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, 1997.
[ ] 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.)
5000 South Quebec Street, Suite 450, Denver, CO 80237
(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)
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
October 31, 1997
9,916,154
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30,1997 March 31, 1997
----------------- --------------
Cash $ 106,139 201,715
Receivables:
Oil and gas revenues 42,774 1,680
Affiliates 3,340 2,904
Other 186 871
------------ -----------
46,300 5,455
Prepaid expenses 2,482 1,428
------------ -----------
Total current assets 154,921 208,598
------------ -----------
Oil and gas property interests, full-
cost method of accounting --
Greece (note 2) 39,000,000 39,000,000
Less accumulated amortization,
depreciation and valuation allowance (38,392,065) (38,263,165)
------------ -----------
607,935 736,835
Other assets 2,880 --
------------ -----------
$ 765,736 945,433
------------ -----------
------------ -----------
(Continued)
2
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
September 30, 1997 March 31, 1997
------------------ --------------
Current liabilities:
Notes payable to affiliate (note 3) $ 814,690 874,474
Accounts payable 164,254 187,767
Accounts payable to affiliate 60,000 60,000
United Kingdom taxes payable,
including accrued interest 460,818 456,337
Accrued expenses 69,077 78,286
----------- -----------
Total current liabilities 1,568,839 1,656,864
Deferred income taxes (note 4) 540,222 594,865
----------- -----------
Total liabilities 2,109,061 2,251,729
----------- -----------
Stockholders' 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 (note 5) 619,759 619,759
Capital in excess of par value 155,696 155,696
Accumulated deficit (2,118,780) (2,081,751)
----------- -----------
Total stockholders' deficit (1,343,325) (1,306,296)
----------- -----------
Contingencies (note 2)
$ 765,736 945,433
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
3
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
-------------------------- -------------------------
Revenues:
Oil and gas sales - Greece (note 2) $ 404,660 539,048 246,858 322,221
Other 162,977 149,640 84,487 74,264
--------- -------- ------- -------
567,637 688,688 331,345 396,485
--------- -------- ------- -------
Costs and expenses:
Interest and financing costs 45,804 62,417 22,462 35,654
Exploration expenses 23,286 8,255 19,262 7,564
Amortization and depreciation 128,900 161,000 64,400 80,489
General and administrative 299,455 382,316 147,513 230,824
--------- -------- ------- -------
497,445 613,988 253,637 354,531
--------- -------- ------- -------
Income before income taxes 70,192 74,700 77,708 41,954
Income tax expense (note 4) (107,221) (148,758) (70,861) (95,456)
--------- -------- ------- -------
Net (loss) income $ (37,029) (74,058) 6,847 (53,502)
--------- -------- ------- -------
--------- -------- ------- -------
(Loss) income per common share $ (.01) (.01) .01 (.01)
--------- -------- ------- -------
--------- -------- ------- -------
See accompanying notes to consolidated financial statements.
4
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
September 30,
1997 1996
-----------------------
Cash flows from operating activities:
Net loss $ (37,029) (74,058)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization and depreciation 128,900 161,000
Deferred income tax benefit (54,643) (66,861)
Increase in accounts receivable and due from affiliates (40,845) (85,672)
Increase in prepaid expenses and other assets (3,934) (821)
(Decrease) increase in accounts payable and accounts payable
to affiliate (23,513) 1,476
(Decrease) increase in United Kingdom taxes payable, including
accrued interest payable, and accrued expenses (4,728) 34,784
--------- --------
Net cash used in operating activities (35,792) (30,152)
--------- --------
Cash flows from financing activities:
Repayments of notes payable to affiliate (59,784) (149,331)
--------- --------
Net decrease in cash (95,576) (179,483)
--------- --------
Cash at beginning of period 201,715 642,650
--------- --------
Cash at end of period $ 106,139 463,167
--------- --------
--------- --------
See accompanying notes to consolidated financial statements.
5
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 1997 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 the Registrant 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. The accounting policies of the Registrant are set forth in the
financial statements and notes thereto and are included in the Registrant's
latest annual report on Form 10-KSB. It is suggested that these consolidated
financial statements be read in conjunction with that document.
