Attached files
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EX-31.2 - EX-31.2 - OCEANIC EXPLORATION CO | c92604exv31w2.htm |
EX-31.1 - EX-31.1 - OCEANIC EXPLORATION CO | c92604exv31w1.htm |
EX-32.1 - EX-32.1 - OCEANIC EXPLORATION CO | c92604exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-08521
Oceanic Exploration Company
(Exact name of registrant as specified in its charter)
Delaware | 84-0591071 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
7800 East Dorado Place, Suite 250
Englewood, CO 80111
(Address of principal executive offices)
Englewood, CO 80111
(Address of principal executive offices)
Registrants telephone number, including area code: (303) 220-8330
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The total number of shares of the registrants common stock outstanding as of November 13,
2009 was 59,688,881 shares.
TABLE OF CONTENTS
Item 1 FINANCIAL STATEMENTS |
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Item 5 OTHER INFORMATION |
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
- 2 -
Table of Contents
PART I FINANCIAL INFORMATION
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | (audited) | |||||||
ASSETS |
||||||||
Cash |
$ | 72,333 | $ | 162,858 | ||||
Due from affiliates |
14,371 | 13,191 | ||||||
Prepaid expenses and other |
18,485 | 40,567 | ||||||
Total current assets |
105,189 | 216,616 | ||||||
Oil and gas property interests (note 6) |
| | ||||||
Furniture, fixtures and equipment |
73,390 | 73,390 | ||||||
Less accumulated depreciation |
(54,819 | ) | (50,516 | ) | ||||
18,571 | 22,874 | |||||||
Total assets |
$ | 123,760 | $ | 239,490 | ||||
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |
||||||||
Accounts payable |
$ | 35,843 | $ | 33,337 | ||||
Accrued expenses |
196,383 | 363,947 | ||||||
Accrued expenses security for legal costs (note 2) |
| 245,197 | ||||||
Note payable, related party NWO Resources, Inc., including accrued interest (note 4) |
3,417,815 | 1,946,022 | ||||||
Total current liabilities |
3,650,041 | 2,588,503 | ||||||
United Kingdom taxes payable, including accrued interest (note 7) |
702,215 | 624,433 | ||||||
Other non-current liabilities |
4,524 | 6,963 | ||||||
Total non-current liabilities |
706,739 | 631,396 | ||||||
Commitments and contingencies (notes 2, 3, 5 and 7) |
| | ||||||
Total liabilities |
4,356,780 | 3,219,899 | ||||||
Stockholders (deficit) equity |
||||||||
Preferred stock, $10 par value. Authorized 600,000 shares; no shares issued |
| | ||||||
Common stock, $.0625 par value. Authorized 100,000,000 shares; 59,688,881 shares
issued and outstanding |
3,730,555 | 3,730,555 | ||||||
Capital in excess of par value |
8,165,609 | 8,165,609 | ||||||
Accumulated deficit |
(16,129,184 | ) | (14,876,573 | ) | ||||
Total stockholders (deficit) |
(4,233,020 | ) | (2,980,409 | ) | ||||
Total liabilities and stockholders (deficit) |
$ | 123,760 | $ | 239,490 | ||||
See accompanying notes to the condensed consolidated financial statements.
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OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue: |
||||||||||||||||
Management revenue related parties |
$ | 211,561 | $ | 282,168 | $ | 740,535 | $ | 934,032 | ||||||||
Costs and expenses: |
||||||||||||||||
Exploration expenses (note 2) |
167,105 | 548,688 | 580,676 | 1,565,419 | ||||||||||||
Amortization and depreciation |
1,401 | 1,451 | 4,303 | 4,124 | ||||||||||||
General and administrative |
433,270 | 405,470 | 1,235,068 | 1,337,479 | ||||||||||||
601,776 | 955,609 | 1,820,047 | 2,907,022 | |||||||||||||
Operating loss |
(390,215 | ) | (673,441 | ) | (1,079,512 | ) | (1,972,990 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income and realized gains |
338 | 6,883 | 5,844 | 25,186 | ||||||||||||
Interest expense and financing costs (note 4) |
(51,650 | ) | (23,196 | ) | (137,713 | ) | (39,409 | ) | ||||||||
Foreign currency gains (losses) |
28,640 | 9,214 | (41,230 | ) | 50,504 | |||||||||||
(22,672 | ) | (7,099 | ) | (173,099 | ) | 36,281 | ||||||||||
Loss before income taxes |
(412,887 | ) | (680,540 | ) | (1,252,611 | ) | (1,936,709 | ) | ||||||||
Income tax expense (note 5) |
| | | | ||||||||||||
Net loss |
$ | (412,887 | ) | $ | (680,540 | ) | $ | (1,252,611 | ) | $ | (1,936,709 | ) | ||||
Basic and diluted loss per common share |
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
Weighted average number of common shares outstanding |
59,688,881 | 59,688,881 | 59,688,881 | 59,688,881 |
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
OCEANIC EXPLORATION COMPANY
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,252,611 | ) | $ | (1,936,709 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Amortization and depreciation |
4,303 | 4,124 | ||||||
Accrued interest payable to NWO Resources, Inc. |
121,793 | 19,542 | ||||||
Changes in operating assets and liabilities: |
||||||||
Increase in due from affiliates |
(1,180 | ) | (57,278 | ) | ||||
Decrease (increase) in prepaid expenses and other assets |
22,082 | (8,002 | ) | |||||
Increase (decrease) in accounts payable |
2,506 | (23,870 | ) | |||||
(Decrease) increase in accrued expenses |
(167,564 | ) | 274,027 | |||||
Decrease in security for legal costs |
(245,197 | ) | (35,480 | ) | ||||
Increase (decrease) in United Kingdom taxes payable, including
accrued interest payable |
77,782 | (57,468 | ) | |||||
Decrease in other non-current liabilities |
(2,439 | ) | (2,189 | ) | ||||
Net cash used in operating activities |
(1,440,525 | ) | (1,823,303 | ) | ||||
Cash used in investing activities: |
||||||||
Purchase of fixed assets |
| (9,141 | ) | |||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of note payable, related party NWO Resources, Inc. |
1,350,000 | 1,300,000 | ||||||
Net decrease in cash |
(90,525 | ) | (532,444 | ) | ||||
Cash at beginning of period |
162,858 | 912,672 | ||||||
Cash at end of period |
$ | 72,333 | $ | 380,228 | ||||
See accompanying notes to condensed consolidated financial statements.
