of period $ 5,594,344 32,083
=========== ===========
See accompanying notes to consolidated financial statements.
5
6
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet as of December 31, 1999 which has been
derived from audited statements and the unaudited interim consolidated
financial statements included herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those rules and regulations, although Oceanic believes
that the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, all adjustments consisting of normal
reoccurring accruals have been made which are necessary for the fair
presentation of the periods presented. Interim results are not necessarily
indicative of results for a full year. The information included in this Form
10-QSB should be read in conjunction with Management's Discussion and Analysis
and financial statements and notes thereto included in the December 1999 Form
10-KSB.
(2) NET PROFITS INTEREST PROCEEDS
Oceanic has a contract with Denison Mines, Ltd., as working interest
owner of the Greek properties, whereby Oceanic is entitled to receive 15% net
profits interest on any successful development of the Greek properties. The
calculation of net profits interest proceeds for the period January 1, 1993
through December 31, 1997 was a matter of disagreement between Denison and
Oceanic. Oceanic was successful in a legal action that was commenced against
Denison Mines in June 1994 and was completed in January 2000. Oceanic received
$8,614,789 and $15,868 on January 27, 2000 and February 9, 2000, respectively,
from Denison. These amounts consisted of $6,739,342 (net of Greek taxes) for
net profits interest payments from January 1, 1993 through December 31, 1997,
$118,255 for court costs and accrued interest of $1,773,060 (net of Canadian
withholding taxes).
Calendar year 1998 was the final year of production for the Prinos oil
field in Greece. Under the terms of the consortium agreement with the Greek
government, Denison is entitled to 100% cost recovery in the final year,
therefore Oceanic did not receive any net profits interest payments subsequent
to December 31, 1997. Effective March 31, 1999, the consortium operating the
Greek properties relinquished its license to operate the Prinos oil field in
Greece. However, the consortium retained its exploration rights in the
remaining exploration area of the Aegean Sea, a portion of which has been
subject to an ongoing jurisdictional dispute between Greece and Turkey. Should
the dispute be resolved and the consortium drill and successfully develop any
additional prospects, Oceanic would be entitled to once again receive its 15%
net profits interest, applicable to Denison's working interest.
6
7
(3) OIL AND GAS PROPERTY
On September 19, 2000, Oceanic entered into a Participation Agreement
with Mariah Energy, LLC giving Oceanic a 75% working interest in certain oil
and gas property in Finney County, Kansas at a cost of $33,600. The agreement
also provided for participation in drilling of an obligation test well and
accordingly Oceanic prepaid drilling costs of $142,061. These costs are
included in prepaid expenses at September 30, 2000. The test well was drilled
in October and determined to be a dry hole.
(4) ALLIANCE ACQUISITION
Effective March 31, 2000, Oceanic purchased the employment operations
and certain assets of Alliance Services Associates, Inc., the wholly owned
subsidiary of Alliance Staffing Associates, Inc. (collectively "Alliance") for
$581,000. Alliance is an employment agency located in San Diego, California.
The acquisition was accounted for using the purchase method of accounting.
Under this method, the excess of the purchase price over the net assets
acquired is first allocated to adjust the recorded value of the tangible and
identified intangible assets acquired to their fair market value, with any
excess then recorded as goodwill. In the case of Alliance, the excess of the
purchase price, plus legal and other professional fees incurred, over the net
assets acquired, resulted in an increase in the recorded value of cash,
prepaids and fixed assets in the amount of $34,373, $10,998 and $101,041,
respectively, with the excess of $570,193 being recorded as goodwill.
The unaudited pro forma revenue, net income (loss) and income (loss)
per common share for the nine months ended September 30, 2000 and 1999,
respectively, assuming the acquisition occurred on January 1, 1999 are as
follows:
Nine Months Ended
September 30,
2000 1999
------------ ---------
Revenue $ 12,296,224 3,296,848
Net income (loss) 7,956,934 (835,131)
Basic and diluted income (loss) per common share $ .80 (.08)
The above pro forma results are not necessarily indicative of results had the
acquisition occurred on January 1, 1999.
