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, 1999
[ ] 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, 1999
9,916,154
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, 1999 March 31, 1999
------------- --------------
Cash $ 25,634 23,337
Receivables:
Affiliates 30,261 7,857
Other 1,680 1,680
----------- -----------
31,941 9,537
Prepaid expenses 5,460 1,552
----------- -----------
Total current assets 63,035 34,426
----------- -----------
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 (39,000,000) (39,000,000)
----------- -----------
-- --
Other assets 1,760 1,920
----------- -----------
$ 64,795 36,346
----------- -----------
----------- -----------
(Continued)
2
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
June 30, 1999 March 31, 1999
------------- --------------
Current liabilities:
Note payable to shareholder (note 3) $ 1,202,636 1,092,636
Accounts payable 179,055 179,038
Accounts payable to affiliate 60,000 60,000
United Kingdom taxes payable, including
accrued interest 485,043 490,403
Accrued expenses 198,553 172,809
----------- -----------
Total current liabilities 2,125,287 1,994,886
Deferred income taxes 22,022 22,022
----------- -----------
Total liabilities 2,147,309 2,016,908
----------- -----------
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 (2,857,969) (2,756,017)
----------- -----------
Total stockholders' deficit (2,082,514) (1,980,562)
----------- -----------
Contingencies (note 2)
$ 64,795 36,346
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
3
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
1999 1998
----------- -----------
Revenues:
Oil and gas sales - Greece (note 2) $ -- --
Other 141,690 111,156
--------- ---------
141,690 111,156
--------- ---------
Costs and expenses:
Interest and financing costs 29,206 23,544
Exploration expenses 2,730 2,387
Amortization and depreciation -- 47,500
General and administrative 211,706 179,199
--------- ---------
243,642 252,630
--------- ---------
Loss before income taxes (101,952) (141,474)
Income tax benefit -- 19,000
--------- ---------
Net loss $(101,952) (122,474)
--------- ---------
--------- ---------
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,
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss $(101,952) (122,474)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization and depreciation -- 47,500
Deferred income tax benefit -- (19,000)
Increase in accounts receivable and
due from affiliates (22,404) (12,537)
(Increase) decrease in prepaid expenses
and other assets (3,748) 660
Increase (decrease) in accounts payable
and accounts payable to affiliate 17 (5,096)
Increase in United Kingdom taxes payable,
including accrued interest payable,
and accrued expenses 20,384 50,346
--------- ---------
Net cash used in operating activities (107,703) (60,601)
Cash flows from financing activities:
Advances from notes payable to shareholder 110,000 60,000
--------- ---------
Net increase (decrease) in cash 2,297 (601)
--------- ---------
Cash at beginning of period 23,337 38,601
--------- ---------
Cash at end of period $ 25,634 38,000
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
5
OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 1999 which has been
derived from audited statements and the unaudited interim consolidated
financial statements included herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although 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 $6,111,101 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. The hearing before the
Ontario Court of Appeal was held on June 14 and 15, 1999. However, the
6
Ontario Court of Appeal has not as yet issued the final decision. While the
Registrant believes it has a reasonable probability of prevailing in its
action, the 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 December 1998, the Registrant was notified by Denison that April 1,
1998 through March 31, 1999 would be the final year of production for the
Prinos property. In the final year of production, Denison is entitled to 100%
cost recovery; consequently, the Registrant did not receive any net profits
interest payments for this period.
Effective March 31, 1999, the consortium operating the Greek properties
relinquished its license to operate the Prinos oil field in Greece. However,
the consortium retained its exploration rights in an area of the Aegean Sea
over which there has been an ongoing ownership dispute between Greece and
Turkey. Should the dispute be resolved and the consortium drill and
successfully develop any additional prospects, the Registrant would be
entitled to once again receive its 15% net profits interest, applicable to
Denison's working interest.
(3) NOTE PAYABLE TO SHAREHOLDER
Note payable to shareholder at March 31, 1999 and June 30, 1999
previously represented borrowings under a $2,000,000 line of credit
established in favor of the Registrant by NWO Resources, Inc. ("NWO"),
previously the parent company of International Hydrocarbons ("IH"), the
Registrant's majority stockholder. 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. In October 1998, the
line of credit was assigned from NWO to IH.
In April 1999, an Extension Agreement was executed with IH allowing the
Registrant to draw up to $1,500,000 as needed for working capital. In
addition, the Registrant is currently not required to make interest payments
to IH. Principal and accrued interest are due on demand by IH. In June 1999,
the remaining balance under the IH line of credit was replaced with a new
line of credit with NWO in which the Registrant is allowed to draw up to
$300,000 for general working capital purposes. Interest payments to NWO
calculated at the rate of 8.25% are due monthly. Principal is due upon demand
by NWO. This line of credit, although subordinate to that with IH, is also
secured by the Registrant's 15% net profits interest in the offshore Greece
oil and gas property and all proceeds from the pending litigation. Funds from
the NWO line of credit should be sufficient to fund the litigation and
limited operations through the final judgment by the Appellate Court;
however, the Registrant may be required to obtain additional capital to fund
continuing operations and pay off the IH and NWO loans and accrued interest
when due. 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 IH and NWO, there is
substantial doubt about the ability of the Registrant to continue as a going
concern in the event the judgment is overturned on appeal. Accordingly, the
Registrant's auditors have issued an opinion on the Registrant's financial
statements
7
for the year ended March 31, 1999 that includes an explanatory paragraph
discussing the uncertainty regarding the Registrant's ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As of June 30, 1999, the outstanding loan payable to IH was $1,202,636
and no amounts had been drawn under the line of credit with NWO. Since the
Consortium has declared final year with respect to the Prinos property and it
is unknown if or when further development in the exploration area in Greece
will be undertaken, it is unlikely that the Registrant will have sufficient
funds to repay the obligations owed to IH and NWO if demand is made before
the collection of any judgment or settlement from Denison.