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OCEANIC EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2009
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet as of December 31, 2008 that has been derived from audited financial
statements, and the unaudited interim condensed consolidated financial statements included herein,
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial statements,
prepared in accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted pursuant to those rules and regulations, although Oceanic
Exploration Company (Oceanic) believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all adjustments consisting of
normal recurring accruals have been made which are necessary for the fair presentation of the
periods included. Interim results are not necessarily indicative of results for a full year. The
information included herein should be read in conjunction with the financial statements and notes
thereto included in the December 31, 2008 Form 10-K.
Oceanic operates as one business segment. All of Oceanics revenue is derived from management
contracts with related parties. Oceanics oil and gas exploration activities have generally
consisted of 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. For various reasons, Oceanic has not participated in
exploration and development of any of its concessions since 1994.
As of September 30, 2009 and December 31, 2008, Oceanic had accounts receivable only from related
parties. Accordingly, there were no unrelated customers who were considered to be significant.
(2) EXPLORATION EXPENSES
In 1974, Petrotimor Companhia de Petróleos, S.A. (Petrotimor), a 99% owned subsidiary of Oceanic,
was granted an exclusive offshore concession by Portugal to explore for and develop oil and gas in
an approximately 14.8 million-acre area between East Timor and Australia known as the Timor Gap.
At that time, Portugal had administrative control over East Timor. On January 5, 1976, following
Indonesias unlawful invasion and occupation of East Timor, Petrotimor applied for and obtained on
April 14, 1976, Portugals consent to a suspension of performance under the concession agreement
based upon force majeure. This force majeure status remained in effect until at least October 25,
1999.
Commercial Opportunity in East Timor. Oceanic submitted an application for an Expansion of Seabed
Concession to the transitional government of East Timor in October 2001 requesting that
Petrotimors 1974 concession area be expanded to include the additional maritime areas within the
properly determined seabed delimitation of East Timor. Oceanic believes that, under international
law, East Timor is entitled to exercise sovereign jurisdiction over its seabed and to have an
Exclusive Economic Zone as codified in the 1982 United Nations Convention on the Law of the Sea.
Oceanic believes that by so doing, East Timor could acquire jurisdiction over hydrocarbon reserves
containing approximately 12 trillion cubic feet of natural gas and associated condensate.
Neither the transitional government, nor any subsequent East Timor government, has recognized
Petrotimors concession in East Timor. Oceanic has never received any formal response
acknowledging the application for an Expansion of Seabed Concession. An article carried on the Dow
Jones Newswires on September 26, 2002 quotes a senior East Timor government official as stating
that the government does not recognize this concession. Oceanic has not been officially advised of
the status of the application or if the current East Timor government is even considering it. A
formal response may never be issued, or Oceanic could receive an unfavorable response.
If the East Timor government were to recognize the concession and grant the application, it would
expand the 1974 Petrotimor concession to correspond with the offshore area over which East Timor is
entitled to claim sovereign rights under international law. Oceanic sponsored a seminar in East
Timor in 2001 for the purpose of explaining appropriate maritime boundaries under applicable
international law and the resulting benefits to East Timor if such boundaries were to be enforced.
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In August 2001, Oceanic and Petrotimor commenced litigation in the Federal Court of Australia
(Australian Federal Court) regarding the Timor Gap concession. On February 3, 2003, the Australian
Federal Court issued decisions in which it declared that it lacked
jurisdiction to hear Oceanics claims. As part of the Australian litigation, Oceanic was required
to provide bank guarantees as security for the defendants litigation costs. The Australian and
New Zealand Banking Group (ANZ Bank) in Sydney, Australia provided the guarantees. As of September
30, 2008, Oceanic had $359,219 ($437,506 in Australian dollars) on deposit with the ANZ Bank as
collateral for the guarantees. On March 18, 2009, Oceanic reached a settlement in the amount of
AUS$800,000 that it must pay for these litigation costs. AUS$550,000 (including the deposit with
the ANZ Bank of AUS$451,000), was paid on April 16, 2009. The remaining AUS$250,000 was paid on
September 22, 2009 satisfying the full amount of the liability.
During the nine months ended September 30, 2009 and 2008, Oceanic incurred expenses of $559,330 and
$1,514,697 respectively, mostly related to legal, consulting and commercial activities associated
with oil and gas interests in the Timor Gap. These expenses have been recorded as exploration
expenses in the accompanying statements.