(2) OIL AND GAS SALES - GREECE
Effective January 1, 1993, the operator of the Greek properties
negotiated an agreement with the Greek government which amended the original
license agreement entered into in June 1975 (the "License Agreement"). The
amendment provides for a sliding scale for calculating the operator's
recoverable costs and expenses and for the calculation of the Greek royalty
interest. Denison Mines, Ltd. ("Denison"), the working interest owner
having the contractual obligation to the Registrant for the 15% net profits
interest, (also called "Prinos Interest" in some parts of this Report)
asserted that the calculation of the amounts due to the Registrant should be
based on the amended agreement with the Greek government. The Registrant
disagreed with this interpretation and commenced a legal action in Canada
seeking a declaration by the Ontario Court of Justice (General Division) in
Toronto, Canada (the "Court") that amounts due the Registrant attributable to
its 15% net profits interest be calculated based on the terms of the License
Agreement before this amendment. In December 1996, the Registrant received
notification that the Court had issued a judgment in its favor. The Court
ordered Denison to pay approximately $4,000,000 plus interest to the
Registrant for the period from January 1, 1993 through December 31, 1995 and
to make payments to the Registrant subsequent to December 31, 1995 also based
on the terms of the original license agreement. The Court also awarded court
costs to the Registrant which are anticipated to be approximately $107,000.
Denison subsequently filed a Notice of Appeal requesting that the judgment be
set aside. Therefore, it appears that the final determination will likely
have to be made by the Appellate Court. While the Registrant believes it has
a reasonable probability of prevailing in its action, the ultimate outcome of
the matter
6
cannot presently be determined. Accordingly, no amounts have been recorded
in the accompanying consolidated financial statements for current revenues
or damages, if any, that may ultimately be awarded to the Registrant. It
should be noted that if the appeal by Denison is successful, the Registrant
will only be entitled to payment of the Prinos Interest calculated in
accordance with the terms of the License Agreement, as amended. The amounts
of such payments would be substantially lower than the payments received
prior to January 1, 1993.
In response to the legal action, the working interest owner had ceased
remitting payment to the Registrant and, accordingly, no revenue was received
for the period from January 1, 1993 to October 31, 1995. In November 1995,
the Registrant received a payment from the working interest owner for this
period. In December 1995, the working interest owner resumed monthly revenue
payments. All of these revenue payments were calculated under the terms of
the amended License Agreement.
(3) NOTES PAYABLE
Notes payable to affiliate at March 31, 1997 and September 30, 1997
represent borrowings under a $2,000,000 line of credit established in favor
of the Registrant by NWO Resources, Inc. ("NWO"), the parent company of
International Hydrocarbons, the Registrant's majority stockholder. The NWO
line of credit provides for cumulative draws of up to $2,000,000 with
interest payable monthly on the outstanding balance at the greater of the
U.S. bank prime lending rate or 1- 3/4% above the 30-day LIBOR. The line of
credit is secured by the Registrant's 15% net profits interest in the
offshore Greece oil and gas property and all proceeds from the pending
litigation. Prior to the end of fiscal year 1995, the Registrant's credit
line was exhausted and the Registrant had no resources to make monthly
interest payments on the advances under the line of credit.
In September 1995, the Registrant entered into a Modification Agreement
with NWO (the "Modification Agreement") concerning the line of credit. The
Modification Agreement provided that NWO would forbear collection of
principal and interest on the line of credit until December 31, 1996. In
addition, the annual interest rate was adjusted to 8.25%. In exchange, the
Registrant was required to pursue funding from the sale of additional shares
of its common stock, which offering was subsequently completed.
In December 1996, an Extension Agreement was executed extending the
period of time during which NWO would forbear collection of principal and
interest until March 31, 1997. In March 1997, another Extension Agreement
was executed extending the forbearance period until March 31, 1998. This
agreement allows the Registrant to retain 50% of all net profits interest
payments from Denison, with the remaining amount payable to NWO.
As of September 30, 1997, the outstanding loan balance was $814,690.
The Registrant does not believe that the payments made under the net profits
interest as calculated under the terms of the amended License Agreement at
current production and price levels will be sufficient to repay the
obligations owed to NWO by March 31, 1998.
7
(4) INCOME TAXES
Income tax (expense) benefit consists of the following:
Six Months Ended
September 30,
1997 1996
---------- ---------
Current:
Foreign - Greece (161,864) (215,439)
Deferred:
Foreign - Greece 54,643 66,681
---------- ---------
Total income tax expense $(107,221) (148,758)
---------- ---------
---------- ---------
(5) COMMON STOCK
In accordance with the terms of the Modification Agreement, the
Registrant filed a Registration Statement on Form SB-2 with the Securities
and Exchange Commission on October 6, 1995 for the purpose of registering
6,001,000 shares of additional common stock to be issued pursuant to a rights
offering ("Rights Offering"). In January 1996, the Registration Statement
became effective and the Registrant raised $524,093, net of offering costs,
from the Rights Offering. The Registrant used the proceeds to reimburse NWO
for advances of legal fees and accrued interest thereon, and retained the
remainder to fund its operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's principal source of revenue, its net profits interest
in an oil and gas concession located offshore Greece, is currently the
subject of litigation. Denison, who has the contractual obligation to pay
the net profits interest, has asserted that the calculation of the amounts
due the Registrant should be based upon the 1993 amendment to the License
Agreement. Payments received under the amended License Agreement are
significantly lower.
