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, 2002
[ ] 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)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Shares outstanding at
October 31, 2002
9,916,154 Common $.0625 Par Value
Transitional Small Business Disclosure Format (Check One) YES NO X
---- ----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS September 30, 2002 December 31, 2001
------------------ -----------------
Cash and cash equivalents $ 215,408 $ 2,462,692
Trade accounts receivable, net of allowance for doubtful
accounts of $12,932 and $7,968, respectively 281,469 273,544
Due from affiliates 5,729 14,340
Accounts receivable-miscellaneous 181,999 195,922
Prepaid expenses and other 72,169 85,038
------------ ------------
Total current assets 756,774 3,031,536
------------ ------------
Oil and gas property interests, full-cost method of accounting 39,000,000 39,000,000
Less accumulated amortization and depreciation (39,000,000) (39,000,000)
------------ ------------
-- --
Furniture, fixtures and equipment 193,731 193,329
Less accumulated depreciation (113,680) (80,351)
------------ ------------
80,051 112,978
Restricted cash 179,493 185,507
Other noncurrent assets 100,056 --
Goodwill, net of accumulated amortization of $73,534 (note 2) 346,659 346,659
Other intangible assets, net of accumulated amortization of
$125,000 and $87,500, respectively 25,000 62,500
------------ ------------
$ 1,488,033 $ 3,739,180
============ ============
(Continued)
2
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 2002 December 31, 2001
------------------ -----------------
Current liabilities:
Accounts payable $ 177,159 $ 321,965
Accounts payable to affiliates 1,427 60,000
United Kingdom taxes payable, including
accrued interest 528,341 495,156
Accrued expenses 247,724 179,916
------------ ------------
Total current liabilities 954,651 1,057,037
Other noncurrent liabilities 24,917 26,736
------------ ------------
Total liabilities 979,568 1,083,773
------------ ------------
Stockholders' equity:
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) (266,990) 1,879,952
------------ ------------
Total stockholders' equity 508,465 2,655,407
------------ ------------
$ 1,488,033 $ 3,739,180
============ ============
See accompanying notes to consolidated financial statements.
3
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Staffing revenue $ 635,022 713,818 $ 1,801,546 2,009,401
Management revenue - related parties 167,614 114,967 540,583 350,016
----------- ----------- ----------- -----------
802,636 828,785 2,342,129 2,359,417
----------- ----------- ----------- -----------
Costs and expenses:
Exploration expenses (note 3) 118,081 546,406 1,246,294 883,235
Staffing direct costs 528,556 605,271 1,496,757 1,719,651
Amortization and depreciation 23,985 33,670 71,434 100,651
General and administrative 533,667 503,477 1,663,796 1,754,564
----------- ----------- ----------- -----------
1,204,289 1,688,824 4,478,281 4,458,101
----------- ----------- ----------- -----------
Operating Loss (401,653) (860,039) (2,136,152) (2,098,684)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 3,233 33,858 17,933 163,625
Interest and financing costs (5,899) (5,413) (17,037) (15,095)
Other (19,786) (16,885) (11,686) 15,181
----------- ----------- ----------- -----------
(22,452) 11,560 (10,790) 163,711
----------- ----------- ----------- -----------
Loss before income taxes (424,105) (848,479) (2,146,942) (1,934,973)
Income tax expense -- (174,985) -- (140,170)
----------- ----------- ----------- -----------
Net loss $ (424,105) (1,023,464) (2,146,942) (2,075,143)
=========== =========== =========== ===========
Loss per common share $ (0.04) (0.10) (0.22) (0.21)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $(2,146,942) (2,075,143)
Adjustments to reconcile net loss to cash
used in operating activities:
Amortization and depreciation 71,434 100,651
Loss on disposal of fixed assets 909 373
Changes in operating assets and liabilities:
Accounts receivable and due from affiliates 14,609 84,652
Prepaid expenses and other assets 12,869 (16,472)
Other noncurrent assets including restricted cash (94,042) --
Accounts payable and due to affiliates (203,379) 178,027
United Kingdom taxes payable, including accrued interest
payable and accrued expenses 100,993 48,333
Other noncurrent liabilities (1,819) --
----------- -----------
Cash used in operating activities (2,245,368) (1,679,579)
Cash flows from investing activities:
Purchase of fixed assets (2,216) (22,643)
Sale of fixed assets 300 --
----------- -----------
Cash used in investing activities (1,916) (22,643)
----------- -----------
Net decrease in cash (2,247,284) (1,702,222)
----------- -----------
Cash at beginning of period 2,462,692 5,475,156
----------- -----------
Cash at end of period $ 215,408 3,772,934
=========== ===========
See accompanying notes to consolidated financial statements.