Although Oceanic is not currently directly involved in any other oil and gas exploration or
production activities, Oceanic continues to evaluate potential exploration and production
activities elsewhere in the world. Oceanic did not receive any revenue from oil and gas properties
in 2008 and it is not currently conducting any activities that would result in material oil and gas
revenue in 2009.
(3) PENDING LITIGATION
On March 1, 2004, Oceanic and Petrotimor filed a complaint in the United States District Court for
the District of Columbia (DC Federal Court) regarding their 14.8 million-acre Timor Gap concession.
Oceanic and Petrotimor, as plaintiffs, brought this action to redress the harm caused by the
defendants (collectively including ConocoPhillips, Inc. and designated subsidiaries, the Timor Sea
Designated Authority for the Joint Petroleum Development Area, the Timor Gap Joint Authority for
the Zone of Cooperation, PT Pertamina and BP Migas) theft, misappropriation and conversion of oil
and gas resources within the Timor Gap.
Oceanic filed a Second Amended Complaint (the Complaint) with the DC Federal Court on March 1,
2005. The Complaint reflected claims that the misdeeds of the defendants effectively prevented
Oceanic from competing for rights to explore for and produce oil and gas within the Timor Gap.
On September 21, 2006, the DC Federal Court dismissed certain defendants and certain of Oceanics
claims and ordered that the remaining defendants file an Answer or other Responsive Pleading to the
Complaint.
On February 5, 2007, the DC Federal Court granted the motion of the remaining defendants,
ConocoPhillips, Inc. and ConocoPhillips Company (ConocoPhillips), to transfer the case to the
United States District Court for the Southern District of Texas (Texas Federal Court).
The defendants subsequently filed a motion for judgment on the pleadings. On April 16, 2008, the
Texas Federal District Court issued its Opinion on Dismissal stating that Oceanics claims fail
because it does not plead facts that, if true, would show that its loss was proximately caused by
the bribery. The District Court further held that To recover, Oceanic must show what would have
happened absent the bribe to a high degree of probability. It can not. Accordingly, the Texas
Federal Court granted defendants Rule 12( c ) motion for judgment on the pleadings. A final
judgment was entered on April 22, 2008. Oceanics timely notice of appeal was filed on or about
May 19, 2008. On August 19, 2008, Oceanic/Appellants filed their opening Brief with the United
States Court of Appeals for the Fifth Circuit asserting multiple grounds of error by the District
Court. These included the arguments (1) that the District Court erred in applying a heightened
pleading standard in judging the sufficiency of Oceanics proximate cause allegations, (2) that the
District Court did not accept Oceanics well-pleaded allegations as true and failed to draw
reasonable inference in Oceanics favor, (3) that the case should be reversed, remanded, and
assigned to a different judge, and (4) that the District Court erred in dismissing ConocoPhillips
subsidiaries for lack of personal jurisdiction. The defendants/appellees filed their Brief in
response on October 6, 2008. Appellants filed their Reply Brief on October 21, 2008. The parties
presented oral arguments on their respective positions on March 30, 2009. On November 6, 2009, the
United States Court of Appeals affirmed the final judgment of the District Court. Oceanic is
reviewing its options in light of the recent court decision.
(4) NOTE PAYABLE RELATED PARTY
On March 7, 2007, Oceanic established a new line of credit evidenced by a promissory note with NWO
Resources, Inc. (NWO), in the amount of $4,000,000 at an interest rate of 2% over prime rate with
repayment due on or before March 7, 2008. In addition, NWO committed to increase the line of
credit to $6,000,000 under certain circumstances. On February 28, 2008, this was replaced by a new
line of credit for $4,000,000 plus the additional $2,000,000 commitment for additional financing
with repayment due on or before March 31, 2009. Repayment of the line of credit and the additional
financing commitment was subsequently extended to March 31,
2010. As of September 30, 2009 and November 13, 2009, $3,250,000 and $3,350,000, respectively,
were outstanding under this line of credit with additional accrued interest of $167,815 and
$192,254, respectively.
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At the current level of cash expenditures, Oceanic will need sources of additional funding.
Oceanic had considered a rights offering or other equity offering to repay the line of credit and
provide working capital. However, on November 5, 2009, the Oceanic Board determined that a rights
offering was not in Oceanics best interest at this time. Oceanic has requested withdrawal of the
Registration Statement it filed on May 13, 2009 relating to a potential future rights offering. As
of September 30, 2009, Oceanic expensed $85,794 of previously capitalized costs as a result of this
decision. Oceanic currently intends to use the funds available under its line of credit to fund
current operations. Oceanic believes that the cash on hand at November 13, 2009, and the cash
generated from 2009 revenues, plus draws from the line of credit will be sufficient to fund
operations beyond December 31, 2009. Oceanic will need to obtain an increase in its line of credit
or to obtain alternative sources of financing in order to continue operations after the maximum
amount is drawn on the current line of credit.
