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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended March 31, 1998.
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from __________ to __________. Commission file
number 0-6540.
OCEANIC EXPLORATION COMPANY
(Name of small business issuer in its charter)
DELAWARE 84-0591071
(State of Incorporation) (I.R.S. Employer Ident. No.)
5000 South Quebec Street, Suite 450, Denver, Colorado 80237
(303) 220-8330
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of class Name of exchange on which registered
COMMON STOCK ($.0625 PAR VALUE) NOT APPLICABLE
Securities registered under Section 12(g) of the Exchange Act:
NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Issuer's revenues for fiscal year ended March 31, 1998 $740,938
As of June 5, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average of the
bid and ask price on such date was $1,441,925.
As of June 5, 1998 the Registrant had outstanding 9,916,154 shares of common
stock ($.0625 par value).
An index of the documents incorporated herein by reference and/or annexed as
exhibits to this Report appears on pages 37 through 41.
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ITEM 1. BUSINESS
Oceanic Exploration Company (the "Registrant", also called the "Company" in some
parts of this Report, which terms include its subsidiaries) was incorporated in
1969 and is engaged in the business of acquiring oil and gas concessions
covering large blocks of acreage and in conducting exploration activities
thereon, including seismic and other geophysical evaluation and exploratory
drilling where appropriate. The Registrant conducts its operations directly or
through wholly-owned subsidiaries. The term "concession" is used herein to mean
exploration, development and production rights with respect to a specific area,
which rights may be created by agreement with a government, governmental agency
or corporation. When a discovery of oil or gas occurs, the Registrant will
pursue the development of reserves and the production of oil or gas to the
extent considered economically feasible and may finance development by farming
out or selling a portion of its interest in the discovery. The Registrant's
property interests are located in the North Aegean Sea, offshore Greece and in
the East China Sea. The Registrant has identified a prospect in Bolivia, has
prepared a preliminary plan for exploration, but is unable to proceed until
arrangements can be made with the current license holder. Since 1994, the
Registrant has not been able to participate in exploration and development,
other than limited activities in Bolivia to the extent that funding is
available, and has concentrated its efforts on the litigation regarding its
property interest in the North Aegean Sea. (SEE ITEM 2 "PROPERTIES-GREECE.")
The Registrant's only significant source of revenue, its 15% net profits
interest in certain oil and gas producing areas offshore Greece (also called
"Prinos Interest" in some parts of this Report), is currently the subject of
litigation. In June 1994, the Registrant commenced legal action against Denison
Mines, Ltd. ("Denison"), the company having the contractual obligation to pay
the Prinos Interest. The Registrant was seeking a declaration by the Ontario
Court of Justice (General Division) in Toronto, Canada (the "Court") that
amounts due the Registrant attributable to its Prinos Interest (SEE ITEM 2
"PROPERTIES-GREECE.") 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. 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 prospects for the Registrant continuing as a going concern
are dependent on obtaining a favorable determination in the appeal and
collection of such. 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 Registrant's financial statements for current revenue or damages, if any,
that may ultimately be awarded to the Registrant. (SEE ITEM 3 "LEGAL
PROCEEDINGS.") It should be noted that if the appeal by Denison is successful,
the Registrant will remain entitled to payment of the Prinos Interest calculated
in accordance with the terms of the License Agreement, as amended. The amounts
of such payments will be substantially lower than the payments received prior to
January 1, 1993.
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In January 1998, the Registrant was notified 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 anticipation of such, Denison has
ceased remitting monthly 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 this
being the final year. Should the consortium drill and successfully develop
additional exploration prospects in the offshore Greece property, the Registrant
would be entitled to once again receive its 15% net profits interest.
Upon commencement of the litigation, payments under the Prinos Interest were
suspended. The Registrant funded its operations through draws against the
$2,000,000 line of credit established with NWO Resources, Inc. ("NWO"), the
parent of the Registrant's principal stockholder. 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.
On September 19, 1995, the Registrant entered into a Modification Agreement with
NWO (the "Modification Agreement") modifying the existing line of credit
arrangement. The Modification Agreement provided for limited funding of
litigation expenses and relief from any collection actions by NWO until December
31, 1996. The Modification Agreement also allowed the Registrant to retain up
to $200,000 of any proceeds received from its Prinos Interest for general
working capital purposes. The Modification Agreement did not provide any
further funding for operating expenses of the Registrant other than limited
funding of the litigation with respect to the Prinos Interest.
On November 27, 1995, the Registrant received $810,522 from Denison representing
unpaid net revenues from the Prinos Interest. These revenues cover the period
from January 1, 1993 through October 31, 1995, and were calculated under the
terms of the 1975 license agreement between the Greek government and the
consortium operating the Prinos properties (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 Prinos 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 and paid NWO $610,522 on
November 30, 1995.
In January 1996, the Registrant raised $524,093, net of offering costs, from the
sale of 6,001,000 shares of its Common Stock (the "Rights Offering").
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 when due on March 31, 1999.
Due to the uncertainties regarding the outcome of the litigation and the
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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 going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As of March 31, 1998, the outstanding loan balance was $842,636. 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 business activities involve only one industry segment, oil and
gas exploration and development. Financial information relating to the
Registrant's business and an explanation of the same may be found in Items 6 and
7 of this Report.
The Registrant employs seven people, six of whom are full-time employees. The
full-time employees also provide services to two related entities pursuant to
management agreements entered into by the Registrant and those entities. (SEE
ITEM 12 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
The Registrant's principal executive offices are located at 5000 South Quebec
Street, Suite 450, Denver, Colorado 80237, and its telephone number is (303)
220-8330.
(a) MODE OF OPERATION
The Registrant has generally undertaken exploration of concessions through
various forms of joint arrangements with unrelated companies, whereby the
parties agree to share the costs of exploration, as well as the costs of and any
revenue from a discovery. Such arrangements do not always equate the proportion
of expenditures undertaken by a party with the share of revenues to be received
by such party.
The Registrant has usually obtained concessions directly from a government or
governmental agency and has then entered into arrangements with other
participants whereby the Registrant has received cash payments and has had its
share of exploration expenditures paid (either before or after being expended)
in whole or in part by other participants.
Since the Registrant's establishment, sales of partial interest in its
concessions have been part of its normal course of business and have provided
funds for the acquisition of further concessions and for exploration of existing
concessions.
In order to maintain its concessions in good standing, the Registrant is usually
required to expend substantial sums for exploration and, in many instances, for
surface rentals or other cash payments. Additionally, the development of any
discoveries made upon concessions in which the Registrant holds an interest
generally involve the expenditure of substantial sums of money. The Registrant
has, in the past, satisfied required expenditures on its concessions. The
Registrant cannot be certain that its revenues in the future will be sufficient
to satisfy expenditures required to be made on its
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concessions and continues to pursue other opportunities from alternative sources
which would enhance its liquidity.
(b) COMPETITION
The oil and gas industry is competitive, and the Registrant must compete with
many long-established companies having far greater resources and operating
experience. Furthermore, the demand for financing of oil and gas and mineral
exploration and development programs substantially exceeds the available supply,
and the Registrant competes with other exploration and development companies of
far greater means for the available funds. Because of the Registrant's
financial condition, the Registrant is not currently able to participate in
exploration and development activities.
ITEM 2. PROPERTIES
The Registrant holds various interests in concessions or leases for oil and gas
exploration which are listed below. Oil and gas property interests as reflected
in the accompanying financial statements include costs attributable only to the
Greek interest. Costs on all other foreign concessions described below have
been charged to expense in prior years.
GREECE: The Registrant has the right to receive proceeds from the Prinos
Interest payable by Denison from the proceeds of production of oil and gas from
certain concession areas totaling approximately 430,000 acres in the North
Aegean Sea, offshore Greece. "Development areas" for the Prinos Oil Field
covering 23,390 gross acres and for the Kavala Gas Field covering 11,787 gross
acres have been defined by the Greek government and given "development status."