5
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet as of December 31, 2001 that has been
derived from audited financial 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 accounting principles generally accepted
in the United States of America, have been condensed or omitted pursuant to
those rules and regulations, although Oceanic Exploration Company ("Oceanic" or
"the Company") believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments consisting of normal recurring accruals have been made which are
necessary for the fair presentation of the periods presented. Certain amounts
recorded in prior periods have been reclassified to conform with current
presentation. Interim results are not necessarily indicative of results for a
full year. The information included herein should be read in conjunction with
the financial statements and notes thereto included in the December 31, 2001
Form 10-KSB.
(2) GOODWILL
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," which was adopted by the Company effective January 1, 2002. Under SFAS
No. 142, goodwill and intangible assets with indefinite useful lives will no
longer be amortized, but will instead be tested periodically for impairment.
SFAS No. 142 also requires that intangible assets with finite lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed periodically for impairment. As of January 1, 2002, goodwill
previously recorded in connection with the acquisition of Alliance, the net
balance of which was $346,659 as of December 31, 2001, will no longer be
amortized and will be reviewed for impairment at least annually. The Company has
completed its transitional impairment analysis and has determined there was no
impairment of goodwill as of January 1, 2002. There can be no assurance there
will not be an impairment of goodwill at a later date. Oceanic will continue to
monitor the carrying value of its goodwill and will record an impairment
write-down as required. The impact of adopting SFAS 142 in 2002 was a reduction
in expense during the first three and nine months ended September 30, 2002 of
approximately $10,500 and $31,500, respectively, as compared to the three and
nine months ended September 30, 2001.
(3) EXPLORATION EXPENSES
As discussed in the December 31, 2001 Form 10-KSB, in 1974, Portugal
granted an exclusive offshore concession to Petrotimor Companhia de Petroleos,
S.A.R.L. ("Petrotimor"), a
6
subsidiary of Oceanic, to explore for and develop oil and gas in the Timor Gap
area. On January 5, 1976, following Indonesia's unlawful invasion and occupation
of East Timor, Petrotimor applied for and obtained on April 14, 1976 Portugal's
consent to a suspension of performance under the concession agreement, based
upon force majeure. This force majeure status remained in effect until at least
October 25, 1999.
On December 11, 1989, Australia and Indonesia, ignoring Petrotimor's
rights under the concession from Portugal, signed the Timor Gap Treaty (the
"Treaty"), purporting to create a joint zone of cooperation whereby these two
countries could control the exploration and development of hydrocarbons in an
area over which both countries claimed rights. A portion of this area,
designated as Zone A, falls largely within the area where Petrotimor holds
rights under its concession agreement with Portugal. The Treaty created a Joint
Authority that purported to enter into production sharing contracts with various
companies who have carried out exploration activities.
During 1999, the people of East Timor voted for independence from
Indonesia and the United Nations initiated a transition of East Timorese
independence under the authority of the United Nations Transitional
Administration in East Timor. On August 30, 2001, East Timor elected
representatives to the Constituent Assembly to prepare a constitution for an
independent and democratic East Timor. A constitution was approved by the
Constituent Assembly and East Timor became an independent nation on May 20,
2002.