(5) NOTES PAYABLE TO SHAREHOLDER AND AFFILIATE
Notes payable to shareholder and affiliate at December 31, 1999
represent borrowings under agreements with International Hydrocarbons ("IH"),
Oceanic's majority shareholder and its affiliate, NWO Resources, Inc. ("NWO").
After Oceanic received the funds in January 2000 from its litigation against
Denison, they paid off the outstanding principal and accrued interest balances
of $1,202,636 and $180,381, respectively, to IH and the outstanding principal
balance of $175,000 to NWO on February 1, 2000.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-QSB includes certain statements that
may be deemed to be "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. All statements, other than statements of historical facts,
included in this Form 10-QSB that address activities, events or developments
that the Company expects, believes or anticipates will or may occur in the
future, including such matters as future capital, development and exploration
expenditures (including the amount and nature thereof), drilling of wells,
reserve estimates (including estimates of future net revenues associated with
such reserves and the present value of such future net revenues), future oil
and gas production estimates, repayment of debt, business strategies, expansion
and growth of the Company's operations and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions, expected future developments and
other factors it believes are appropriate in the circumstances. Such statements
are subject to a number of assumptions, risks and uncertainties, including such
factors as uncertainties in cash flow, expected acquisition benefits, the
volatility and level of oil and natural gas prices, production rates and
reserve replacement, reserve estimates, drilling and operating risks,
competition, litigation, environmental matters, the potential impact of
government regulations, and other such matters, many of which are beyond the
control of the Company. Readers are cautioned that forward-looking statements
are not guarantees of future performance and that actual results or
developments may differ materially from those expressed or implied in the
forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Oceanic's primary sources of liquidity are cash and cash equivalents on
hand, cash provided by operating activities and debt financing provided by
shareholder and affiliate, as necessary. Cash needs are for the acquisition,
exploration and development of oil and gas properties, the operation of a
temporary staffing agency and the payment of trade payables. Exploration and
development programs and temporary staffing operations are being financed by
internally generated cash flow and cash and cash equivalents on hand. The
capital expenditure budget is continually reviewed and is a function of
necessity and available cash flow.
Cash Flow: Oceanic's net cash provided by operating activities of
$7,621,979 for the nine months ended September 30, 2000 is a dramatic increase
compared to net cash used in operating activities of $287,635 for the same
period in 1999. As described in Note 2 of the Notes to Consolidated Financial
Statements, Oceanic received $8,614,789 and $15,868 on January 27, 2000 and
February 9, 2000, respectively, relating to net profits interest payments for
January 1, 1993 through December 31, 1997, applicable to the Greek properties,
that had been the subject of litigation. The increase in revenues was somewhat
offset by an increase in accounts receivable due to the acquisition of
Alliance, and an increase in prepaid expenses due to the pre-payment of
drilling costs, as discussed in Note 3 of the Notes to the Consolidated
Financial Statements.
8
9
Included in operating cash flows is a net decrease of approximately
$250,000 relating to operations of Alliance, the temporary employment agency
that was acquired March 31, 2000. Revenue generated by the employment agency
has averaged $309,000 per month since acquisition, however margins remain small
mainly due to the highly competitive nature of the industry in San Diego.
Alliance spent $75,000 during the quarter ended September 30, 2000 for an
advertising and marketing campaign that has provided additional name
recognition.
Oceanic currently receives approximately $569,000 per year in
connection with services provided to Cordillera Corporation and San Miguel
Valley Corporation pursuant to management agreements. The amounts received
under the agreements are based on costs relating to employee salaries and other
operating expenses, plus an additional fee of 5% of the total amount.
Net cash used in investing activities of $736,461 for the nine months
ended September 30, 2000 is a 100% increase from the same period a year ago
when there were no investing activities. This increase is primarily due to the
acquisition of Alliance as described in Note 4 of the Notes to Consolidated
Financial Statements. Additionally, Oceanic purchased a 75% interest in certain
oil and gas property located in Kansas. The balance of capital expenditures was
for office furniture and equipment.