(5) INCOME TAXES
Oceanic and NWO maintain a tax-sharing agreement with the same provisions applicable to all
subsidiaries included in NWOs consolidated return. To calculate its tax provision, Oceanic first
estimates what its taxes would have been if NWO did not file a consolidated tax return with
Oceanic. This specifically includes an estimate of Oceanics share of book-tax differences, which
apply ratably to all NWO subsidiaries. The provision will include a tax benefit from losses to the
extent of previous profits, but only to the extent such profits were included in the NWO
consolidated return. To the extent a tax benefit for Oceanics loss has not been previously
allowed, and Oceanic has profits in a future year, the benefit of the loss will be included in the
provision to the extent the loss would provide a tax benefit to Oceanic on a stand-alone basis and
to the extent that the prior year tax losses could be carried forward under United States tax
rules.
In evaluating the realizability of the net deferred tax assets, Oceanic takes into account a number
of factors, primarily relating to the ability to generate taxable income. Where it is determined
that it is likely that Oceanic will be unable to realize deferred tax assets, a valuation allowance
is established against the portion of the deferred tax asset. Because it cannot be accurately
determined when or if Oceanic will become profitable, a valuation allowance was
provided against the entire deferred income tax asset attributable to the net operating losses
incurred during the nine months ended September 30, 2009 and 2008.
(6) OIL AND GAS INTERESTS
Oceanic holds various interests in concessions or leases for oil and gas exploration around the
world as described in the December 31, 2008 Form 10-K. Costs for these oil and gas property
interests have been charged to expense in prior years so no amounts are reflected on the balance
sheet. Although Oceanic is not currently conducting any direct exploration activities, it
continues to evaluate potential exploration and production activities elsewhere in the world.
(7) COMMITMENTS AND CONTINGENCIES
Prior to 1985, Oceanic had subsidiaries operating in the United Kingdom (UK). During 1985, the
subsidiaries disposed of an interest in a license. Oceanic has been advised that there may be
taxable capital gains resulting from the transaction. A review of UK tax law indicated that there
did not appear to be a statute of limitations with respect to tax liability and collection of
taxes. Oceanic has accrued the estimated capital gains tax liability and continues to accrue
interest on that liability. Oceanic believes that the UK tax authorities are unlikely to collect
any taxable UK capital gains tax in the U.S. Oceanic has no current plans on resuming future
operations in the UK.
In addition, Oceanic may be involved from time to time in various claims and lawsuits incidental to
its business. In the opinion of Oceanics management, no claims or lawsuits, not previously
disclosed, exist at September 30, 2009 that will result in a material adverse effect on the
financial position or operating results of Oceanic.
(8) TRANSACTIONS WITH RELATED PARTIES
Oceanic provides bookkeeping, administrative and day-to-day management services to San Miguel
Valley Corporation (San Miguel), a real estate company. Oceanic also provides management,
professional and administrative services to Cordillera Corporation (Cordillera), a holding company.
Oceanics management is responsible for the day-to-day management of real estate and other
activities of Cordillera. Oceanics subsidiary, Petrotimor, provides exploration and consulting
services to Harvard International Resources, Ltd. (HIRL), a related company. These contracts have
no contractual termination date, but management cannot be certain
that some or all of these contracts will continue in the future. Most of the management contracts
contain clauses requiring 60-days termination notice. Oceanics Chairman of the Board of Directors
and Chief Executive Officer, James N. Blue, is affiliated with each of these corporations.
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Management Fee Revenue
For the nine months ended September 30,
(Unaudited)
For the nine months ended September 30,
(Unaudited)
2009 | 2008 | |||||||||||||||
San Miguel Valley Corporation |
$ | 396,000 | 54 | % | $ | 334,576 | 36 | % | ||||||||
Cordillera Corporation |
321,300 | 43 | % | 573,086 | 61 | % | ||||||||||
Harvard International Resources, Ltd. |
23,235 | 3 | % | 26,370 | 3 | % | ||||||||||
Total management fee revenue |
$ | 740,535 | $ | 934,032 | ||||||||||||
Except for the contract with HIRL, all labor services are provided at payroll cost plus benefits
and include a 5% markup on that total to cover the administrative expenses. This charge is
calculated annually based on the prior years costs. All expenses are billed at cost. The
contract with HIRL differs from the management contracts with the other related companies, as it is
a flat charge of $2,500 per month plus expenses directly incurred in providing those consulting
services. These expenses totaled $735 and $3,870 for the nine months ended September 30, 2009 and
2008, respectively. The purpose for the management agreements is to avoid duplication of functions
and costs for the economic benefit of all of the companies involved.
Effective June 30, 2007, Oceanic entered into a services agreement with General Atomics (GA), a
company controlled by Oceanics Chairman of the Board of Directors and Chief Executive Officer.
This agreement specifies that Oceanic will pay GA for the services of Stephen M. Duncan to serve as
President of Oceanic at a fixed rate of $7,500 per month. The agreement has no contractual
termination date, but can be terminated with 30 days notice by either party. Oceanic recorded
expenses of $67,500 for each of the nine-month periods ended September 30, 2009 and 2008, for
payments made to GA for Stephen M. Duncans services.
Karsten Blue, son of Oceanics Chairman of the Board of Directors and Chief Executive Officer,
coordinates various activities relating to the Timor Gap matters. On July 31, 2007, Oceanic
entered into a services agreement with GA. The agreement specifies a fixed amount for Karsten
Blues services at $6,500 per month and has no contractual termination date. Oceanic expensed
$58,500 for each of the nine-month periods ended September 30, 2009 and 2008, for Karsten Blues
services.