On August 21, 2001, Oceanic and Petrotimor issued a Statement of Claim (as
amended) out of the Federal Court of Australia against the Commonwealth of
Australia, the Joint Authority established under the Treaty, and the Phillips
Petroleum companies operating within the Timor Gap area. Oceanic and Petrotimor
claim that the Treaty and the related legislation of the Australian Parliament
was void or invalid for a number of reasons including: (1) the Treaty and the
legislation sought to claim significant portions of the continental shelf over
which it had no sovereign rights for Australia, which the Company believes under
international law belonged to East Timor, and (2) the Treaty and the legislation
attempted to extinguish the property interest and rights granted by the then
legitimate power, Portugal, to Oceanic and Petrotimor, without providing for
just compensation as required by Australian law. As the case involves complex
issues of international and Australian constitutional law, it is expected that
it will take a considerable period before the case is resolved.
There have been several preliminary hearings in the Federal Court of
Australia. A hearing by the court on the question of whether the court has
jurisdiction over the claim was held on May 16 and 17, 2002. The court has taken
under advisement a motion to dismiss the suit on the basis that the court does
not have jurisdiction over the claim. If Oceanic and Petrotimor are not able to
obtain a favorable order on this motion, its suit may be dismissed and it would
be forced to appeal the decision in order to continue with its claim in
Australia.
In addition to the Statement of Claim issued in Australia, Oceanic
submitted an application for an Expansion of Seabed Concession to the
transitional government in East Timor requesting that Petrotimor's 1974
concession area be expanded to include the additional maritime areas within the
7
properly determined seabed delimitation of East Timor. The Company believes East
Timor is entitled under international law to exercise sovereign jurisdiction
over its seabed and to have an Exclusive Economic Zone as codified in the 1982
United Nations convention on the law of the sea. The Company has received no
response to this application.
The current government of East Timor has not thus far recognized
Petrotimor's concession in East Timor. The Company submitted an application for
an Expansion of Seabed Concession to the transitional government in East Timor
and received no response. An article carried on the Dow Jones Newswires on
September 26, 2002 quotes a "senior East Timor government official" as stating
that the government does not recognize the concession. The Company has not been
advised of the status of the application and whether it is being considered by
the new East Timor government. The Company may never receive a response or may
receive an unfavorable response. Oceanic and Petrotimor are continuing
discussions with East Timor government officials in an effort to obtain a
favorable formal response. Oceanic and Petrotimor intend to continue to pursue
the application and the commercial opportunities in East Timor. If no response
is given by the government of East Timor or if the response is unfavorable, the
Company will review its political and legal options to determine if any further
effort is warranted. Because East Timor is in the early stages of the formation
of its government, its judicial infrastructure has not been fully established
and therefore the Company cannot at this time accurately assess its legal
options.
If the government were to recognize the concession and grant the
application, it would expand the 1974 Petrotimor concession to correspond with
the offshore area over which East Timor is entitled to claim sovereign rights
under international law. Petrotimor sponsored a seminar in East Timor for the
purpose of explaining appropriate maritime boundaries under applicable
international law and the resulting benefits to East Timor if such boundaries
are enforced. There is no assurance even if the Company is successful in the
Australian litigation that East Timor will recognize its concession.
During the nine months ended September 30, 2002 and 2001, respectively,
the Company incurred expenses of $1,236,098 and $878,764, respectively, related
to its activities in the Timor Gap area which are included in exploration
expense.
In connection with the Company's litigation over the Timor Gap area, the
Company was required to escrow certain funds in a separate bank account as
security for court costs in the event the Company's litigation proves
unsuccessful. The funds have been designated as restricted cash.
(4) INCOME TAXES
A valuation allowance was provided for the entire deferred income tax
asset attributable to the net operating loss incurred during the nine months
ended September 30, 2002.