The term of each "development" license is 26 years, with an automatic 10-year
renewal. The remaining exploration area adjoining Prinos and South Kavala
covers 153,316 acres and an exploration area east of the island of Thasos covers
an additional 243,367 acres. The Prinos Interest is subject to a lien in favor
of NWO, which lien secures payment of the amounts due to NWO by the Registrant.
Daily production from the Prinos/South Kavala Fields averaged 8,473 barrels of
oil and 122 tons of sulphur during the fiscal year ended March 31, 1998,
including production for Prinos North averaging 2,218 barrels of oil per day.
According to Denison's 1997 Annual Report, Denison's share of calendar year 1997
production decreased 15% from that of 1996. The decrease is primarily due to
normal production declines and an unexpected increase in the water cut from the
Prinos North well.
Due to high Greek income taxes and royalties in combination with declining
production levels, low oil prices and increasing operating costs, the consortium
believed that the Greek operation was at its economic break-even point. As a
result, Denison and its partners commenced negotiations in 1992 with senior
Greek government officials to obtain relief from the high level of government
taxes and royalties. On February 23, 1993, the consortium reached an agreement
with the Greek government resulting in an amendment to the License Agreement
known as Law 98/1975 which regulates the operation of the field. The amendment
was ratified by the Greek Parliament on June 23, 1993 and was retroactive to
January 1, 1993. The amendment provides for a sliding scale for both the cost
recovery factor and the Greek royalty interest based on the annual adjusted
gross income from
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operations on a calendar year basis. The new law also provides for a reduction
in the effective Greek income tax rate from 50% to 40%.
In addition, the new law required Denison and its partners to spend $15 million
during 1993 and 1994 in infill drilling in order to enhance the recoverability
of the hydrocarbons. In April 1996, the consortium signed another agreement
with the Greek government ("Second Supplemental Agreement") setting out the
terms under which the drilling at Prinos North was to proceed. This agreement
increased the Greek government's participating interest in Prinos North from 15%
to 35% and allows the consortium to recover $5.00 per barrel of Prinos North
crude produced for operating costs. In June 1996, the consortium received a
Ministerial Decision (the "Decision") from the Greek government allowing for the
write-off of up to $20,000,000 in capitalized costs associated with the drilling
activities at Prinos and Prinos North. The Greek government is allowing the
deduction of these costs from annual gross income before calculation of their
total share. In August 1996, production commenced in the Prinos North oil field
at 3,500 barrels per day. Denison has been calculating payment of the
Registrant's net profits interest after consideration of the Second Supplemental
Agreement and the Decision. The Registrant disagrees with this approach and has
notified Denison of such.
Denison, who has the contractual obligation to pay the Prinos Interest, has
asserted that the calculation of the amounts due the Registrant should be based
on the amended agreement with the Greek government. The amended agreement
provides for higher cost recoveries than the License Agreement before the 1993
amendment. If higher cost recoveries are used in calculating the amount due
under the Prinos Interest, the amount will be significantly lower than the
amount calculated under the License Agreement before the 1993 amendment. The
Registrant disagrees with this interpretation and commenced legal action seeking
a declaration by the Court that amounts due the Registrant attributable to its
Prinos Interest be calculated based on the terms of the License Agreement before
the 1993 amendment. The trial began in September 1996. In December 1996, the
Registrant received a favorable judgment from the Court. However, Denison has
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. In addition, if the Registrant obtains a final determination
against Denison, there is no assurance that the Registrant will be able to
collect the judgment if Denison's current financial condition weakens. (SEE
ITEM 3 "LEGAL PROCEEDINGS.")
When the legal action against Denison commenced, Denison suspended payments
under the Prinos Interest. Denison also asserted a counterclaim against the
Registrant for alleged past overpayments by Denison. On November 27, 1995, the
Registrant received $810,522 from Denison representing unpaid revenues on the
Prinos Interest. These revenues covered the period from January 1, 1993 through
October 31, 1995, and were 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.
In December 1995, Denison resumed monthly revenue payments to the Registrant for
its Prinos Interest as calculated under the terms of the amended License
Agreement.
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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 this being the final year.
Public information from Denison has disclosed that it has identified six new
prospects in the offshore Greece property. The consortium partners have
unanimously agreed to proceed with the drilling of two exploratory wells and
anticipate drilling may commence as early as June 1998. Any successful
drilling and completion of these new prospects could also extend the life of
Prinos and Prinos North and produce additional future revenue for the
Registrant. The Registrant would be entitled to once again receive its 15% net
profits interest.
There is no assurance as to how long the Prinos property will continue to
produce oil and gas or if the Registrant can expect any further revenue from its
Prinos Interest. 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.
REPUBLIC OF CHINA (TAIWAN): The Registrant holds a 22.23% working interest in a
concession located north of Taiwan in the East China Sea, covering 3,706,560
gross acres. The exploration license for this concession had a nominal term
extending to 1979, requiring exploration activity and minimum expenditures.
Preparations for initial exploratory drilling were suspended in 1977 under a
claim of force majeure, pending resolution of a territorial dispute among the
Republic of China (Taiwan), the Government of Japan and the People's Republic of
China. The Chinese Petroleum Corporation (Taiwan) has agreed to suspend
obligations under this concession until December 31, 1998.
During fiscal 1990, the Registrant entered into a farmout agreement with two
United Kingdom companies conveying two-thirds of its original 66.67% interest in
the concession.
Due to the uncertainty of sovereignty in the area, no immediate development
expenditures, as required under the terms of the concession agreement, are
anticipated.
In fiscal year 1994, the Registrant reported that the People's Republic of China
was indicating its intention to open up adjacent concession areas for bidding
and that a resolution to the sovereignty issues may result. Nothing has
occurred in fiscal year 1998 to indicate that the lifting of the current force
majeure status is imminent.
BOLIVIA: The Registrant has conducted a preliminary exploration study of a
10,500 square kilometer area located in the eastern part of the country near the
Paraguayan border, pursuant to a work study
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program with Y.P.F.B., the government-controlled agency having responsibility
for oil and gas exploration in Bolivia. The Registrant had preliminarily agreed
to the terms of an operations contract pertaining to such area; however, prior
to reaching agreement with Y.P.F.B., the hydrocarbons law was changed to give
the National Secretariat of Energy jurisdiction over oil and gas exploration.
Pursuant to the new law, the area was offered for competitive bidding. The
Registrant was unsuccessful in the bidding process. However, the Registrant
intends to monitor future exploration and development of this area with hopes of
obtaining a farm-out from the company ultimately awarded the bid.
ITEM 3. LEGAL PROCEEDINGS
The Registrant has commenced an action in the Ontario Court (General Division),
Canada, against Denison. The Registrant claims that Denison has failed since
January 1, 1993 to pay the Registrant the full amount of the Prinos Interest
(including Prinos North) pursuant to an agreement dated August 30, 1976, which
is to be calculated on the basis of the terms of the License Agreement.
The Registrant has claimed the following relief in the action:
1. a constructive trust or equitable lien over funds received by Denison
representing the unpaid portion of the Prinos Interest;
2. a vendor's lien over assets purchased by Denison from the Registrant
including Denison's interest in the License Agreement; and
3. $27,000,000.00 or alternatively, an accounting and payment of the
Prinos Interest in respect of the period commencing January 1, 1993.
Denison has defended the action on the basis that the Registrant is not entitled
to the payment claimed, and is entitled only to payment of the Prinos Interest
calculated in accordance with the terms of the License Agreement as amended by
an agreement with the Greek State dated February 23, 1993.
Denison counterclaimed for the repayment of the sum of $4,747,811 that it
alleged it mistakenly paid to the Registrant as part of the Prinos Interest
during the period from January 1, 1989, to December 31, 1993. On November 27,
1995, the Registrant received unpaid revenues on the Prinos Interest for the
period from January 1, 1993 through October 31, 1995, 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 has resumed
monthly revenue payments to the Registrant for its Prinos Interest as calculated
under the terms of the amended License Agreement.