The Registrant also receives revenues from sales of seismic data
gathered in its oil and gas exploration and development activities. This
revenue is sporadic and is not sufficient to fund the Registrant's ongoing
operations.
The Registrant currently receives approximately $278,000 per year in
connection with services it renders to Cordillera Corporation and San Miguel
Valley Corporation pursuant to management agreements providing for
reimbursement of costs for actual time and expenses incurred in activities
conducted on behalf of those entities. The amounts received under the
management agreements are a reimbursement for employee salaries and other
operating expenses.
8
When payments for the net profits interest were suspended in 1994, the
Registrant funded its operations through draws against the line of credit
established with NWO. Prior to the end of fiscal year 1995, the Registrant's
credit line was exhausted. During the first half of fiscal year 1996, the
Registrant had no resources to make monthly interest payments on the advances
under the line of credit.
On September 19, 1995, the Registrant entered into the Modification
Agreement with NWO. The Modification Agreement, secured by the Registrant's
Prinos Interest and all proceeds from the Registrant's lawsuit against
Denison, provided for limited funding of litigation expenses and temporary
relief from any collection actions by NWO. The Modification Agreement also
allowed the Registrant to retain up to $200,000 of any proceeds received for
its net profits interest for general working capital purposes.
On November 27, 1995, the Registrant received $810,522 from Denison
representing unpaid revenues for its net profits interest. These revenues
covered the period from January 1, 1993 through October 31, 1995, and are
calculated under the terms of the License Agreement as amended in 1993. This
payment was made in connection with the agreement of Denison to withdraw the
counterclaim filed by Denison against the Registrant. As of December 1995,
Denison resumed monthly revenue payments to the Registrant for its net
profits interest as calculated under the terms of the amended License
Agreement. Pursuant to the Modification Agreement, the Registrant retained
$200,000 from the payment received from Denison. On November 30, 1995, the
Registrant paid NWO $610,522. $92,402 was applied to accrued interest and
$518,120 was applied to the loan leaving an outstanding balance under the
line of credit of $1,481,880. Future payments by Denison for the net profits
interest will also be applied to the Registrant's obligations to NWO pursuant
to the Modification Agreement.
In January 1996, the Registrant was able to successfully raise $524,093,
net of offering costs, in connection with the sale of 6,001,000 shares of
additional common stock through the Rights Offering. Pursuant to the terms
of the Modification Agreement with NWO, $64,107 from the Rights Offering was
used to reimburse NWO for advances made to the Registrant for legal fees;
$61,876 and $2,231 were applied to the principal and accrued interest,
respectively.
In March 1997, the Registrant executed an Extension Agreement to the
Modification Agreement whereby NWO agreed to forbear any collection
proceedings on the line of credit until March 31, 1998. In addition, the
Registrant may retain 50% of all net profits interest payments received to
cover its operating expenses. The Registrant estimates that these funds, in
addition to those from the Rights Offering, will be sufficient to fund the
litigation and limited operations through at least March 31, 1998.
As of September 30, 1997, the outstanding loan balance was $814,690.
The Registrant does not believe that the payments made under the Prinos
Interest as calculated under the terms of the amended License Agreement at
current production and price levels will be sufficient to repay the
obligations owed to NWO by March 31, 1998.
9
The Registrant's net profits interest in the offshore Greece property is
currently the subject of litigation. In June 1994, the Registrant commenced
legal action against the company having the contractual obligation to pay the
net profits interest. The Registrant was seeking a declaration by the Court
that amounts due the Registrant attributable to its interest be calculated
based on the terms of the License Agreement prior to a 1993 amendment agreed
to by the consortium and the Greek government. In September 1996, the
lawsuit went to trial. In December 1996, the Registrant received
notification that the Court had rendered a judgment in the Registrant's
favor. The defendant subsequently filed a Notice of Appeal requesting that
the judgment be set aside. Therefore, it appears that the final
determination will likely be made by the Appellate Court. While the
Registrant believes there is a reasonable probability of prevailing in the
litigation, the ultimate outcome of the lawsuit cannot be determined at this
time.
Even if a final determination in the Registrant's favor is obtained, of
which there is no assurance, there is no guarantee that the Registrant would
be able to collect that judgment and, if able to collect, when the judgment
would be actually collected. Previously, it appeared, based on Denison's
public filings, that the financial stability of Denison was questionable and
that Denison continued to operate at the sufferance of its secured creditors.