8
(5) INFORMATION CONCERNING BUSINESS SEGMENTS
The Company has operations in two business segments, oil and gas
exploration and employment operations. The Company's oil and gas exploration
activities have generally consisted of exploration of concessions through
various forms of joint arrangements with unrelated companies, whereby the
parties agree to share the costs of exploration, as well as the costs of, and
any revenue from, a discovery. The objective of the Company's employment
operations is to provide services consisting of executive search, professional
and technical placement, human resources consulting, site management and
contract staffing to companies primarily in the San Diego area.
The table below presents certain financial information for the Company's
operating segments as of and for the three and nine months ended September 30,
2002 and 2001.
OIL AND GAS
EXPLORATION,
INCLUDING EMPLOYMENT
THREE MONTHS ENDED SEPTEMBER 30, 2002 CORPORATE OPERATIONS TOTAL
------------------------------------- --------- ---------- -----
Revenues 167,614 635,022 802,636
Loss before taxes (305,078) (119,027) (424,105)
Total assets 620,608 867,425 1,488,033
THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenues 114,967 713,818 828,785
Loss before taxes (719,886) (128,593) (848,479)
Total assets 3,605,946 1,014,525 4,620,471
NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenues 540,583 1,801,546 2,342,129
Loss before taxes (1,722,413) (424,529) (2,146,942)
Total assets 620,608 867,425 1,488,033
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues 350,016 2,009,401 2,359,417
Loss before taxes (1,446,050) (488,923) (1,934,973)
Total assets 3,605,946 1,014,525 4,620,471
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Any statements that are contained in this Form 10-QSB that are not
statements of historical fact are forward-looking statements. Readers can
identify these statements by words such as "may," "will," "expect,"
"anticipate," "estimate," "continue" or other similar words. These statements
discuss future expectations, contain projections of results of operations or
financial condition or state other forward-looking information and 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, fluctuations in the economic environment 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.
The following discussion and analysis should be read in conjunction with
Oceanic's Consolidated Financial Statements and Notes thereto as of December 31,
2001 and September 30, 2002 and 2001 and for the respective periods then ended.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities and the reported amounts
of revenues and expenses. On an on-going basis, we evaluate our estimates
including those related to the collectibility of accounts receivable, the
realizability of goodwill, and income taxes. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those
estimates. We believe the following critical accounting policies affect the
significant judgments and estimates used in the preparation of our consolidated
financial statements.
We maintain an allowance for doubtful accounts for estimated losses
resulting from customers failing to pay amounts we have billed them. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, or if customers were to express
dissatisfaction with the services we have provided, additional allowances may be
required.
10
We assess the impairment of goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. An
impairment would potentially be considered to exist when the estimated fair
value of the reporting unit is less than the carrying amount, including
goodwill. Considerable management judgment is necessary to estimate fair value
and an impairment would be recorded in the period such determination is made.
To record income tax expense, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This involves estimating our
actual current tax exposure together with assessing temporary differences that
result in deferred tax assets and liabilities and expected future tax rates. We
record a valuation allowance to reduce our deferred tax assets to an amount we
believe is more likely than not to be realized. We consider future taxable
income and prudent and feasible tax planning strategies in assessing the need
for a valuation allowance. If we subsequently determine that we will realize
more or less of our net deferred tax assets in the future, such adjustment would
be recorded as an increase or reduction of income tax expense in the period such
determination is made.
LIQUIDITY AND CAPITAL RESOURCES
Oceanic has historically addressed long-term liquidity needs for oil and
gas exploration and development through the use of farm out agreements. Under
such agreements, Oceanic sells a portion of its ownership interest in the
concession to an outside party who is then responsible for the exploration
activities. This is a strategy that Oceanic intends to continue in the event it
becomes feasible to proceed with further exploration in any of the areas where
the Company currently owns concessions.