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The trial, which began on September 30, 1996, was concluded two weeks later. On
December 13, 1996, the Registrant received notification that the Court 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 requesting that the judgment be set aside based on its belief that the
trial judge erred in her interpretation of the respective contracts. As a
result, any orders for the payment of money are stayed pending the appeal. An
appeal would likely be heard during 1999. A further appeal to the Supreme Court
of Canada is possible.
The Registrant's legal counsel, Osler, Hoskin & Harcourt in Toronto, Canada, is
unable to advise as to the probable outcome of the appeal by Denison.
Management's decision to pursue a legal action against Denison was based on
management's review of information provided to the Registrant by Denison and
oral discussions with legal counsel. Based on that information and those
discussions, management continues to believe that there is a reasonable
probability of success in the litigation. Litigation is inherently uncertain
and there is no assurance as to the final outcome. The Registrant has not
received a written determination from its legal counsel with respect to the
litigation.
Enforcement of a judgment in Ontario is generally carried out by seizure and
sale of assets, garnishment of debts, or appointment of a receiver. 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 was 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK: Subject to the rights of holders of any series of Preferred Stock
which may from time to time be issued, holders of Common Stock are entitled to
one vote per share on matters acted upon at any shareholders' meeting, including
the election of directors, and to dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. There is no
cumulative voting and the Common Stock is not redeemable. In the event of any
liquidation, dissolution or winding up of the Registrant, each holder of Common
Stock is entitled to share ratably in all assets of the Registrant remaining
after the payment of liabilities and any amounts required to be paid to holders
of Preferred Stock, if any. Holders of Common Stock have no preemptive or
conversion rights and are not subject to further calls or assessments by the
Registrant. All shares of Common Stock now outstanding are and will be fully
paid and non-assessable.
The Registrant's Common Stock is not currently listed on any exchange. The
Registrant has secured a broker-dealer to serve as a market maker for trades in
its Common Stock. In addition, the Registrant's Common Stock is quoted on the
OTC Bulletin Board under the symbol OCEX.U.
Per the OTC Bulletin Board, the range of bid prices in the Registrant's Common
Stock over the last two fiscal years (which are not necessarily representative
of actual transactions) are set out below.
<TABLE>
<CAPTION>
Three Months Fiscal 1998 Fiscal 1997
Ended High Low High Low
-------------- ----------- -----------
<S> <C> <C> <C> <C>
June 30 .55 .50 .16 .15
September 30 .55 .40 .19 .16
December 31 .44 .38 .20 .19
March 31 .44 .40 .50 .40
</TABLE>
The Registrant uses all available funds for working capital purposes and has
never paid a dividend. Registrant's management does not anticipate paying
dividends in the future. As of June 5, 1998, the number of record holders of
the Registrant's common stock was 476.
PREFERRED STOCK: The Board of Directors of the Registrant, without further
action by the stockholders, is authorized to issue the shares of Preferred Stock
in one or more series and to determine the voting rights, preferences as to
dividends, and the liquidation, conversion, redemption and other rights of each
series. The issuance of a series with voting and conversion rights may
adversely affect the voting power of the holders of Common Stock. The issuance
of Preferred Stock
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may have the effect of delaying, deferring or preventing a change in control of
the Registrant without further action by the shareholders. The Registrant has
no present plans to issue any shares of Preferred Stock.
TRANSFER AGENT: The Registrant's Transfer Agent is Chase Mellon Shareholder
Services, 400 South Hope Street, Fourth Floor, Los Angeles, California
90071-3401.
ITEM 6. MANAGEMENT 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. During the year ended March 31, 1996, the Registrant recorded
approximately $36,700 of revenue from the sale of seismic data. There were no
sales of seismic data during the years ended March 31, 1998 or 1997.
The Registrant currently receives approximately $306,000 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.
Denison's curtailment of payments to the Registrant under the Prinos Interest
have 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, 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 under the Prinos 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 relief
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from any collection actions by NWO until December 31, 1996. The Modification
Agreement also allowed the Registrant to retain up to $200,000 of any proceeds
received from its Prinos Interest for general working capital purposes.
On November 27, 1995, the Registrant received $810,522 from Denison representing
unpaid revenues, net of related Greek income taxes, on the Prinos Interest.
These revenues cover 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 Prinos
Interest as calculated under the terms of the amended License Agreement.
Pursuant to the Modification Agreement with NWO, the Registrant retained
$200,000 of the payment 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 principal.
In February 1996, the Registrant raised $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 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 March 31, 1998, the outstanding loan balance was $842,636. 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
12
<PAGE>
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 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 this 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.
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 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.
13
<PAGE>
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.
RESULTS OF OPERATIONS
The Registrant reported net losses of $222,323 and $219,274 for the years ended
March 31, 1998 and 1997, respectively, and net income of $396,166 for the year
ended March 31, 1996.
The following table summarizes the primary components of changes in net income
before the provision for income taxes for the relevant periods:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Calculation of Greek
revenues (1) $ 51,200 (122,700) 861,500
Greek revenues received in 1996
applicable to prior years -- (895,000) 895,000
Production (decline) increase (1) (442,600) 226,500 (217,000)
Price (decrease) increase (1) (127,400) 157,900 38,000
Reduction (increase) in
depreciation and
depletion charges (210,192) (40,030) (62,924)
Increase (reduction) in
other revenues 14,087 (185,389) 165,650
Other 125,539 (23,522) 120,841
--------- ---------- ------------
Decrease in income
before taxes $(589,366) $(882,241) $(1,801,067)
--------- ---------- ------------
--------- ---------- ------------
</TABLE>
(1) Based upon information received from the operator.
The most significant factors in the fluctuations of net income between the
periods are Denison's suspension of revenues in 1994 followed by receipt of
unpaid revenues for January 1, 1993 through October 31, 1995 in November 1995
(SEE ITEM 2 "PROPERTIES-GREECE"), variances in oil and gas prices
14
<PAGE>
received, and production declines from the Prinos and South Kavala fields in
Greece, offset in part by a production increase in 1997 due to the successful
completion of Prinos North and recent infill drilling programs. (SEE ITEM 2
"PROPERTIES-GREECE.") The provision for depletion increased from $296,613 in
1996 to $336,643 in 1997 to $546,835 in 1998 as a result of reductions in the
estimated future net revenues attributable to the Prinos Interest. The
provision for depletion in 1998 includes an additional amount to reduce the
carrying value of the Prinos Interest to the Registrant's estimate of the
remaining future net revenues attributable to the Prinos Interest.
Fluctuations in other revenues are primarily attributable to interest income
from Denison in 1996 relating to unpaid revenues, management fees (SEE ITEM
12 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS") and receipts from sales
of seismic data and investments in 1996.
The provision for income taxes in fiscal 1998 decreased approximately $586,000
from the fiscal 1997 provision due to a decrease in Greek income taxes
corresponding to the decrease in Greek oil and gas revenues recorded and the
1998 provision for federal income taxes.
