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 June 30, 1998
[ ] 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
July 31, 1998
9,916,154
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
- ------ June 30, 1998 March 31, 1998
------------- --------------
Cash $ 38,000 38,601
Receivables:
Affiliates 19,616 5,753
Other 1,680 3,006
------------ -----------
21,296 8,759
Prepaid expenses 982 1,482
------------ -----------
Total current assets 60,278 48,842
------------ -----------
Oil and gas property interests, full-cost method
of accounting (note 2) 39,000,000 39,000,000
Less accumulated amortization, depreciation
and valuation allowance (38,857,500) (38,810,000)
------------ -----------
142,500 190,000
Other assets 2,400 2,560
------------ -----------
$ 205,178 241,402
------------ -----------
------------ -----------
(Continued)
2
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ------------------------------------- June 30, 1998 March 31, 1998
------------- --------------
Current liabilities:
Notes payable to affiliate (note 3) $ 902,636 842,636
Accounts payable 205,242 210,338
Accounts payable to affiliate 60,000 60,000
United Kingdom taxes payable, including
accrued interest 491,119 486,959
Accrued expenses 113,539 67,353
----------- ----------
Total current liabilities 1,772,536 1,667,286
Deferred income taxes (note 4) 83,735 102,735
----------- ----------
Total liabilities 1,856,271 1,770,021
----------- ----------
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 619,759 619,759
Capital in excess of par value 155,696 155,696
Accumulated deficit (2,426,548) (2,304,074)
----------- ----------
Total stockholders' deficit (1,651,093) (1,528,619)
----------- ----------
Contingencies (note 2)
$ 205,178 241,402
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
3
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
1998 1997
------------------------
Revenues:
Oil and gas sales - Greece (note 2) $ -- 157,802
Other 111,156 78,490
---------- --------
111,156 236,292
---------- --------
Costs and expenses:
Interest and financing costs 23,544 23,342
Exploration expenses 2,387 4,024
Amortization and depreciation 47,500 64,500
General and administrative 179,199 151,942
---------- --------
252,630 243,808
---------- --------
Loss before income taxes (141,474) (7,516)
Income tax benefit (expense) (note 4) 19,000 (36,360)
---------- --------
Net loss $(122,474) (43,876)
---------- --------
---------- --------
Loss per common share $ (.01) (.01)
---------- --------
---------- --------
See accompanying notes to consolidated financial statements.
4
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
1998 1997
-------------------------
Cash flows from operating activities:
Net loss $(122,474) (43,876)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization and depreciation 47,500 64,500
Deferred income tax benefit (19,000) (26,761)
Increase in accounts receivable and due from affiliates (12,537) (4,252)
Decrease (increase) in prepaid expenses and other assets 660 (2,594)
(Decrease) increase in accounts payable and accounts payable
to affiliate (5,096) 23,204
Increase in United Kingdom taxes payable, including accrued
interest payable, and accrued expenses 50,346 15,019
---------- ---------
Net cash used in operating activities (60,601) 25,240
Cash flows from financing activities:
Advances from (repayments of) notes payable to affiliate 60,000 (41,413)
---------- ---------
Net decrease in cash (601) (16,173)
---------- ---------
Cash at beginning of period 38,601 201,715
---------- ---------
Cash at end of period $ 38,000 185,542
---------- ---------
---------- ---------
See accompanying notes to consolidated financial statements.
5
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 1998 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 $6,100,000 including interest to the
Registrant for the period from January 1, 1993 through December 13, 1996 and
to make payments to the Registrant subsequent to December 13, 1996 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
plus interest. 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
6
ultimate outcome of the matter 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.
In January 1998, the Registrant was notified by Denison that 1998 may be
the final year of production for the Greek properties. In the final year of
production, Denison is entitled to 100% cost recovery; consequently, the
Registrant will not receive any payments for its net profits interest in the
final year. In anticipation of such, Denison has ceased remitting monthly
payments to the Registrant. In response, the Registrant has notified Denison
that this action is inappropriate prior to the formal declaration to the
Greek government that 1998 is the final year. Should the consortium drill
and successfully develop additional exploration prospects in the offshore
Greece property, or otherwise extend the productive life of the property, the
Registrant would be entitled to once again receive its 15% net profits
interest.
(3) NOTES PAYABLE TO AFFILIATE
Notes payable to affiliate at March 31, 1998 and June 30, 1998 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 to be paid to NWO. In
February 1998, a third extension agreement was executed extending the
forbearance period until March 31, 1999. This agreement allows the
Registrant to draw an additional $350,000 for general working capital
purposes and to defer all interest payments until maturity.
As of June 30, 1998, the outstanding loan balance was $902,636. Even if
payments were to resume under the Prinos Interest as calculated under the
terms of the amended License Agreement,
7
the Registrant does not believe that at current production and price levels,
the Prinos Interest will generate funds sufficient to repay the obligations
owed to NWO by March 31, 1999.