Currently, primary sources of liquidity are the employment operations and
management agreements. Cash needs are for the operation of the employment
agency, corporate expenses, costs associated with actions relating to East Timor
and the payment of trade payables. On August 15, 2002, the Company established a
$500,000 line of credit with NWO Resources, Inc. The line of credit is unsecured
and payable upon demand. As of September 30, 2002, no amount was outstanding
under the line of credit. As of October 31, 2002, $100,000 was outstanding under
the line of credit and the Company drew down an additional $100,000 on November
13, 2002. Oceanic's Chairman of the Board and Chief Executive Officer is
Chairman of the Board of Directors and President of Cordillera Corporation, the
major stockholder of NWO Resources, Inc. NWO Resources, Inc. and Cordillera
Corporation own 49.5% and 5.5%, respectively, of Oceanic's stock. Oceanic is in
the process of conducting a rights offering for 21,000,000 shares of the
Company's common stock with gross proceeds of up to $3,150,000. The rights
offering is made only by the prospectus. NWO Resources, Inc. and Cordillera
Corporation have stated their intention to exercise their subscription rights,
thereby purchasing 11,558,668 shares for approximately $1,733,800, and have also
indicated that they may purchase any additional shares that are not subscribed
for by other stockholders. They are, however, not obligated to exercise their
subscription rights or to purchase additional shares. The rights offering is
expected to close in December 2002. The capital expenditure budget is
periodically reviewed and is a function of necessity and available cash flow.
11
Cash Flow: Cash used in operating activities for the nine months ended
September 30, 2002 and 2001 was $2,245,368 and $1,679,579, respectively. Ongoing
legal and professional fees associated with the litigation in the Australian
courts and the application for an Expansion of Seabed Concession in East Timor
has required substantial expenditures. During the nine months ended September
30, 2002 and 2001, respectively, the Company incurred expenses of $1,236,098 and
$878,764 related to legal and commercial activities in Australia and the Timor
Gap area. These costs are included in exploration expenses resulting in an
increase over what exploration expenses have been historically. Until the
Company obtains a final judgment or settlement of the suit or achieves
recognition of its rights by the new government in East Timor, exploration
expenses will continue to be high.
During the nine months ended September 30, 2002, operations of the
employment agency in San Diego, California, produced a net loss of approximately
$424,500, and resulted in cash used in operating activities of approximately
$357,000 compared to a net loss of approximately $488,900 and cash used in
operating activities of approximately $394,500 during the nine months ended
September 30, 2001. Staffing revenue generated by Alliance during the first nine
months of 2002 averaged approximately $200,150 per month compared to
approximately $223,250 during the first nine months of 2001.
Oceanic currently receives approximately $540,000 per year in connection
with services provided to Cordillera Corporation and San Miguel Valley
Corporation, pursuant to management agreements, compared to $448,000 for the
year ended December 31, 2001. The cost of services provided to San Miguel Valley
Corporation decreased approximately $10,000 per month during 2001 as a result of
a change in employees providing services under the management contract. During
2002, the cost of service has increased approximately $4,000 per month. Because
the cost of service is dependent upon the needs of the corporation, it is normal
to see fluctuations from year to year. In addition, Oceanic has management
agreements with Points Four World Travel, Inc. and, until September 1, 2002 when
services were terminated by mutual agreement, Global Access Telecommunications,
Inc. Amounts received from Global Access Telecommunications, Inc. through August
31, 2002 were approximately $134,000. Amounts received from Points Four World
Travel, Inc. are expected to be immaterial in 2002. The amount received under
these two contracts during the year ended December 31, 2001 was approximately
$66,800. Our Chairman of the Board and Chief Executive Officer is affiliated
with Cordillera Corporation, San Miguel Valley Corporation and Global Access
Telecommunications, Inc. Points Four World Travel, Inc. is owned by James N.
Blue's sons, Karsten Blue and Linden P. Blue. Amounts received under the
management agreements are based on costs relating to employee salaries and other
operating expenses, plus an additional fee up to 5% of the total amount.
Oceanic had $215,408 in cash and cash equivalents at September 30, 2002
compared with $2,462,692 in cash and cash equivalents at December 31, 2001. Our
management believes that existing resources, together with the line of credit
with NWO Resources, Inc., will be sufficient to fund our operation through
December 31, 2002.