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 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C>
Independent Auditors' Report 17
Consolidated Balance Sheets 18
Consolidated Statements of
Operations and Accumulated Deficit 19
Consolidated Statements of
Cash Flows 20
Notes to Consolidated Financial Statements 21-28
</TABLE>
15
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
16
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
OCEANIC EXPLORATION COMPANY:
We have audited the accompanying consolidated balance sheets of Oceanic
Exploration Company and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of operations and accumulated deficit and cash
flows for each of the years in the three-year period ended March 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly the financial position of Oceanic Exploration Company and subsidiaries as
of March 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended March 31, 1998 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Oceanic Exploration Company and subsidiaries will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company's inability to generate sufficient cash flow to sustain operations and
service its debt raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also disclosed in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Denver, Colorado
May 22, 1998
17
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
Cash $ 38,601 201,715
Accounts receivable 3,006 2,551
Due from affiliates 5,753 2,904
Prepaids and other 1,482 1,428
----------- ----------
Total current assets 48,842 208,598
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 (38,810,000) (38,263,165)
----------- ----------
190,000 736,835
Other assets 2,560 -
----------- ----------
$ 241,402 945,433
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Notes payable to affiliate (note 3) $ 842,636 874,474
Accounts payable 210,338 187,767
Accounts payable to affiliates 60,000 60,000
United Kingdom taxes payable, including
accrued interest 486,959 456,337
Accrued expenses 67,353 78,286
----------- ----------
Total current liabilities 1,667,286 1,656,864
Deferred income taxes 102,735 594,865
----------- ----------
Total liabilities 1,770,021 2,251,729
Stockholders' deficit (note 4):
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 (2,304,074) (2,081,751)
----------- ----------
Total stockholders' deficit (1,528,619) (1,306,296)
----------- ----------
Commitments and contingencies (notes 1, 2 and 6)
$ 241,402 945,433
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Oil and gas sales (note 2) $ 425,094 943,895 1,577,222
Other (note 6) 315,844 301,757 487,145
--------- --------- ---------
740,938 1,245,652 2,064,367
--------- --------- ---------
Costs and expenses:
Interest and financing costs 90,567 116,117 167,494
Exploration expenses 31,392 13,464 18,466
Amortization and depreciation 546,835 336,643 296,613
General and administrative 616,559 734,477 654,602
--------- --------- ---------
1,285,353 1,200,701 1,137,175
--------- --------- ---------
(Loss) income before income taxes (544,415) 44,951 927,192
Income tax benefit (expense) (note 5) 322,092 (264,225) (531,026)
--------- --------- ---------
Net (loss) income (222,323) (219,274) 396,166
Accumulated deficit at beginning of (2,081,751) (1,862,477) (2,258,643)
year --------- --------- ---------
Accumulated deficit at end of year $(2,304,074) (2,081,751) (1,862,477)
--------- --------- ---------
--------- --------- ---------
(Loss) income per common share $(.02) (.02) .09
--- --- ---
--- --- ---
Weighted average number of common
shares outstanding 9,916,154 9,916,154 4,259,474
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(222,323) (219,274) 396,166
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Amortization and depreciation 546,835 336,643 296,613
Deferred income tax benefit (492,130) (113,333) (99,864)
(Increase) decrease in accounts receivable
and due from affiliates (3,304) (2,007) 8,422
Decrease in restricted cash - - 15,629
(Increase) decrease in prepaid expenses
and other assets (2,614) 72 3,604
Increase (decrease) in accounts payable 22,571 (44,596) 50,484
Increase (decrease) in United Kingdom
taxes payable, including accrued interest
payable, and accrued expenses 19,689 35,287 (109)
Decrease in other noncurrent liabilities - - (15,217)
------- ------- -------
Net cash (used in) provided by
operating activities (131,276) (7,208) 655,728
------- ------- -------
Cash flows from financing activities:
Repayments to affiliate, net (31,838) (433,727) (691,799)
Proceeds from common stock issued pursuant to
rights offering, net of offering costs - - 524,093
------- ------- -------
Net cash used in financing activities (31,838) (433,727) (167,706)
------- ------- -------
Net (decrease) increase in cash (163,114) (440,935) 488,022
Cash at beginning of year 201,715 642,650 154,628
------- ------- -------
Cash at end of year $ 38,601 201,715 642,650
------- ------- -------
------- ------- -------
Interest paid $ 52,226 95,459 144,412
------- ------- -------
------- ------- -------
Foreign income taxes paid $ 178,000 369,467 630,890
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Oceanic Exploration Company (the Company) is principally engaged in a
worldwide search for oil and gas reserves. The Company's investment
in oil and gas properties consists primarily of a non-operated net
profits interest in proven reserves offshore Greece. Substantially
all oil production from the offshore Greece property is sold 50% to
the Greek national refinery and 50% to BP-France based on prices
determined by reference to current world oil prices as specified by
contracts signed by the operator with both customers. Amounts payable
to the Company for its net profits interest are remitted in U.S.
dollars.
(b) GOING CONCERN BASIS OF PRESENTATION
The financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. Several
factors, described below, raise substantial doubt about the ability of
the Company to continue as a going concern.
Currently, the Company's operations are not generating sufficient cash
flow to fund operations and service the Company's debt obligations.
As a result, the Company has been economically dependent upon NWO
Resources, Inc. (NWO) to provide financing for the Company under a
line of credit. NWO is the parent corporation of the Company's
majority stockholder, International Hydrocarbons.
In December 1996, a judgment in the trial concerning the Company's net
profits interest was issued in the Company's favor (see note 2).
However, the defendant appealed the court decision, and it appears
that the final determination will be made by the Appellate Court.
In January 1998, the Company was notified by the working interest
owner that 1998 may be the final year of production for the Greek
properties. In the final year of production, the working interest
owner is entitled to 100% cost recovery; consequently, the Company
will not receive any payments for its net profits interest in the
final year. In anticipation of such, the working interest owner
responsible for payment of the Company's net profits interest has
ceased remitting monthly payments to the Company. In response, the
Company has notified the working interest owner that this action is
inappropriate prior to the formal declaration to the Greek government
of this being the final year.
If the litigation is resolved in the Company's favor and the Company
is successful in collecting or enforcing the judgment, these funds
should be sufficient to support on-going operations. If the judgment
is overturned on appeal, the Company will retain its interest in the
offshore Greece property. However, there is significant uncertainty
whether the net profits interest payments will resume, and even if
they do resume, it is uncertain if the payments will be sufficient to
repay the obligations to NWO.
21
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Although funds available under the NWO line of credit should be
sufficient to fund the litigation and limited operations through March
31, 1999, in the event the judgment is overturned, the Company 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 Company's ability to obtain additional financing to repay the
amounts due to NWO and fund its future operations, in the event the
judgment is overturned there is substantial doubt about the ability of
the Company to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of
this uncertainty.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned domestic and foreign subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(d) OIL AND GAS PROPERTIES
Oil and gas properties are accounted for using the full-cost method of
accounting in accordance with the rules prescribed by the Securities
and Exchange Commission (SEC). Under this method, all acquisition,
exploration and development costs are capitalized on a
country-by-country basis as incurred. Gains or losses on disposition
of oil and gas properties are recognized only when such dispositions
involve significant reserves within the individual country cost pools.
Capitalized costs less related accumulated amortization may not exceed
the sum of (1) the present value of future net revenue from estimated
production, computed using current prices and costs and a discount
rate of 10%; plus (2) the cost of properties not being amortized, if
any; plus (3) the lower of cost or fair value of unproved properties
included in costs being amortized; less (4) income tax effects related
to differences in the book and tax basis of oil and gas properties.
Any excess costs are recorded as additional depletion expense.
The Company's offshore Greece oil and gas property interests represent
a 15% net profits interest in such properties. Accordingly, depletion
of oil and gas properties is computed using the future net revenue
method. Depletion expense has been calculated based on the Company's
estimate of the revenue due for its net profits interest (see note 2).
22
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The rate of depreciation, depletion and amortization as a percentage
of gross revenue (net of Greek income taxes) for Greece is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Greece 214% 59% 31%
</TABLE>
Because the Company's interest in the offshore Greece oil and gas
property is a net profits interest and not a working interest, the
Company is only entitled to receive information regarding current
monthly production quantities and net revenue. Consequently, certain
reserve information regarding the operations of the property is
unavailable to the Company (see note 7).
The cost of undeveloped properties is excluded from amortization
pending a determination of the existence of proved reserves. Such
undeveloped properties are assessed periodically for impairment. The
amount of impairment, if any, is added to the costs to be amortized.