Oceanic leases approximately 5,191 square feet of office space in an office building located at
7800 East Dorado Place, Suite 250, Englewood, Colorado 80111. Sorrento West Properties, Inc., a
related company, owns the office building. The lease has been extended to October 31, 2010 at the
current rate of $16.50 per square foot adjusted for the annual CPI increase effective November 1,
2009. Oceanic also subleases 940 square feet of space from Cordillera in the same building. This
sublease has been extended to March 31, 2010 at an annual rate of $12.00 per square foot.
Oceanics facilities are adequate for their current needs. Rent expense, including a prorated
share of building operating expenses, for the nine months ended September 30, 2009 and 2008 were
$68,807 and $65,159, respectively.
On March 7, 2007, Oceanic established a line of credit, evidenced by a promissory note with NWO, in
the amount of $4,000,000 at an interest rate of 2% over prime rate with repayment due on or before
March 7, 2008. In addition, NWO committed to increase the line of credit to $6,000,000 under
certain circumstances. On February 28, 2008, this was replaced by a new line of credit for
$4,000,000 plus the additional $2,000,000 commitment for additional financing with repayment due on
or before March 31, 2009. Repayment of the line of credit and the additional financing commitment
was subsequently extended to March 31, 2010. As of September 30, 2009 and November 13, 2009,
Oceanic had borrowed $3,250,000 and $3,350,000, respectively, under this line of credit with
accrued interest of $167,815 and $192,254, respectively, on these outstanding balances.
(9) NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued new accounting guidance
related to fair value measurements and related disclosures. This new guidance defines fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. Oceanic adopted this new guidance on January 1, 2008, as required for its financial
assets and financial liabilities. However, the FASB deferred the effective date of this new
guidance for one year as it relates to fair value measurement requirements for nonfinancial assets
and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring
basis. Oceanic adopted these remaining provisions on January 1, 2009. The adoption of this
accounting guidance did not have a material impact on Oceanics consolidated financial statements.
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In December 2007, the FASB issued new accounting guidance related to the accounting for business
combinations and related disclosures. This new guidance addresses the recognition and accounting
for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business
combinations. The guidance also establishes expanded disclosure requirements for business
combinations. The guidance was effective on January 1, 2009, and Oceanic will apply this new
guidance prospectively to all business combinations subsequent to the effective date.
In May 2009, the FASB issued authoritative guidance which establishes general standards of
accounting for, and disclosures of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires disclosure of the date
through which an entity has evaluated subsequent events. Oceanics management has evaluated events
subsequent to September 30, 2009 through November 13, 2009 which is the issuance date of this
report. There have been no material events noted in this period which would either impact the
results reflected in this report or Oceanics results going forward.
In June, 2009, the FASB established the FASB Accounting Standards Codification (ASC or
Codification), officially released on July 1, 2009, as the sole source of authoritative generally
accepted accounting principles used by nongovernmental entities in the preparation of financial
statements. The Codification is meant to simplify the authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent
structure. The Codification supersedes all existing non-SEC accounting and reporting standards and
was effective for Oceanic beginning July 1, 2009. The FASB will not issue new standards in the
form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as
authoritative in their own right; these updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases for conclusions on the change(s)
in the Codification.
Accounting Standards Updates not effective until after September 30, 2009 are not expected to have
a significant effect on Oceanics consolidated financial position or results of operations.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Any statements that are contained in this Form 10-Q that are not statements of historical fact are
forward-looking statements. Readers can identify these statements by words such as may, will,
expect, anticipate, estimate, continue or other similar words. These statements discuss
future expectations, contain projections of results of operations or financial condition or state
other forward-looking information and are based on certain assumptions and analyses made by Oceanic
in light of its experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes are appropriate in the circumstances. Such
statements are subject to a number of assumptions, risks and uncertainties, including such factors
as uncertainties in cash flow, expected costs of litigation, the outcome of litigation, the
potential impact of government regulations and rulings, fluctuations in the economic environment
and other such matters, many of which are beyond the control of Oceanic. Readers are cautioned
that forward-looking statements are not guarantees of future performance and that actual results or
developments may differ materially from those expressed or implied in the forward-looking
statements.
The following discussion and analysis should be read in conjunction with Oceanics condensed
consolidated financial statements and notes thereto for the respective periods ended December 31,
2008 and September 30, 2009 and 2008.
(1) CRITICAL ACCOUNTING POLICIES
The discussion and analysis of financial condition and results of operations is based on Oceanics
condensed consolidated financial statements, which have been prepared in accordance with generally
accepted accounting principles in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of
revenues and expenses. On an on-going basis, management evaluates the estimates including those
related to the realizability of income tax assets and the provision for loss contingencies. These
estimates are based on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates. Management believes the following
critical accounting policies affect the significant judgments and estimates used in the preparation
of Oceanics condensed consolidated financial statements.
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To record income tax expense, Oceanic is required to estimate income taxes in each of the
jurisdictions in which it operates. This involves estimating actual current tax exposure together
with assessing temporary differences that result in deferred tax assets and
liabilities and expected future tax rates. Oceanic records a valuation allowance to reduce the
deferred tax assets to an amount that management believes is more likely than not to be realized.
Management considers future taxable income and prudent and feasible tax planning strategies in
assessing the need for a valuation allowance. If management subsequently determines that Oceanic
will realize more or less of the net deferred tax assets in the future, such adjustment would be
recorded as an increase or reduction of income tax expense in the period such determination is
made.