12
RESULTS OF OPERATIONS
THREE-MONTH COMPARISON
Total revenue for the three months ended September 30, 2002 is 3% less
than total revenue for the three months ended September 30, 2001. Staffing
revenue is down 11% for the three months ended September 30, 2002 compared to
the three months ended September 30, 2001. Despite the decrease in revenues,
overall operations for Alliance have improved. Gross margin was 17% for the
three months ended September 30, 2002 compared to 15% for the three months ended
September 30, 2001. General and administrative costs were reduced by 6% during
the three months ended September 30, 2002 compared to the same three months of
2001 and net loss declined 7%.
Management revenue for the three months ended September 30, 2002 is 46%
higher than for the three months ended September 30, 2001 primarily due to the
addition of management fees from Points Four World Travel, Inc. and Global
Access Telecommunications, Inc. Effective September 1, 2002, services for Global
Access Telecommunications, Inc. were terminated by mutual agreement.
Exploration expenses for the three months ended September 30, 2002 are 78%
less than during the comparable three months of 2001. There are ongoing legal
and professional fees associated with the legal action commenced in Australia,
as described below, and the application to expand an offshore oil and gas
concession located in an area between Australia and East Timor known as the
Timor Gap. Oceanic commenced the litigation process in Australia during the
three months ended September 30, 2001 resulting in substantial legal costs
during that time.
In 1974 Portugal granted an exclusive offshore concession to Petrotimor
Companhia de Petroleos, S.A.R.L. ("Petrotimor"), a subsidiary of Oceanic, to
explore for and develop oil and gas in the Timor Gap area. On January 5, 1976,
following Indonesia's unlawful invasion and occupation of East Timor, Petrotimor
applied for and obtained on April 14, 1976 Portugal's consent to a suspension of
performance under the concession agreement, based upon force majeure. This force
majeure status remained in effect until at least October 25, 1999.
On December 11, 1989, Australia and Indonesia, ignoring Petrotimor's
rights under the concession from Portugal, signed the Timor Gap Treaty (the
"Treaty"), purporting to create a joint zone of cooperation whereby these two
countries could control the exploration and development of hydrocarbons in an
area over which both countries claimed rights. A portion of this area,
designated as Zone A, falls largely within the area where Petrotimor holds
rights under its concession agreement with Portugal. The treaty created a Joint
Authority that purported to enter into production sharing contracts with various
companies who have carried out exploration activities.
During 1999 the people of East Timor voted for independence from Indonesia
and the United Nations initiated a transition of East Timorese independence
under the authority of the United Nations Transitional Administration in East
Timor. On August 30, 2001, East Timor elected representatives to the Constituent
Assembly to prepare a constitution for an independent and
13
democratic East Timor. A constitution was approved by the Constituent Assembly
and East Timor became an independent nation on May 20, 2002.
On August 21, 2001, Oceanic and Petrotimor issued a Statement of Claim (as
amended) out of the Federal Court of Australia against the Commonwealth of
Australia, the Joint Authority established under the Treaty, and the Phillips
Petroleum companies operating within the Timor Gap area. Oceanic and Petrotimor
claim that the Treaty and the related legislation of the Australian Parliament
was void or invalid for a number of reasons including: (1) the Treaty and the
legislation sought to claim significant portions of the continental shelf over
which it had no sovereign rights for Australia, which the Company believes under
international law belonged to East Timor, and (2) the Treaty and the legislation
attempted to extinguish the property interest and rights granted by the then
legitimate power, Portugal, to Oceanic and Petrotimor, without providing for
just compensation as required by Australian law. As the case involves complex
issues of international and Australian constitutional law, it is expected that
it will take a considerable period before the case is resolved.