(4) INCOME TAXES
Income tax benefit (expense) consists of the following:
Three Months Ended
June 30,
1998 1997
------- -------
Current:
Foreign - Greece -- (63,121)
Deferred:
Foreign - Greece 19,000 26,761
------- --------
Total income tax benefit (expense) $19,000 (36,360)
------- --------
------- --------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Registrant's principal source of revenue has been from
its Prinos Interest. The Registrant also receives revenues from sales of
seismic data gathered in its oil and gas exploration and development
activities. That revenue is sporadic and is not sufficient to fund the
Registrant's ongoing operations. There have been no sales of seismic data
during the three-month period ended June 30, 1998 or the year ended March 31,
1998.
The Registrant currently receives approximately $460,000 per year in
connection with services it provides 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.
Unless funds are collected as a result of the litigation with Denison or
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 to fund continuing operations beyond March 1999 and to pay
off the NWO loan and accrued interest when due on March 31, 1999. Due to the
uncertainties regarding the outcome of the litigation and the Registrant's
ability to obtain additional financing to fund its future operations and
repay the amounts due to NWO, in the event the judgment is overturned on
appeal, there is substantial doubt about the ability of the Registrant to
continue as a
8
going concern. Accordingly, the Registrant's auditors have issued an opinion
on the Registrant's financial statements for the year ended March 31, 1998
that includes an explanatory paragraph discussing the uncertainty regarding
the Registrant's ability to continue as a going concern. The financial
statements do not contain any adjustments that may be necessary if the
Registrant is unable to continue as a going concern.
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.
In February 1998, 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, 1999. In addition, this
agreement allows the Registrant to draw an additional $350,000 in principal
for general working capital purposes and to defer further principal and
interest payments until maturity. Although these funds should be sufficient
to fund the litigation and limited operations through at least March 31,
1999, the Registrant will be required to obtain additional capital to fund
continuing operations beyond March 1999 and pay off the NWO loan and accrued
interest.
As of June 30, 1998, the outstanding loan balance was $902,636. Even if
payments were to resume under the Prinos Interest as calculated under the
terms of the amended License Agreement, the Registrant does not believe that
at current production and price levels, the Prinos Interest will generate
funds sufficient to repay the obligations owed to NWO by March 31, 1999.
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.
9
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 to determine whether any assets of Denison are
unencumbered and available for satisfaction of a final determination in favor
of the Registrant.
If the final determination is not favorable, the Registrant will still
be entitled to its Prinos Interest. However, even if the net profits interest
payments resume, 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 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.
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. In the final year of
production, Denison is entitled to 100% cost recovery; consequently, the
Registrant will not receive any payments for its net profits interest. In
anticipation of such, Denison ceased remitting net profits interest payments
to the Registrant. In response, the Registrant has notified the working
interest owner that this action is inappropriate prior to the formal
declaration to the Greek government of 1998 being the final year. Should the
consortium drill and successfully develop the new exploration prospects in
the offshore Greece property or otherwise extend the life of the property,
the Registrant would be entitled to once again receive its 15% net profits
interest.
If the litigation with Denison is resolved in the Registrant's favor and
payments are resumed under the Prinos Interest as calculated under the
License Agreement prior to the 1993 Amendment, that revenue should be
sufficient to repay the NWO loan and 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, if the
Registrant can expect to receive any future revenue from its Prinos Interest.
YEAR 2000 COMPLIANCE
The Registrant has conducted a review of its computer systems to
identify software that could be affected by the Year 2000 issue which results
from computer programs being written using two digits rather than four to
define the applicable year. Any computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, resulting in a major system failure or miscalculations. Since
1996, the Registrant has updated all of its computer
10
hardware and software with that which is Year 2000 compliant. Although the
Registrant believes it has identified the internal Year 2000 issues which
might impact operations, no assurance can be given that all such issues have
been identified or will be corrected. Additionally, no assurances can be
given that the Registrant's vendors, banks or other third parties will not
experience Year 2000 issues which may have a significant impact on the
Registrant's operations.
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 $6,100,000 including interest
to the Registrant for the period January 1, 1993 through December 13, 1996.
Second, the Court ordered Denison to make payments to the Registrant
subsequent to December 13, 1996, 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 plus interest.
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.
See the Registrant's Form 10-KSB for the fiscal year ended March 31,
1998, 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
Not applicable.
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
- -------------- --------------- --------
10.1 Management Agreement with Page 14 of the signed
San Miguel Valley Corporation original of this report
dated May 1, 1998
(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: August 10, 1998 /s/ Charles N. Haas
------------------ ------------------------------
Charles N. Haas
President
Date: August 10, 1998 /s/ Lori A. Brundage
------------------ ------------------------------
Lori A. Brundage
Treasurer and Chief Financial Officer