Net cash used in financing activities of $1,357,636 for the nine
months ended September 30, 2000 is a substantial decrease from $290,000
provided by financing activities for the same period in 1999. When payments
under the Greek properties interest were suspended in 1994, Oceanic funded its
operations through draws against lines of credit established with NWO and IH.
The Company paid off all outstanding principal and accrued interest after the
funds from its litigation against Denison were received in January and February
2000.
Oceanic had $5,594,344 in cash and cash equivalents and working
capital of $5,151,757 as of September 30, 2000 compared with $66,462 in cash
and cash equivalents and negative working capital as of December 31, 1999. The
increase in cash and cash equivalents reflects unused net profits interest
proceeds.
Capital and Exploration Expenditures: The primary use of Oceanic's
capital resources for the nine months ended September 30, 2000 has been the
acquisition of the employment operations and certain assets of Alliance on
March 31, 2000 for $581,000 cash, plus legal and professional fees of $135,605.
During the same period in 1999 Oceanic did not have any capital expenditures.
Oceanic is currently evaluating opportunities in the marketplace for
oil and gas properties. Accordingly, they purchased a 75% interest in certain
oil and gas property in Finney County, Kansas for $33,600. As described in Note
3 of Notes to Consolidated Financial Statements, an exploratory test well was
drilled subsequent to September 30, 2000 at a cost of $142,061 that resulted in
a dry hole.
Oceanic is also actively seeking acquisitions of assets or companies
that would afford opportunities in other areas but no definitive plans have
been made.
9
10
RESULTS OF OPERATIONS
THREE-MONTH COMPARISON
Total revenue for the three months ended September 30, 2000 was almost
nine times higher than the same three months in 1999, however, the net loss was
also greater, approximately 67% higher. The higher revenues are attributable to
staffing revenue from the employment agency that did not exist in 1999 and
higher interest revenue due to investment of proceeds from the successful
settlement of the lawsuit against Denison Mines, Ltd.
Revenue from the employment agency was more than offset by the direct
costs of temporary employees, including payroll costs and workers compensation,
along with selling costs and general and administrative costs. The employment
agency sustained a pre-tax loss of $150,000 for the three months ended
September 30, 2000.
Amortization and depreciation expense for the three months ended
September 30, 2000 is almost 100% higher than the same period a year ago due to
the acquisition of Alliance. Fixed assets acquired, valued at $101,041, are
being depreciated in addition to the amortization of goodwill that was recorded
as a result of the purchase.
Operating costs are expected to increase during the next three months.
Oceanic was recently forced to relocate its corporate offices due to
condemnation proceedings at the old location to allow for highway widening and
light rail construction. Under the terms of the new office-building lease,
dated September 1, 2000, monthly rent has increased from $3,630 to $7,485.
Also, workers compensation costs for Alliance increased almost 150% effective
September 1, 2000.
NINE-MONTH COMPARISON
Total revenues of $11,384,670 for the nine months ended September 30,
2000 are a substantial increase over $424,846 reported a year ago. The revenue
categories are analyzed as follows:
Net Profits Interest Proceeds: Revenues reflect a 100% increase from
1999 when there was no related revenue. As previously discussed, Oceanic
received $6,739,342, net of Greek tax, pertaining to a judgment awarded in its
favor relating to net profits interest from January 1, 1993 through December
31, 1997.
Staffing Revenue: Revenue is related to the employment agency that was
acquired March 31, 2000 therefore there was no related revenue for the same
period in 1999. Staffing revenue has averaged approximately $309,000 per month
for the nine months ended September 30, 2000.
Interest Income: Interest income increased substantially over the same
nine months of 1999 due to the payment of accrued interest on the
above-mentioned judgment, along with interest earnings on the large cash
balance that is currently being maintained.