At March 31, 1998 and 1997, all capitalized costs were subject to
amortization.
(e) INCOME TAXES
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES.
Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in operations in the period
that includes the enactment date.
(f) INCOME (LOSS) PER SHARE
Income (loss) per share is based on the weighted average number of
common shares outstanding during the period.
(g) ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
23
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(2) OIL AND GAS SALES
Effective January 1, 1993, the operator of the Greek properties negotiated
an agreement with the Greek government which amended the original 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. The working interest owner who has the contractual
obligation to the Company for the 15% net profits interest asserted that
the calculation of the amounts due to the Company should be based on the
amended agreement with the Greek government. The Company 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 Company attributable to its 15% net
profits interest be calculated based on the terms of the license agreement
before this amendment. In December 1996, the Company received notification
that the Court had rendered a judgment in the Company's favor. The Court
ordered the working interest owner to pay approximately $6,100,000
including interest to the Company for the period from January 1, 1993
through December 13, 1996 and to make payments to the Company subsequent to
December 13, 1996 also based on the terms of the original license
agreement. The Court also awarded court costs to the Company which are
anticipated to be approximately $107,000 plus interest. 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 Company 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
revenues or damages, if any, that may ultimately be awarded to the
Company.
In response to the legal action, the working interest owner had ceased
remitting payment to the Company. In November 1995, the Company received a
payment representing unpaid revenue for the royalty interest from
January 1, 1993 through October 31, 1995. 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.
Oil and gas sales revenue for the year ended March 31, 1996 included
$682,503 in respect of the royalty interest for the current year, while
$894,719 related to unpaid revenue relating to prior years.
In January 1998, the Company was notified by the working interest owner
that 1998 may be the final year of production for the Greek properties. In
the final year of production, the working interest owner is entitled to
100% cost recovery; consequently, the Company will not receive any payments
for its net profits interest in the final year. In anticipation of such,
the working interest owner responsible for payment of the Company's net
profits interest has ceased remitting monthly payments to the Company. In
response, the Company has notified the working interest owner that this
action is inappropriate prior to the formal declaration to the Greek
government of this being the final year. The working interest owner has
advised the Company that in the event they do not declare this to be the
final year of production, the maximum net profits interest which would be
paid to the Company is estimated to be $190,000, net of Greek income taxes.
Therefore, the Company has increased its provision for depletion to reduce
the carrying value of the Greece properties to the amount it expects to
receive. 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 Company would be entitled to once
again receive its 15% net profits interest.
24
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(3) NOTES PAYABLE TO AFFILIATE
Notes payable to affiliate represents borrowings under a line of credit
with NWO. The NWO line of credit provides for cumulative draws of up to
$2,000,000 with interest payable monthly on the outstanding principal
balance at the greater of the U.S. bank prime lending rate or 1 3/4% above
the 30-day LIBOR. Borrowings under the line of credit are secured by the
Company's 15% net profits interest in the offshore Greece oil and gas
property and all proceeds from the pending litigation (see note 2).
In September 1995, the Company entered into a Modification Agreement with
NWO concerning the line of credit. The Modification Agreement provided
that NWO would forebear 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 Company was required to pursue funding
from the sale of additional shares of its common stock, which offering was
completed (see note 4).
In December 1996, an Extension Agreement was executed extending the period
of time during which NWO would forebear 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 allowed the Company to retain 50% of all net profits interest
payments received from Denison, with the remaining amount payable to NWO.
In February 1998, a third extension agreement was executed extending the
forbearance period until March 31, 1999. This agreement allows the Company
to draw an additional $350,000 for general working capital purposes and to
defer all interest payments until maturity.
(4) COMMON STOCK
In January 1996, the Company issued 6,001,000 shares of common stock
pursuant to a rights offering for proceeds of $524,093, net of offering
costs. Each shareholder was offered the right to purchase 1.5325 shares of
additional common stock for each share of common stock owned as of the
record date at the price of $.10 per share. The Company used the proceeds
to reimburse NWO for advances of legal fees and accrued interest thereon,
and retained the remainder to fund its operations.
The Company adopted an incentive plan in June 1976 which reserved 500,000
shares of common stock for stock options and 200,000 shares for stock
grants to be awarded to Company officers, directors, and employees,
including certain eligible consultants. At March 31, 1998, no stock
options or grants were outstanding. At that date, 223,500 shares were
available for future stock option awards and 115,626 shares were available
for future stock grants.
25
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(5) INCOME TAXES
Income tax benefit (expense) consists of the following:
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Foreign - Greece $(170,038) (377,558) (630,890)
------- ------- -------
Deferred:
Foreign - Greece 218,734 134,658 118,664
U.S. federal 273,396 (21,325) (18,800)
------- ------- -------
Total deferred income
tax benefit 492,130 113,333 99,864
------- ------- -------
Total income tax benefit
(expense) $ 322,092 (264,225) (531,026)
------- ------- -------
------- ------- -------
</TABLE>
The reconciliation between tax expense computed by multiplying pretax income by
the U.S. federal statutory tax rate of 34% and the reported amount of income tax
expense is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed at U.S. statutory tax rate $ 185,101 (15,283) (315,246)
Effect of Greek operations, including
foreign tax credits (136,405) (227,617) (196,980)
Adjustment of taxes provided in prior
years and other, net 273,396 (21,325) (18,800)
------- ------- -------
Income tax benefit (expense) $ 322,092 (264,225) (531,026)
------- ------- -------
------- ------- -------
</TABLE>
Greek income taxes are withheld from oil and gas revenue payments to the
Company. The effective Greek income tax rate applicable to the Company's 15%
net profits interest was reduced from 50% to 40% effective January 1, 1993 with
respect to existing development areas. The 50% tax rate remains effective for
areas outside the current development area.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the deferred tax liability at
March 31, 1998 and 1997 relate primarily to the Greece oil and gas property
interest.
(6) RELATED PARTY TRANSACTIONS
The Company provides management services under a cost sharing arrangement to
Cordillera Corporation (Cordillera), the beneficial controlling shareholders of
the Company, and to San Miguel Valley Corporation (SMVC), an affiliate of
Cordillera, under agreements providing for reimbursement of costs for actual
time and expenses incurred on Cordillera and SMVC
26
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
activities. In 1998, 1997, and 1996, such reimbursements amounted to
approximately $306,000, $278,000, and $322,000, respectively, and have been
included as other revenue in the accompanying consolidated statements of
operations.
Cordillera has a defined contribution pension plan and a 401(k) plan
covering all qualified employees of the Company. Contributions to the
pension plan are based on a percentage of employee compensation ranging
from 6% to 11.7%. The Company is required to match employee contributions
to the 401(k) plan to the extent of 6% of annual compensation. During
1998, 1997, and 1996, the Company recorded $50,468, $39,886, and $36,748,
respectively, as pension expense under these plans.
The Company leases 2,562 square feet of space in an office building owned
by Sorrento West Properties, Inc., a company indirectly owned and
controlled by an officer and director of the Company. Rent payments were
$42,380 for 1998, $29,463 for 1997 and $26,675 for 1996. Future minimum
lease payments are $43,554 and $39,925 for 1999 and 2000, respectively.
(7) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following information is presented in accordance with Statement of
Financial Accounting Standards No. 69, DISCLOSURE ABOUT OIL AND GAS
PRODUCING ACTIVITIES, (SFAS No. 69).
(a) OIL AND GAS REVENUE
Results of operations from oil and gas producing activities in Greece
for the fiscal years ended March 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Oil and gas sales $ 425,094 943,895 1,577,222
Amortization and depreciation (546,835) (336,643) (296,613)
Greek income taxes paid (170,038) (377,558) (630,890)
------- ------- -------
$(291,779) 229,694 649,719
------- ------- -------
------- ------- -------
</TABLE>
The Company's gross revenues are burdened only by Greek income taxes. The
Company has no production costs since its property interest is a net
profits interest.
