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 December 31, 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
January 31, 1998
9,916,154
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
December 31, 1997 March 31, 1997
----------------- --------------
Cash $ 108,773 201,715
Receivables:
Affiliates 5,938 2,904
Other 1,866 2,551
------------ -----------
7,804 5,455
Prepaid expenses 1,982 1,428
------------ -----------
Total current assets 118,559 208,598
------------ -----------
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 (38,456,565) (38,263,165)
------------ -----------
543,435 736,835
Other assets 2,720 --
------------ -----------
$ 664,714 945,433
------------ -----------
------------ -----------
(Continued)
2
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31, 1997 March 31, 1997
----------------- --------------
Current liabilities:
Notes payable to affiliate (note 3) $ 792,636 874,474
Accounts payable 203,018 187,767
Accounts payable to affiliate 60,000 60,000
United Kingdom taxes payable, including
accrued interest 466,089 456,337
Accrued expenses 101,954 78,286
------------- ----------
Total current liabilities 1,623,697 1,656,864
Deferred income taxes (note 4) 512,837 594,865
------------- ----------
Total liabilities 2,136,534 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 (2,247,275) (2,081,751)
------------- ----------
Total stockholders' deficit (1,471,820) (1,306,296)
------------- ----------
Contingencies (note 2)
$ 664,714 945,433
------------- ----------
------------- ----------
See accompanying notes to consolidated financial statements.
3
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
December 31, December 31,
1997 1996 1997 1996
---------------------------- ---------------------------
Revenues:
Oil and gas sales - Greece (note 2) $ 429,003 745,828 24,343 206,780
Other 241,204 222,603 78,227 72,963
---------- --------- -------- ---------
670,207 968,431 102,570 279,743
---------- --------- -------- ---------
Costs and expenses:
Interest and financing costs 68,019 92,194 22,215 29,777
Exploration expenses 28,937 12,540 5,651 4,285
Amortization and depreciation 193,400 241,500 64,500 80,500
General and administrative 455,802 595,477 156,347 213,161
---------- --------- -------- ---------
746,158 941,711 248,713 327,723
---------- --------- -------- ---------
(Loss) income before income taxes (75,951) 26,720 (146,143) (47,980)
Income tax (expense) benefit (note 4) (89,573) (198,072) 17,648 (49,314)
---------- --------- -------- ---------
Net loss $(165,524) (171,352) (128,495) (97,294)
---------- --------- -------- ---------
---------- --------- -------- ---------
Loss per common share $ (.02) (.02) ( .01) (.01)
---------- --------- -------- ---------
---------- --------- -------- ---------
See accompanying notes to consolidated financial statements.
4
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31,
1997 1996
-----------------------
Cash flows from operating activities:
Net loss $ (165,524) (171,352)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization and depreciation 193,400 241,500
Deferred income tax benefit (82,028) (100,259)
Increase in accounts receivable and due from affiliates (2,349) (11,470)
Increase in prepaid expenses and other assets (3,274) (375)
Increase (decrease) in accounts payable and accounts payable
to affiliate 15,251 (70,379)
Increase in United Kingdom taxes payable, including accrued
interest payable, and accrued expenses 33,420 94,207
----------- ----------
Net cash used in operating activities (11,104) (18,128)
Cash flows from financing activities:
Repayments of notes payable to affiliate (81,838) (328,050)
----------- ----------
Net decrease in cash (92,942) (346,178)
----------- ----------
Cash at beginning of period 201,715 642,650
----------- ----------
Cash at end of period $ 108,773 296,472
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
5
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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.
In January 1998, Denison notified the Registrant that based upon current
price and production levels, it anticipates that 1998 may be the final year of
production for the Prinos and Prinos North Fields. Based upon the original
license agreement, Denison is entitled to 100% cost recovery during the last
year of production. Although Denison has notified the Registrant that it
intends to suspend payments of the 15% net profits interest in anticipation of
this being the final year, the Registrant has notified Denison that pursuant to
the Oil Payment and Net Earnings Interest Agreement between Denison and the
Registrant, Denison may not suspend payments to the Registrant prior to formal
declaration to the Greek government of this being the last year of production.
(3) NOTES PAYABLE
Notes payable to affiliate at March 31, 1997 and December 31, 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.
7
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 to be paid to NWO.
As of December 31, 1997, the outstanding loan balance was $792,636. The
Registrant does not believe that if payments are resumed under the net profits
interest as calculated under the terms of the amended License Agreement at
current production and price levels that they will be sufficient to repay the
obligations owed to NWO by March 31, 1998.
(4) INCOME TAXES
Income tax (expense) benefit consists of the following:
Nine Months Ended
December 31,
1997 1996
------ --------
Current:
Foreign - Greece (171,601) (298,331)
Deferred:
Foreign - Greece 82,028 100,259
----------- ----------
Total income tax expense $ (89,573) (198,072)
----------- ----------
----------- ----------
(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
8
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. Any 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.
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.
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.
9
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.
In January 1998, Denison notified the Registrant that based upon current
price and production levels, it anticipates that 1998 may be the final year of
production for the Prinos and Prinos North Fields. Based upon the original
license agreement, Denison is entitled to 100% cost recovery during the last
year of production. Although Denison has notified the Registrant that it
intends to suspend payments of the 15% net profits interest in anticipation of
this being the final year, the Registrant has notified Denison that pursuant to
the Oil Payment and Net Earnings Interest Agreement between Denison and the
Registrant, Denison may not suspend payments to the Registrant prior to formal
declaration to the Greek government of this being the last year of production.
As of December 31, 1997, the outstanding loan balance was $792,636. The
Registrant does not believe that if payments are resumed under the net profits
interest as calculated under the terms of the amended License Agreement at
current production and price levels that they will be sufficient to repay the
obligations owed to NWO by March 31, 1998.
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.
10
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
or possibly eliminated. If such unfavorable outcome occurs, it is unlikely 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
payment on such is received from Denison, those proceeds should be sufficient
to fund on-going operations and limited new exploration activities. As
previously indicated, the Registrant has been informed by Denison that this may
be the final year of production. Consequently, there is no assurance as to how
long the Prinos property will continue to produce oil and gas and, accordingly,
if the Registrant can expect revenue from its Prinos Interest, and if so, for
how long.
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
11
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.
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.
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: February 6, 1998 /s/ Charles N. Haas
----------------------------- --------------------------------------
Charles N. Haas
President
Date: February 6, 1998 /s/ Lori A. Brundage
----------------------------- --------------------------------------
Lori A. Brundage
Treasurer and Chief Financial Officer