In evaluating the need to provide for contingent liabilities, Oceanic takes into account a number
of factors, including the expected likelihood of an unfavorable outcome in its lawsuit, and the
ability to reasonably estimate the financial impact of an unfavorable outcome and managements
intentions with respect to the contingency.
(2) LIQUIDITY AND CAPITAL RESOURCES
Oceanic has historically addressed long-term liquidity needs for oil and gas exploration and
development through the use of farm-out agreements. Under such agreements, Oceanic sells a portion
of its ownership interest in the concession to an outside party who is then responsible for the
exploration activities. This is a strategy that management intends to continue in the event it
becomes feasible to begin further exploration in any of the areas where Oceanic currently holds
concessions.
Cash Flow. Cash used in operating activities was $1,440,525 for the first nine months of 2009
compared to $1,823,303 in the first nine months of 2008. During the nine months ended September
30, 2009 and 2008, Oceanic made actual cash payments of $541,537 and $972,133, respectively, mostly
related to litigation and professional activities associated with oil and gas interests in the
Timor Gap. An additional $39,139 of expenses were accrued and remained unpaid as of September 30,
2009. These costs are included in exploration expense. Exploration expenses have decreased in 2009
compared to the same period in 2008, primarily because of the decrease in litigation-related
expenses. Until the lawsuit is finally
resolved, litigation charges recorded as exploration expenses will continue to be high and will use
most of Oceanics cash resources. Cash flows from financing activities are the borrowings from the
note payable to NWO Resources, Inc. (NWO) totaling $3,250,000 as of September 30, 2009. The first
nine months of 2009 ended with a net decrease in total cash of $90,525, including cash received
under the line of credit with NWO of $1,350,000.
Oceanic had $72,333 in cash and cash equivalents at September 30, 2009 compared with $162,858 at
December 31, 2008. At September 30, 2009, Oceanic had accounts receivable from affiliates of
$14,371, which Oceanic anticipates will be paid in full. Oceanic had a negative working capital of
($3,544,852) at September 30, 2009 compared to a negative working capital of $(2,371,887) at
December 31, 2008. Negative working capital occurs when current liabilities exceed cash and
current assets. This decrease of $1,172,965 in working capital from December 31, 2008 to September
30, 2009 was primarily the result of drawing on the NWO line of credit to pay for litigation
related expenses and general and administrative expenses.
On March 7, 2007, Oceanic established a new line of credit evidenced by a promissory note with NWO
in the amount of $4,000,000 at an interest rate of 2% over prime rate with repayment due on or
before March 7, 2008. In addition, NWO committed to increase the line of credit to $6,000,000
under certain circumstances. On February 28, 2008, this was replaced by a new line of credit for
$4,000,000 plus the additional $2,000,000 commitment for additional financing with repayment due on
or before March 31, 2009. Repayment of the line of credit and the additional financing commitment
was subsequently extended to March 31, 2010. As of September 30, 2009, and November 13, 2009,
$3,250,000 and $3,350,000, respectively, were outstanding under this line of credit, with
additional accrued interest of $167,815 and $192,254, respectively.
At the current level of cash expenditures, Oceanic will need sources of additional funding.
Oceanic had considered a rights offering or other equity offering to repay the line of credit and
provide working capital. However, on November 5, 2009, the Oceanic Board determined that a rights
offering was not in Oceanics best interest at this time. Oceanic has requested withdrawal of the
Registration Statement it filed on May 13, 2009 relating to a potential future rights offering. As
of September 30, 2009, Oceanic expensed $85,794 of previously capitalized costs as a result of this
decision. Oceanic currently intends to use the funds available under its line of credit to fund
current operations. Oceanic believes that the cash on hand at November 13, 2009, and the cash
generated from 2009 revenues, plus draws from the line of credit will be sufficient to fund
operations beyond December 31, 2009. Oceanic will need to obtain an increase in its line of credit
or to obtain alternative sources of financing in order to continue operations after the maximum
amount is drawn on the current line of credit.
Revenue. Oceanic provides management services to various entities with which its Chairman of the
Board of Directors and Chief Executive Officer is affiliated. Services provided are:
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| Management, administrative and bookkeeping services to San Miguel Valley Corporation (San Miguel), | ||
| Management, administrative and professional services to Cordillera Corporation (Cordillera), and |
| Consulting services, including monitoring exploration and production activities on a worldwide basis to identify potential investment opportunities for Harvard International Resources Ltd. (HIRL). |
Together, these management services provided all of Oceanics total revenue for the nine months
ended September 30, 2009 and 2008.
Management Fee Revenue
For the nine months ended September 30,
(Unaudited)
For the nine months ended September 30,
(Unaudited)
2009 | 2008 | |||||||||||||||
San Miguel Valley Corporation |
$ | 396,000 | 54 | % | $ | 334,576 | 36 | % | ||||||||
Cordillera Corporation |
321,300 | 43 | % | 573,086 | 61 | % | ||||||||||
Harvard International Resources, Ltd. |
23,235 | 3 | % | 26,370 | 3 | % | ||||||||||
Total management fee revenue |
$ | 740,535 | $ | 934,032 | ||||||||||||
Except for the contract with HIRL, all labor services are provided at payroll cost plus benefits
and include a 5% markup on that total to cover the administrative expenses. This charge is
calculated annually based on the prior years costs. All expenses are billed at cost. The purpose
of the management agreements is to avoid duplication of functions and costs for the economic
benefit of all of the companies involved.