Based upon more recent public filings, however, it appears that Denison's
debt restructuring approved in 1995 may have been successful in preserving
Denison as a going concern. This restructuring may also increase the
likelihood that Denison would have assets available for satisfaction of a
judgment in favor of the Registrant. However, the Registrant does not have
sufficient information in its possession to determine whether any assets of
Denison are unsecured and available for satisfaction of a final determination
in favor of the Registrant.
Unless funds are collected as a result of the litigation with Denison
and the revenue stream is resumed under the Prinos Interest as calculated
under the original License Agreement, the Registrant will be required to
obtain additional capital, in addition to the Rights Offering described
above, to fund continuing operations beyond March 1998 and to pay off the NWO
loan and accrued interest when due on March 31, 1998.
If the final determination is not favorable, the Registrant will still
have its Prinos Interest; however, the revenue stream will be substantially
reduced. If such unfavorable outcome occurs, it is uncertain if the payments
made under the Prinos Interest as calculated under the terms of the amended
License Agreement at current production and price levels will be sufficient
to repay the obligations owed to NWO. The Registrant may be forced to
liquidate its assets, and in such case, little if any assets would be
available for distribution to shareholders.
If the litigation with Denison is resolved in the Registrant's favor and
payments are resumed under the net profits interest as calculated under the
License Agreement prior to the 1993 amendment, that revenue should be
sufficient to fund on-going operations and limited new exploration
activities. There is no assurance as to how long the Prinos property will
continue to produce oil and gas and, accordingly, how long the Registrant can
expect revenue from its Prinos Interest.
10
The financial statements do not include any adjustments that might
result from the uncertainties described above.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1994, the Registrant commenced legal action against Denison
seeking a declaration by the Court that amounts due the Registrant
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, the Registrant received notification that
the Ontario Court of Justice (General Division) in Toronto, Canada, had
issued a judgment in its favor. Specifically, the Court found that Denison
is obligated to pay the Registrant its 15% net profits interest in accordance
with the terms of the License Agreement prior to the 1993 amendment. First,
the Court ordered Denison to pay approximately $4,000,000 plus interest to
the Registrant for the period January 1, 1993 through December 31, 1995.
Second, the Court ordered Denison to make payments to the Registrant
subsequent to December 31, 1995, also calculated based on the terms of the
original License Agreement. Lastly, the Court awarded court costs to the
Registrant which are anticipated to be approximately $107,000. Subsequent to
receiving the judgment from the Court, Denison filed a Notice of Appeal with
the Court in which it requested that the judgment be set aside for errors in
the judge's findings. The Registrant disagrees that there were errors made.
Therefore, it appears that the final determination will likely have to be
made by the Appellate Court. While the Registrant believes there is a
reasonable probability of prevailing in the litigation, the ultimate outcome
of the lawsuit cannot be determined at this time. Accordingly, no amounts
have been recorded in the accompanying financial statements for current
revenues or damages, if any, that may ultimately be awarded to the
Registrant.
In November, 1995, Denison agreed to withdraw its counterclaim filed
against the Registrant in connection with the litigation between the parties.
See the Registrant's Form 10-KSB for the fiscal year ended March 31,
1997, for a more detailed discussion of these legal proceedings.
ITEM 2. CHANGE IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In August 1995, the Registrant was notified by the Pacific Stock
Exchange (the "Exchange") that it was subject to the initiation of delisting
procedures for failure to maintain the minimum standards as a Tier II
Security on the Exchange and effective October 3, 1995, the Registrant's
common stock was delisted from the Exchange. In January 1996, the National
Association of Securities Dealers, Inc. granted its approval for the
Registrant's common stock to be quoted on the OTC Bulletin Board under the
symbol OCEX.U.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith are listed below and if not located in
another previously filed registration statement or report, are attached to
this Report at the pages set out below. The "Exhibit Number" below refers to
the Exhibit Table in Item 601 of Regulation S-B. Those reports previously
filed with the Securities and Exchange Commission as required by Item 601 of
Regulation S-B are incorporated herein by reference, in accordance with the
provisions of Rule 12b-32, to the reports or registration statements
identified below.
Exhibit Number Name of Exhibit Location
- -------------- --------------- --------
None
(b) No reports on Form 8-K were filed during the quarter for
which this Report is filed.
12
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 7, 1997 /s/ Charles N. Haas
--------------------------- ---------------------------------------
Charles N. Haas
President
Date: November 7, 1997 /s/ Lori A. Brundage
--------------------------- ---------------------------------------
Lori A. Brundage
Treasurer and Chief Financial Officer
13