27
<PAGE>
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(7) SUPPLEMENTAL FINANCIAL DATA - OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED),
(CONTINUED)
(b) INFORMATION REGARDING PROVED OIL AND GAS RESERVES
The Company's interest in the oil and gas property offshore Greece consists
of a contractual right to receive a 15% "net profits interest." Because
the Company has a net profits interest and not a working interest in this
property, the Company is only entitled to receive information regarding
current monthly production quantities and net revenue. Consequently,
certain information regarding the operations of the property is unavailable
to the Company. Therefore, the Company is not in a position to estimate
the potential future production and/or present value of future net revenues
attributable to its Greek property.
28
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names and ages of the members of the
Registrant's Board of Directors and its executive officers, and sets forth the
position with the Registrant held by each:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James Neal Blue 63 Director; Chairman of the Board and Chief
Executive Officer of the Registrant
Charles N. Haas 60 Director and President of the Registrant
John L. Redmond 67 Director and Vice President, International
Exploration of the Registrant
Gene E. Burke, M.D. 68 Director
Sidney H. Stires 68 Director
Janet A. Holle 47 Vice President/Secretary of the Registrant
Lori A. Brundage 34 Treasurer and Chief Financial Officer of the
Registrant
</TABLE>
Directors of the Registrant hold these positions until their respective
successors are elected and qualified. The current directors, except for John L.
Redmond, were elected in 1982 and no meeting of the stockholders has been held
since that date. Mr. Redmond was appointed in 1994 by the remaining directors
to fill a vacancy on the Board of Directors.
JAMES N. BLUE. Mr. Blue has been a director and officer of the Registrant since
1981. He is also Chairman of General Atomics in San Diego, California and
President of Cordillera Corporation in Denver, Colorado.
CHARLES N. HAAS. Mr. Haas has been a director and officer of the Registrant
since 1981.
29
<PAGE>
JOHN L. REDMOND. Mr. Redmond has been a director of the Registrant since 1994.
He has been Vice President, International Exploration of the Registrant since
1990.
GENE E. BURKE, M.D.. Dr. Burke has been a director of the Registrant since
1972. He has been a physician in sole practice in Houston, Texas during that
time.
SIDNEY H. STIRES. Mr. Stires has been a director of the Registrant since 1980.
During that time Mr. Stires has been the President of Stires, O'Donnell & Co.,
Inc., an investment banking company in New York, New York.
JANET A. HOLLE. Ms. Holle has been an officer of the Registrant since 1987.
LORI A. BRUNDAGE. Ms. Brundage has been an officer of the Registrant since
1996. Since 1991, she has held the positions of Accounting Manager and Senior
Accountant for the Denver Technological Center, a real estate development
company in Denver, Colorado.
30
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following information summarizes compensation paid by Registrant to James N.
Blue, Chief Executive Officer and Charles N. Haas, President.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payout
------ ------------ ------ ------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Fiscal Annual Restric-
and Year Compen- ted Stock LTIP All Other
Principal Ended Salary Bonus sation Award(s) Options/ Payouts Compensa-
Position March 31 ($) ($) ($) ($) SARs (#) ($) tion ($)
-------- ----- -- --- --- --- --- -------- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James N. Blue 1998 60,000 (1) - - - - - -
Chairman of 1997 60,000 (1) - - - - - -
the Board 1996 60,000 (1) - - - - - -
and Chief
Executive
Officer
Charles N. Haas 1998 157,956 (2) 25,000 (3) - - - - 23,836 (2)(4)
President 1997 158,086 (2) - - - - - 21,988 (2)(4)
1996 158,886 (2) - - - - - 21,562 (2)(4)
</TABLE>
(1) Monthly officer's fee of $5,000.
(2) A portion of the salary and compensation paid to Mr. Haas has been
reimbursed based on cost sharing arrangements with other companies.
(SEE ITEM 12 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
(3) A $25,000 bonus originally awarded by the Board of Directors in 1983
was paid in August 1997.
(4) The Registrant is a participant in the Cordillera and Affiliated
Companies' Money Purchase Pension Plan and 401(k) Plan, covering all
qualified employees of the Registrant. The pension plan is a
non-contributory defined contribution plan. Registrant contributions
to this plan are based on 6% of total compensation not exceeding the
limit established annually for the Federal Insurance Contribution Act
(FICA) and 11.7% of compensation in excess of this limit up to a
maximum of $160,000. Vesting begins after two years of service at a
rate of 20% annually with full vesting subsequent to five years of
service or upon retirement, death or permanent disability. The 401(k)
plan provides for discretionary employee contribution of up to 10% of
annual pre-tax earnings, subject to the maximum amount established
annually under Section 401(k) of the Internal Revenue Code. The
Registrant is required to match contributions to the extent of 6% of
annual employee compensation. Employer contributions to the plan vest
immediately.
Members of Registrant's board of directors who are not employees of the
Registrant or any of its affiliates receive directors' fees of $500 per month.
Members of the board of directors who are
31
<PAGE>
employees do not receive directors' fees. Mr. Blue receives a monthly fee of
$5,000 for services as an officer of the Registrant.
There are no employment contracts outstanding at this time. In fiscal 1983, the
Board of Directors authorized a bonus of $25,000 to the president of the
Registrant, which was paid in August 1997.
The Registrant has no compensation committee. James N. Blue and Charles N. Haas
participated in all deliberations concerning executive officer compensation.
32
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 5, 1998 there were issued and outstanding 9,916,154 shares of Common
Stock, which are the Registrant's only class of voting securities. Holders of
Common Stock are entitled to one vote per share on each matter upon which
shareholders may be entitled to vote.
The following table sets forth information regarding shares of Common Stock of
the Registrant beneficially owned as of June 5, 1998 by: (i) each person known
by the Registrant to beneficially own 5% or more of the outstanding Common
Stock, (ii) each director, (iii) each person named in the summary compensation
table and (iv) all officers and directors as a group.
<TABLE>
<CAPTION>
Nature of Percentage of
Names and Addresses of Officers, Amount of Beneficial Voting
Directors and Principal Shareholders Common Stock Ownership Securities
--------- --- --------- ------------ ------------ --------- ----------
<S> <C> <C> <C>
Allen & Company 824,200 Sole voting and 8.3 %
and various affiliates (1) investment power
711 Fifth Avenue
New York, NY 10022
International Hydrocarbons (2) 4,912,178 Sole voting and 49.5 %
c/o John E. Jones investment power
5000 S. Quebec Street, Suite 450
Denver, CO 80237
International Cordillera Limited 545,800 Sole voting and 5.5 %
c/o WITC investment power
8082 S. Niagara Way
Englewood, CO 80112
James N. Blue (3) (4) None N/A N/A
5000 S. Quebec St., Suite 450
Denver, CO 80237
Charles N. Haas (3) None N/A N/A
5000 S. Quebec St., Suite 450
Denver, CO 80237
Sidney H. Stires (3) 30,000 As Trustee less than 1 %
12 East 44th Street
New York, NY 10017
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Nature of Percentage of
Names and Addresses of Officers, Amount of Beneficial Voting
Directors and Principal Shareholders Common Stock Ownership Securities
--------- --- --------- ------------ ------------ --------- ----------
<S> <C> <C> <C>
Gene E. Burke, M.D. (3) None N/A N/A
3555 Timmons, # 680
Houston, TX 77027
John L. Redmond (3) None N/A N/A
5000 S. Quebec St., Suite 450
Denver, CO 80237
All Directors and Officers 30,000 less than 1 %
as a group (7 persons)
</TABLE>
(1) The information regarding Common Stock owned by Allen & Company is based
on the information contained in the Amendment No. 1 to Schedule 13D
dated April 20, 1987 filed by the persons and entities identified below,
which reports the following ownership of the Common Stock (not adjusted
for the issuance of 6,001,000 shares of Common Stock pursuant to the
Rights Offering):
<TABLE>
<CAPTION>
Names Common Shares Percentages
----- ------------- -----------
<S> <C> <C>
Allen & Company 165,000 1.7%
American Diversified Enterprises, Inc. 232,500 2.3%
Herbert Anthony Allen, 47,917 .5%
Susan Kathleen Wilson and Herbert
Allen as Successor Trustees of Trust
created by Herbert Allen pursuant to
Agreement dated 12/1/64
Terry Allen Kramer and Irwin H. Kramer, 70,000 .7%
as Trustees U/A for Issuer of
Terry Allen Kramer pursuant to
Agreement dated 4/5/63
Toni Allen Goutal 55,500 .6%
Angela Frances Allen Kramer 43,700 .4%
Nathaniel Charles Allen Kramer 56,000 .6%
Bruce Allen 20,000 .2%
C. Robert Allen, IV 5,000 .1%
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Names Common Shares Percentages
----- ------------- -----------
<S> <C> <C>
John Godwin Allen 5,000 .1%
Luke Andrew Allen 5,000 .1%
Thaddeus Mack Allen 5,000 .1%
Evelyn Henry 52,000 .5%
Marjorie Bisgood 59,500 .6%
Bradley Roberts 2,083 *
* Less than .1%
</TABLE>
(2) International Hydrocarbons is a wholly-owned subsidiary of NWO. Mr.