(3) RESULTS OF OPERATIONS
Revenue. Management fee revenue for the nine months ended September 30, 2009, decreased $193,497
or 21% compared to the nine months ended September 30, 2008. Monthly management fee income for the
first nine months of 2009 decreased for Cordillera by $251,786, increased for San Miguel by $61,424
and decreased for HIRL by $3,135 for the same time period. Because the level of service is
dependent upon the needs of the applicable corporations and available employees, it is normal to
see fluctuations in management fee rates from year to year.
Although Oceanic is currently not directly involved in any other oil and gas exploration or
production activities, Oceanic continues to evaluate potential exploration and production
activities elsewhere in the world. Oceanic did not receive any revenue from oil and gas properties
in 2008, and it is not currently conducting any activities that would result in oil and gas revenue
in 2009.
Exploration Expenses. Oceanic continues to incur ongoing legal and professional fees associated
with its ongoing lawsuit. During the nine months ended September 30, 2009 and 2008, Oceanic
incurred total litigation expenses recorded as exploration expenses of $559,330 and $1,514,697,
respectively.
In August 2001, Oceanic and Petrotimor commenced litigation in the Federal Court of Australia
(Australian Federal Court) regarding the Timor Gap concession. On February 3, 2003, the Australian
Federal Court issued decisions in which it declared that it lacked jurisdiction to hear Oceanics
claims. As part of the Australian litigation, Oceanic was required to provide bank guarantees as
security for the defendants litigation costs. The Australian and New Zealand Banking Group (ANZ
Bank) in Sydney, Australia provided the guarantees. On March 18, 2009, Oceanic reached a
settlement in the amount of AUS$800,000 that it must pay for these litigation costs. AUS$550,000
(including the deposit with the ANZ Bank of AUS$451,000), was paid on April 16, 2009. The
remaining AUS$250,000 was paid on September 22, 2009, satisfying the full amount of the liability.
Pending Litigation. On March 1, 2004, Oceanic and Petrotimor filed a complaint in the United States
District Court for the District of Columbia (DC Federal Court) regarding their 14.8 million-acre
Timor Gap concession. Oceanic and Petrotimor, as plaintiffs, brought this action to redress the
harm caused by the defendants (collectively including ConocoPhillips, Inc. and designated
subsidiaries, the Timor Sea Designated Authority for the Joint Petroleum Development Area, the
Timor Gap Joint Authority for the Zone of Cooperation, PT Pertamina and BP Migas) theft,
misappropriation and conversion of oil and gas resources within the Timor Gap.
Oceanic filed a Second Amended Complaint (the Complaint) with the DC Federal Court on March 1,
2005. The Complaint reflected claims that the misdeeds of the defendants effectively prevented
Oceanic from competing for rights to explore for and produce oil and gas within the Timor Gap.
On September 21, 2006, the DC Federal Court dismissed certain defendants and certain of Oceanics
claims and ordered that the remaining defendants file an Answer or other Responsive Pleading to the
Complaint.
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On February 5, 2007, the DC Federal Court granted the motion of the remaining defendants,
ConocoPhillips, Inc. and ConocoPhillips Company (ConocoPhillips), to transfer the case to the
United States District Court for the Southern District of Texas (Texas Federal Court).
The defendants subsequently filed a motion for judgment on the pleadings. On April 16, 2008, the
Texas Federal District Court issued its Opinion on Dismissal stating that Oceanics claims fail
because it does not plead facts that, if true, would show that its loss was proximately caused by
the bribery. The District Court further held that To recover, Oceanic must show what would have
happened absent the bribe to a high degree of probability. It can not. Accordingly, the Texas
Federal Court granted defendants Rule 12( c ) motion for judgment on the pleadings. A final
judgment was entered on April 22, 2008. Oceanics timely notice of appeal was filed on or about
May 19, 2008. On August 19, 2008, Oceanic/Appellants filed their opening Brief with the United
States Court of Appeals for the Fifth Circuit asserting multiple grounds of error by the District
Court. These included the arguments (1) that the District Court erred in applying a heightened
pleading standard in judging the sufficiency of Oceanics proximate cause allegations, (2) that the
District Court did not accept Oceanics well-pleaded allegations as true and failed to draw
reasonable inference in Oceanics favor, (3) that the case should be reversed, remanded, and
assigned to a different judge, and (4) that the District Court erred in dismissing ConocoPhillips
subsidiaries for lack of personal jurisdiction. The defendants/appellees filed their Brief in
response on October 6, 2008. Appellants filed their Reply Brief on October 21, 2008. The parties
presented oral arguments on their respective positions on March 30, 2009. On November 6, 2009, the
United States Court of Appeals affirmed the final judgment of the District Court. Oceanic is
reviewing its options in light of the recent court decision.