10
11
Other Revenue: Overall, other revenue for the nine months ended
September 30, 2000 was 36% higher than the same period in 1999. The major
components of other revenue for the nine months ended September 30, 2000 were
management fee income of $428,690 and receipt of $106,237 as part of the
aforementioned judgment, that related to prior periods. There was a 5% increase
in management fee income for the nine months ended September 30, 2000 compared
to the same period in 1999.
Certain expenses for the nine months ended September 30, 2000 were
substantially different from the same period a year ago and are analyzed as
follows:
Interest and Financing Costs: These costs are 72% lower for the nine
months ended September 30, 2000 than for the same period in 1999. This is
attributable to the repayment of notes payable to shareholder and affiliate on
February 1, 2000, using funds received from the judgment.
Staffing Direct Costs: These costs represent salaries and related
payroll costs, and workers compensation for the temporary employees of the
employment agency that was acquired March 31, 2000, therefore, there are no
corresponding costs for the nine months ended September 30, 1999.
Amortization and Depreciation: Costs for the nine months ended
September 30, 2000 are 29% higher than the same nine months of 1999. Also, the
underlying assets are different. The main source of amortization and
depreciation in 1999 was major oil and gas producing property in Greece. This
property was fully depleted for book purposes as of March 31, 1999. The main
sources of amortization and depreciation during 2000 relate to the acquisition
of Alliance. Related fixed assets valued at $101,041 are being depreciated, in
addition to the amortization of goodwill that was recorded as a result of the
purchase.
General and Administrative: Costs for the nine months ended September
30, 2000 are almost twice as high as during the same nine months of 1999. Costs
associated with the employment agency were incurred in the amount of $573,439
during the nine months ended September 30, 2000. The balance of the increase is
primarily due to increased professional service fees related to the acquisition
of Alliance.
The large increase in revenues, although somewhat offset by higher
costs and expenses, has translated into net income of $8,120,599 compared to a
net loss of $394,136 during the same period in 1999.
11
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1994, Oceanic commenced legal action against Denison seeking a
declaration by the Court that amounts due Oceanic attributable to its net
profits interest in certain oil and gas producing areas offshore Greece be
calculated based on the terms of the License Agreement prior to a 1993
amendment agreed to by the consortium and the Greek government. On December 13,
1996, Oceanic received notification that the Ontario Court of Justice (General
Division) in Toronto, Canada, had issued a judgment in its favor. Subsequently,
Denison filed a Notice of Appeal. The hearing before the Ontario Court of
Appeal was held in June 1999. On December 16, 1999, Oceanic received
notification that the Appellate Court had upheld the lower court's decision. In
January 2000, Denison and Oceanic reached agreement whereby Denison would pay
the net profits interest as ordered by the Court. Oceanic received $8,614,789
and $15,868 on January 27, 2000 and February 9, 2000, respectively, from
Denison.
See Oceanic's Form 10-KSB for the fiscal year ended December 31,
1999, for a more detailed discussion of these legal proceedings.
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith are listed below and attached to this
Report. The "Exhibit Number" refers to the Exhibit Table in Item
601 of Regulation S-B.
Exhibit Number Name of Exhibit
10 Office Building Lease with Sorrento West
Properties, Inc. dated September 1, 2000.
The exhibits referred to in the agreement
are omitted. Oceanic agrees to furnish
supplementally a copy of any such exhibit
to the Commission upon request.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
12
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OCEANIC EXPLORATION COMPANY
Date: November 13, 2000 /s/ Charles N. Haas
----------------------------
Charles N. Haas
President
Date: November 13, 2000 /s/ Phylis Anderson
----------------------------
Phylis Anderson
Treasurer and
Chief Financial Officer
14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10 Office Building Lease with Sorrento West
Properties, Inc. dated September 1, 2000.
The exhibits referred to in the agreement
are omitted. Oceanic agrees to furnish
supplementally a copy of any such exhibit
to the Commission upon request.
27 Financial Data Schedule