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, 1999 or the year ended March 31,
1999.
The Registrant currently receives approximately $564,000 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.
Denison's curtailment of payments to the Registrant under the Prinos
Interest has resulted in the Registrant's inability to fulfill its financial
obligations as they become due and fund its operations over the longer term.
Consequently, the Registrant faces potential insolvency. Accordingly, the
Registrant's auditors have issued an opinion on the Registrant's financial
statements for the year ended March 31, 1999 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 under the Prinos Interest were suspended in 1994, the
Registrant funded its operations through draws against the line of credit
initially established with NWO. In October 1998, this line of credit was
transferred from NWO to IH, the Registrant's major shareholder. In April
1999, the Registrant executed an Extension Agreement with IH allowing the
Registrant to draw up to $1,500,000 for working capital purposes. Under the
terms of the Extension Agreement, the Registrant is currently not required to
make any principal or interest payments. However, all principal and interest
are due upon demand by IH. In June 1999, the remaining balance under the IH
line of
8
credit was replaced with a new line of credit with NWO in which the
Registrant is allowed to draw up to $300,000 for general working capital
purposes. Interest payments to NWO calculated at the rate of 8.25% are due
monthly. Principal is due upon demand by NWO. Funds from the NWO line of
credit should be sufficient to fund the litigation and limited operations
through the date of the final decision by the Appellate Court; however, the
Registrant may be required to obtain additional capital to fund continuing
operations and pay off the IH and NWO loans and accrued interest when due.
As of June 30, 1999, the outstanding loan payable to IH was $1,202,636
and no amounts had been drawn under the line of credit with NWO. Unless funds
are received from the judgment or a settlement with Denison or another source
of revenue is established, the Registrant will not be able to repay its
obligations to IH or NWO if either demands repayment.
As previously noted, net profits interest payments received by the
Registrant for January 1, 1993 through March 31, 1998 applicable to the
Prinos property are currently the subject of litigation. In June 1994, the
Registrant commenced legal action against Denison who has 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. The hearing
before the Ontario Court of Appeal was held on June 14 and 15, 1999. However,
the Ontario Court of Appeal has not as yet issued the final decision. 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.
If the final determination is not favorable, the Registrant will retain
its interest in the exploration area of the offshore Greece property.
However, there is significant uncertainty whether or not this area will ever
be developed due to territorial disputes. Consequently, the Registrant will
be required to obtain additional financing to repay the amounts due to IH and
NWO and fund its future operations. The Registrant may be forced to liquidate
its assets, and in such case, it is unlikely that any assets would be
available for distribution to shareholders.
9
In December 1998, the Registrant was notified by Denison that April 1,
1998 through March 31, 1999 would be the final year of production for the
Prinos property. In the final year of production, Denison is entitled to 100%
cost recovery; consequently, the Registrant did not receive any net profits
interest payments for this period.
Unless funds are collected as a result of the litigation with Denison,
the Registrant will be required to obtain additional capital to fund
continuing operations and to pay off the IH and NWO loans and accrued
interest when due. 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 IH and NWO, there is
substantial doubt about the ability of the Registrant to continue as a going
concern in the event the judgment is overturned on appeal. Accordingly, the
Registrant's auditors have issued an opinion on the Registrant's financial
statements for the year ended March 31, 1999 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.
If the litigation with Denison is resolved in the Registrant's favor and
funds are received as a result, that revenue should be sufficient to repay
the IH and NWO loans and fund on-going operations and limited new exploration
activities.
YEAR 2000 READINESS
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
any of the Registrant's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in system failures or miscalculations causing disruptions
of operations of the Registrant.
Since 1996, the Registrant has replaced all of its computer hardware and
software with that which is Year 2000 compliant. The cost associated with
these upgrades was not material.
Failure of third parties upon whom the Registrant's business relies to
timely remediate their Year 2000 Issues could adversely affect the
Registrant's operations. However, the major third parties with whom the
Registrant deals have indicated that they are addressing the Year 2000 Issue
and intend to have the matter resolved before December 1999.
The Registrant has not, to date, implemented a Year 2000 Contingency
Plan. However, the Registrant is prepared to develop and implement a
contingency plan should the status of any of the above change.
10
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 $6,111,101 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. The hearing before the Ontario Court of Appeal
was held on June 14 and 15, 1999. However, the Ontario Court of Appeal has
not as yet issued the final decision. 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,
1999, 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
Not applicable.
11
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 Promissory Note with NWO Page 13 of the signed original
Resources, Inc. dated June 30, 1999 of this report.
10.2 Security Agreement in favor of NWO Page 14 of the signed original
Resources, Inc. dated June 30, 1999 of this report.
(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 11, 1999 /s/ Charles N. Haas
------------------- ------------------------------
Charles N. Haas
President
Date: August 11, 1999 /s/ Lori A. Brundage
------------------- ------------------------------
Lori A. Brundage
Treasurer and Chief Financial Officer