There have been several preliminary hearings in the Federal Court of
Australia. A hearing by the court on the question of whether the court has
jurisdiction over the claim was held on May 16 and 17, 2002. The court has taken
under advisement a motion to dismiss the suit on the basis that the court does
not have jurisdiction over the claim. If Oceanic and Petrotimor are not able to
obtain a favorable order on this motion, its suit may be dismissed and it would
be forced to appeal the decision in order to continue with its claim in
Australia.
In addition to the Statement of Claim issued in Australia, Oceanic
submitted an application for an Expansion of Seabed Concession to the
transitional government in East Timor requesting that Petrotimor's 1974
concession area be expanded to include the additional maritime areas within the
properly determined seabed delimitation of East Timor. The Company believes East
Timor is entitled under international law to exercise sovereign jurisdiction
over its seabed and to have an Exclusive Economic Zone as codified in the 1982
United Nations convention on the law of the sea. The Company has received no
response to this application.
The current government of East Timor has not thus far recognized
Petrotimor's concession in East Timor. The Company submitted an application for
an Expansion of Seabed Concession to the transitional government in East Timor
and received no response. An article carried on the Dow Jones Newswires on
September 26, 2002 quotes a "senior East Timor government official" as stating
that the government does not recognize the concession. The Company has not been
advised of the status of the application and whether it is being considered by
the new East Timor government. The Company may never receive a response or may
receive an unfavorable response. Oceanic and Petrotimor are continuing
discussions with East Timor government officials in an effort to obtain a
favorable formal response. Oceanic and Petrotimor intend to continue to pursue
the application and the commercial opportunities in East Timor. If no response
is given by the government of East Timor or if the response is unfavorable, the
Company will review its political and legal options to determine if any further
effort is warranted. Because East Timor is in the early stages of the
14
formation of its government, its judicial infrastructure has not been fully
established and therefore the Company cannot at this time accurately assess its
legal options.
If the government were to recognize the concession and grant the
application, it would expand the 1974 Petrotimor concession to correspond with
the offshore area over which East Timor is entitled to claim sovereign rights
under international law. Petrotimor sponsored a seminar in East Timor for the
purpose of explaining appropriate maritime boundaries under applicable
international law and the resulting benefits to East Timor if such boundaries
are enforced. There is no assurance even if the Company is successful in the
Australian litigation that East Timor will recognize its concession.
Staffing direct costs are 13% less for the three months ended September
30, 2002 compared to the three months ended September 30, 2001. This is related
to the reduction in staffing revenue and increase in gross margin.
Amortization and depreciation for the three months ended September 30,
2002 is 29% less than the three months ended September 30, 2001. This is mainly
due to implementation of Statement of Financial Accounting Standards (SFAS) No.
142, Accounting for Goodwill and Intangible Assets. Pursuant to SFAS 142, net
goodwill of $346,659 as of December 31, 2001, associated with the acquisition of
Alliance, is no longer being amortized but will be tested for impairment
annually. Oceanic has completed its transitional impairment analysis and has
determined there was no impairment of goodwill as of January 1, 2002. There can
be no assurance there will not be an impairment of goodwill at a later date.
Oceanic will continue to monitor the carrying value of its goodwill and will
record an impairment write-down as required. Amortization expense related to
goodwill was $10,505 during the three months ended September 30, 2001.
Total general and administrative costs for the three months ended
September 30, 2002 are 6% more than for the three months ended September 30,
2001. As discussed above, expenses relating to the employment operations
declined 6%. General and administrative costs for corporate and the oil and gas
operations increased 55% mainly due to increased salary expense relating to the
addition of personnel.
Overall other income (expense) decreased approximately 290% for the three
months ended September 30, 2002 compared to the three months ended September 30,
2001. Interest income for the three months ended September 30, 2002 is 90% less
than for the same three months of 2001 due to lower cash balances and a decrease
in interest rates. The category "Other" consists mainly of gains and losses on
the disposal of fixed assets and foreign exchange rate gains and losses. Foreign
exchange rates were much less favorable for the three months ended September 30,
2002 than for the three months ended September 30, 2001.