Blue is president and a director both of International Hydrocarbons and
NWO. He is also president and a major stockholder of Cordillera
Corporation ("Cordillera"), the major stockholder of NWO. Through
Cordillera and affiliates, Mr. Blue beneficially holds 43.25% of Class B
nonvoting, participating common stock of NWO.
(3) Director of the Registrant
(4) Does not include shares owned by International Hydrocarbons.
International Hydrocarbons is a wholly-owned subsidiary of NWO. Mr.
Blue is president and a director of both International Hydrocarbons and
NWO. He is also president and major stockholder of Cordillera, the
major stockholder of NWO. Through Cordillera and affiliates, Mr. Blue
beneficially holds 43.25% of Class B nonvoting, participating common
stock of NWO.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NWO LINE OF CREDIT
The Registrant has a $2,000,000 line of credit with NWO, the parent company of
International Hydrocarbons, the Registrant's principal stockholder. The line of
credit is secured by the Registrant's Prinos Interest. In February 1998, the
Registrant executed an Extension 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. As of March 31, 1998, the outstanding loan balance
was $842,636.
35
<PAGE>
Cordillera is the major stockholder of NWO. Mr. Blue, the Chairman of the Board
and Chief Executive Officer of the Registrant, is president and a major
stockholder of Cordillera. Through Cordillera and affiliates, Mr. Blue
beneficially holds 43.25% of Class B nonvoting, participating common stock of
NWO.
MANAGEMENT AGREEMENTS
The Registrant has a cost sharing arrangement under which it provides management
services to Cordillera and to San Miguel Valley Corporation (SMVC), an affiliate
of Cordillera, pursuant to agreements providing for reimbursement of costs for
actual time and expenses incurred on Cordillera and SMVC activities. In 1998,
1997 and 1996 such reimbursements amount to approximately $306,000, $278,000 and
$322,000, respectively. Mr. Blue, the Chairman of the Board and Chief Executive
Officer of the Registrant, is president and a major stockholder of Cordillera.
OFFICER FEES
Mr. Blue receives officers' fees of $5,000 per month for his services as
Chairman of the Board and Chief Executive Officer of the Registrant. Mr. Blue
is president and a director of International Hydrocarbons, the Registrant's
principal stockholder, and its parent, NWO. He is also president and a major
stockholder of Cordillera, the major stockholder of NWO. Through Cordillera and
affiliates, Mr. Blue beneficially holds 43.25% of Class B nonvoting,
participating common stock of NWO.
EMPLOYEE BENEFIT PLANS
Cordillera has a defined contribution pension plan and a 401(k) plan covering
all qualified employees of the Registrant. Contributions to the pension plan
are based on a percentage of employee compensation ranging from 6% to 11.7%.
The Registrant is required to match employee 401(k) contributions to the extent
of 6% of annual compensation. During 1998, 1997 and 1996, the Registrant
recorded $50,468, $39,886, and $36,748, respectively, as pension and 401(k)
expense under these plans. Mr. Blue, the Chairman of the Board and Chief
Executive Officer of the Registrant, is president and a major stockholder of
Cordillera.
LEASE OF CORPORATE HEADQUARTERS
The Registrant leases 2,562 square feet of space in an office building located
at 5000 South Quebec Street, Denver, Colorado. The building is owned by
Sorrento West Properties, Inc., a company indirectly owned and controlled by Mr.
Blue, the Chairman of the Board and Chief Executive Officer of the Registrant,
and his family. Rent payments for 1998, 1997 and 1996 were $42,380, $29,463
and $26,675, respectively. These payments include adjustments for the
Registrant's proportionate share of operating expenses. Lease payments are
estimated to be $43,554 and $39,925 for 1999 and 2000, respectively. The
Registrant believes that, with respect to the lease of its corporate
headquarters, it obtained terms no less favorable than what could have been
obtained from unrelated parties in arms-length transactions.
36
<PAGE>
BONUS
In fiscal 1983, the Board of Directors authorized a bonus of $25,000 to the
president of the Registrant, which was paid in August 1997.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. Financial statements filed as part of this Report in Item 7 are
as follows:
Independent Auditors' Report
Consolidated Balance Sheets - March 31, 1998 and 1997
Consolidated Statements of Operations and Accumulated Deficit - Years
ended March 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended
March 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
37
<PAGE>
2. 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.