General and Administrative Expenses. Total general and administrative costs and expenses for the
nine months ended September 30, 2009 decreased by $102,411 or 8% from the same period in 2008. The
largest changes between the two years were:
| Salaries and employee benefits decreased $152,816 due to fewer employees and the CFO position changing from full-time to part-time in August 2008. |
| General legal fee expense has increased by $41,178 due to legal fees previously capitalized for Oceanics potential future rights offering being written off subsequent to the Boards decision to withdraw Oceanics Registration Statement. |
| Auditing and Accounting fee expense has increased by $15,502 due to accounting fees previously capitalized for Oceanics potential future rights offering being written off subsequent to the Boards decision to withdraw Oceanics Registration Statement. |
Other Income and Expense. Interest income for the nine months ended September 30, 2009 is $5,844,
which is $19,342 lower than the amount for the same period last year. This is because Oceanic did
not have as much available cash to invest in the first nine months of 2009 as compared to the same
period for 2008. Interest income for 2008 includes interest on the remaining proceeds from the
2006 rights offering. In addition, the rate of interest earned on the investment of the trust
account with the ANZ Bank was higher in 2008 than in 2009.
Interest expense at September 30, 2009 of $137,713 compared to $39,409 for the same period in 2008,
is primarily interest accrued on the line of credit payable to NWO. The outstanding principal
balance of this obligation was $3,250,000 and $1,300,000 at September 30, 2009 and 2008,
respectively.
Non-cash net foreign exchange losses of $41,230 at September 30, 2009 versus gains of $50,504 at
September 30, 2008, resulted from the weakening of the U.S. dollar as against the British pound,
the Euro and the Australian dollar for the first nine months of 2009 compared to the first nine
months of 2008.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 4T. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the Evaluation Date), the President and Chief
Financial Officer carried out an evaluation, which included inquiries made to certain other Oceanic
employees, of the effectiveness of Oceanics design and operation of disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended) as of the end of the period covered by this report. Based upon that evaluation, the
President and Chief Financial Officer concluded that, as of the Evaluation Date, Oceanics
disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports that Oceanic files or submits under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods specified in the applicable
rules and forms, and (ii) accumulated and communicated to the management of Oceanic to allow timely
decisions regarding disclosure.
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Changes in Internal Controls
There have been no changes in Oceanics internal controls over financial reporting that occurred
during the period covered by this report that has materially affected, or is reasonably likely to
materially affect, its internal controls over financial reporting.
Report of Management
Management prepared, and is responsible for, the condensed consolidated financial statements and
the other information appearing in this report. The condensed consolidated financial statements
present fairly Oceanics financial position, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States. In preparing its condensed
consolidated financial statements, Oceanic includes amounts that are based on estimates and
judgments that management believes are reasonable under the circumstances.
Assessment of Internal Control Over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal control over
financial reporting. Oceanics internal control system was designed to provide reasonable
assurance to Oceanics management and directors regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of Oceanics internal control over financial reporting as of
September 30, 2009. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal ControlIntegrated Framework. Based
on its assessment, Oceanic believes its internal controls over financial reporting were effective
as of September 30, 2009.
PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Legal proceeding developments in 2008 were reported in the December 31, 2008 Form 10-K. See
the Pending Litigation section in Footnotes (2) and (3) and in Managements Discussion and
Analysis (3) above for activity through November 13, 2009.
ITEM 1A. | RISK FACTORS |
The Annual Report on Form 10-K listed certain risk factors which should be carefully considered in
addition to the other information included in the periodic reports. The following risk factors
have materially changed since the date of the Annual Report. Each of these risk factors could
adversely affect Oceanics business, operating results and financial condition, as well as
adversely affect the value of an investment in its common stock.
(1) MATERIAL NET LOSSES
Oceanic has suffered recurring material net losses and losses from operations during the most
recent interim period and in recent fiscal years. Net losses for the nine months ended September
30, 2009 and 2008 were ($1,252,611) and ($1,936,709), respectively. Oceanics stockholders equity
decreased from a negative ($2,980,409) at December 31, 2008 to a negative ($4,233,020) as of
September 30, 2009. If Oceanic continues to incur significant legal expenses related to its
ongoing lawsuit, Oceanic expects significant losses to continue.
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(2) NEED FOR ADDITIONAL FINANCING
Oceanic will need additional financing. During the first nine months of 2009, Oceanic used $90,525
more cash than it generated from operating and financing activities and ended the third quarter
with a negative stockholders equity of ($4,233,020). Oceanics current operations are financed
with a line of credit evidenced by a promissory note with NWO Resources, Inc. (NWO). However,
Oceanic had considered a rights offering or other equity offering to repay the line of credit and
provide working capital. However, on November 5, 2009, the Oceanic Board determined that a rights
offering was not in Oceanics best interest at this time. Oceanic has requested withdrawal of the
Registration Statement it filed on May 13, 2009 relating to a potential future rights offering. As
of September 30, 2009, Oceanic expensed $85,794 of previously capitalized costs as a result of this
decision. Oceanic intends to use the funds available under its line of credit to fund current
operations.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
ITEM 3. | DEFAULTS OF SENIOR SECURITIES |
None
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None
ITEM 6. | EXHIBITS |
(a) | Exhibits filed herewith are listed below and attached to this report. The Exhibit Number refers to the Exhibit Table in Item 601 of Regulation S-K. |
Exhibit Number | Name of Exhibit | |||
31.1 | Rule 13a-14(a) Certification of Principal Executive Officer |
|||
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer |
|||
32.1 | Rule 13a-14(b) Certification of Officers |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Oceanic Exploration Company |
||||
Date: November 13, 2009 | /s/ Stephen M. Duncan | |||
Stephen M. Duncan President | ||||
Date: November 13, 2009 | /s/ Lori A. Brundage | |||
Lori A. Brundage Chief Financial Officer | ||||
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