NINE-MONTH COMPARISON
Total revenue for the nine months ended September 30, 2002 is 1% less than
total revenue for the nine months ended September 30, 2001. Staffing revenue is
down 10% for the nine months ended September 30, 2002 compared to the nine
months ended September 30, 2001. Despite the
15
decrease in revenues, overall operations for Alliance have improved. Gross
margin was 17% for the nine months ended September 30, 2002 compared to 14% for
the nine months ended September 30, 2001. General and administrative costs were
reduced by 8% during the nine months ended September 30, 2002 compared to the
same nine months of 2001 and net loss declined 13%.
Management revenue for the nine months ended September 30, 2002 is 54%
higher than for the nine months ended September 30, 2001 primarily due to the
addition of management fees from Points Four World Travel, Inc. and Global
Access Telecommunications, Inc. Effective September 1, 2002, services for Global
Access Telecommunications, Inc. were terminated by mutual agreement.
Exploration expenses for the nine months ended September 30, 2002 are 41%
higher than during the comparable nine months of 2001. The increase is due to
ongoing legal fees associated with the legal action commenced in Australia and
the application to expand an offshore oil and gas concession located in an area
between Australia and East Timor known as the Timor Gap, as described in the
Three-Month Comparison.
Staffing direct costs are 13% less for the nine months ended September 30,
2002 compared to the nine months ended September 30, 2001. This is related to
the reduction in staffing revenue and increase in gross margin.
Amortization and depreciation for the nine months ended September 30, 2002
is 29% less than the nine months ended September 30, 2001. This is mainly due to
implementation of Statement of Financial Accounting Standards (SFAS) No. 142,
Accounting for Goodwill and Intangible Assets, as discussed in the Three-Month
Comparison. Amortization expense related to goodwill was $31,515 during the nine
months ended September 30, 2001.
Total general and administrative costs for the nine months ended September
30, 2002 are 5% less than for the nine months ended September 30, 2001. During
2001 Oceanic made severance payments to the outgoing President and Human
Resources Director of Alliance and during 2002 expenses were reduced due to the
write-off of a previous accrual that we believe is no longer due and payable. We
had accrued $60,000 during the period 1985 to 1991 relating to security costs
for a loan that we had during that period. The underlying loan was paid off in
1992 and therefore we believe we are no longer liable for this amount because
the statute of limitations regarding this matter has expired.
Overall other income (expense) decreased approximately 107% for the nine
months ended September 30, 2002 compared to the nine months ended September 30,
2001. Interest income for the nine months ended September 30, 2002 is 89% less
than for the same nine months of 2001 due to lower cash balances and a decrease
in interest rates. The category "Other" consists mainly of gains and losses on
the disposal of fixed assets and foreign exchange rate gains and losses. Foreign
exchange rates were much less favorable for the nine months ended September 30,
2002 than for the nine months ended September 30, 2001.
16
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company's
management, including the President (principal executive officer) and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon the evaluation, the Company's President
(principal executive officer) and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information required to be included in the Company's periodic
SEC filings. There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company's management carried out its evaluation.
PART II - OTHER INFORMATION
ITEM 6. 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
-------------- ---------------
99 Certification of Chief Executive
Officer and Chief Financial
Officer
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
17
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, 2002 /s/ Charles N. Haas
----------------------------- -------------------------------------
Charles N. Haas
President
Date: November 13, 2002 /s/ Phylis J. Anderson
----------------------------- -------------------------------------
Phylis J. Anderson
Treasurer and Chief Financial Officer
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Charles N. Haas, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Oceanic
Exploration Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
-----------------------
/s/ Charles N. Haas
--------------------------------
Charles N. Haas
President
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Phylis J. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Oceanic
Exploration Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
------------------------
/s/ Phylis J. Anderson
----------------------------------------
Phylis J. Anderson
Treasurer and Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Name of Exhibit
-------------- ---------------
99 Certification of Chief Executive
Officer and Chief Financial
Officer