<TABLE>
<CAPTION>
Exhibit Number Name of Exhibit Location
- -------------- --------------- --------
<S> <C> <C>
3.1 Articles of Incorporation Page 58 of Report on
(including all amendments) Form 10-K for year
ended September 30, 1980
3.2 Bylaws (including all amend- Page 15 of Form 8
ments) (Amendment No. 1 to
10-K Report) dated
June 1, 1982
10.1 Memorandum of Agreement dated Report on Form 10-K for
June 30, 1976 between Oceanic year ended September 30, 1976
Exploration Company and Denison
Mines Limited
10.2 Letter Agreement dated July 28, Report on Form 10-K for
1976 amending Agreement of year ended September 30, 1976
June 30, 1976
10.3 Amendment dated August 27, 1976 Report on Form 10-K for
to Agreement of June 30, 1976 year ended September 30, 1976
10.4 Farm-out Agreement with Page 38 of the Report
Enterprise Oil Exploration on Form 10-KSB for the
Limited and NMX Resources year ended March 31, 1995
(Overseas) Limited dated
September 22, 1989
10.5 Letter Agreement with Page 54 of the Report
Enterprise Oil Exploration on Form 10-KSB for the
Limited and NMX Resources year ended March 31, 1995
(Overseas) Limited dated
September 22, 1989
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER NAME OF EXHIBIT LOCATION
- -------------- --------------- --------
<S> <C> <C>
10.6 Letter of Indemnification with Page 62 of the Report
Enterprise Oil Exploration on Form 10-KSB for the
Limited and NMX Resources year ended March 31, 1995
(Overseas) Limited dated
September 22, 1989
10.7 Agreement for Study and Exhibit 10.8 on Form SB-2
Petroleum Evaluation of the filed October 6, 1995,
South East Area of Bolivia, File # 33-63277
dated May 11, 1992
10.8 Management Agreement with Page 63 of the Report
Cordillera Corporation dated on Form 10-KSB for the
January 1, 1990 year ended March 31, 1995
10.9 Management Agreement with Page 67 of the Report
San Miguel Valley Corporation on Form 10-KSB for the
dated January 1, 1990 year ended March 31, 1995
10.10 Office Building Lease with Page 71 of the Report
Sorrento West Properties, Inc. on Form 10-KSB for the
dated March 1, 1991 year ended March 31, 1995
10.11 Addendum to Office Building Page 129 of the Report
Lease dated March 1, 1994 on Form 10-KSB for the
year ended March 31, 1995
10.12 Promissory Note with NWO Page 131 of the Report
Resources, Inc. dated on Form 10-KSB for the
June 15, 1994 year ended March 31, 1995
10.13 Promissory Note with NWO Page 132 of the Report
Resources, Inc. dated on Form 10-KSB for the
July 18, 1994 year ended March 31, 1995
10.14 Security Agreement in favor Page 133 of the Report
of NWO Resources, Inc. on Form 10-KSB for the
dated July 27, 1994 year ended March 31, 1995
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER NAME OF EXHIBIT LOCATION
- -------------- --------------- --------
<S> <C> <C>
10.15 Promissory Note with NWO Page 149 of the Report
Resources, Inc. dated on Form 10-KSB for the
September 22, 1994 year ended March 31, 1995
10.16 Promissory Note with NWO Page 150 of the Report
Resources, Inc. dated on Form 10-KSB for the
December 15, 1994 year ended March 31, 1995
10.17 Promissory Note with NWO Page 151 of the Report
Resources, Inc. dated on Form 10-KSB for the
January 1, 1995 year ended March 31, 1995
10.18 Promissory Note with NWO Page 152 of the Report
Resources, Inc. dated on Form 10-KSB for the
February 15, 1995 year ended March 31, 1995
10.19 Modification Agreement Exhibit 10.20 on Form SB-2
with NWO Resources, Inc. filed October 6, 1995,
dated September 19, 1995 File # 33-63277
10.20 First Amendment to Exhibit 10.21 on Form SB-2
Security Agreement with filed October 6, 1995,
NWO Resources, Inc. File # 33-63277
dated September 19, 1995
10.21 Letter dated August 22, 1995 Exhibit 10.22 on Form SB-2
from International Hydrocarbons filed October 6, 1995,
regarding purchase of unsubscribed File # 33-63277
stock in Rights Offering
10.22 Extension Agreement Exhibit 10.23 on Form SB-2,
with NWO Resources, Inc. Amendment 2, filed
dated December 27, 1995 January 3, 1996,
File # 33-63277
10.23 Extension Agreement Page 16 of the Report
with NWO Resources, Inc. on Form 10-QSB for the
dated December 11, 1996 quarterly period
ended December 31, 1996
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER NAME OF EXHIBIT LOCATION
- -------------- --------------- --------
<S> <C> <C>
10.24 Second Addendum to Page 42 of the Report
Office Building Lease on Form 10-KSB for the
dated March 1, 1997 year ended March 31, 1997
10.25 Extension Agreement Page 44 of the Report
with NWO Resources, Inc. on Form 10-KSB for the
dated March 10, 1996 year ended March 31, 1997
10.26 Extension Agreement Page 42 of the
with NWO Resources, Inc. signed original
dated February 13, 1998 of this report
</TABLE>
(b) No reports on Form 8-K were filed during the last quarter during the period
covered by this Report.
41
<PAGE>
EXTENSION AGREEMENT
This Extension Agreement (the "Agreement") is entered into as of the 13th
day of February 1998, by and among Oceanic Exploration Company, a Delaware
corporation ("OEC"), Oceanic International Properties Corporation, a Colorado
corporation and wholly-owned subsidiary of OEC ("OIPC"), and NWO Resources,
Inc., an Ohio corporation ("NWO").
WHEREAS, OEC, OIPC and NWO entered into that certain Modification Agreement
dated September 19, 1995 which provided among other things that NWO would
forbear collection of principal or interest on the Oceanic Notes until December
31, 1996 (subsequently extended to March 31, 1997 pursuant to an Extension
Agreement dated December 11, 1996 and further extended to March 31, 1998
pursuant to an Extension Agreement dated March 10, 1997); and that OEC would
diligently pursue its pending lawsuit against Denison Mines, Ltd. ("Denison");
and
WHEREAS, OEC, OIPC and NWO have entered into three previous Extension
Agreements dated December 27, 1995, December 11, 1996 and March 10, 1997; and
WHEREAS, OEC has pursued its lawsuit against Denison as provided for in the
Modification Agreement, and a judgment has been issued in OEC's favor by a lower
court; which judgment has since been appealed by Denison; and
WHEREAS, the parties hereto will wish to extend the period of forbearance
on collection of principal or interest on the Oceanic Notes and allow OEC
sufficient operating cash until such final determination has been received; and
WHEREAS, Denison has notified OEC of its intention to suspend payments of
the 15% net profits interest in anticipation of this being the final year. OEC
has notified Denison that pursuant to the Oil Payment and Net Earnings Interest
Agreement between Denison and OEC, Denison may not suspend payments to OEC prior
to formal declaration to the Greek government of this being the last year of
production;
NOW THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereby agree as follows:
1. The period of time during which NWO will forbear collection of
principal or interest on the Oceanic Notes shall be further extended for a
period of twelve months commencing March 31, 1998 to March 31, 1999.
2. Effective immediately and until such time as OEC is able to collect
funds from Denison pursuant to a final determination by the Appellate Court or a
settlement with Denison, OEC and OIPC will be allowed to draw an additional
$350,000 under the existing line of credit for general working capital purposes.
In addition, OEC will not be required to make any interest payments until such
time as the outstanding principal balance is due to NWO.
42
<PAGE>
3. Except as modified herein and in the Extension Agreements dated
December 27, 1995, December 11, 1996 and March 10, 1997, the Modification
Agreement will continue in full force and effect and the remaining terms,
provisions, covenants and conditions shall remain unchanged.
IN WITNESS HEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
OEC
OCEANIC EXPLORATION COMPANY
By: \s\ Charles N. Haas
--------------------------------
Charles N. Haas
President
OIPC
OCEANIC INTERNATIONAL
PROPERTIES CORPORATION
By: \s\ Charles N. Haas
--------------------------------
Charles N. Haas
President
NWO
NWO RESOURCES, INC.
By: \s\ John E. Jones
--------------------------------
John E. Jones
Secretary-Treasurer
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OCEANIC EXPLORATION COMPANY
(REGISTRANT)
By /s/ Charles N. Haas
--------------------------------------
Charles N. Haas, President
Dated June 24, 1998
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the date indicated, namely:
1. By its principal executive officer.
Date: June 24, 1998 /s/ Charles N. Haas
------------------------- ----------------------------------------
Charles N. Haas, President
2. And by its principal financial officer.
Date: June 24, 1998 By /s/ Lori A. Brundage
------------------------- ----------------------------------------
Lori A. Brundage, Treasurer
3. And by a majority of its board of directors.
Date: June 25, 1998 By /s/ James N. Blue
------------------------- ----------------------------------------
James N. Blue, Director
Date: June 24, 1998 By /s/ Charles N. Haas
------------------------- ----------------------------------------
Charles N. Haas, Director
Date: June 25, 1998 By /s/ Sidney H. Stires
------------------------- ----------------------------------------
Sidney H. Stires, Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<PERIOD-START> APR-01-1997
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 38,601
<SECURITIES> 0
<RECEIVABLES> 8,759
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,842
<PP&E> 39,000,000
<DEPRECIATION> 38,810,000
<TOTAL-ASSETS> 241,402
<CURRENT-LIABILITIES> 1,667,286
<BONDS> 0
0
0
<COMMON> 619,759
<OTHER-SE> 155,696
<TOTAL-LIABILITY-AND-EQUITY> 241,402
<SALES> 0
<TOTAL-REVENUES> 740,938
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,194,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,567
<INCOME-PRETAX> (544,415)
<INCOME-TAX> (322,092)
<INCOME-CONTINUING> (222,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (222,323)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
