UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
BUSINESS ISSUERS
Commission File Number 0-20915
------------------------------
GEO PETROLEUM, INC.
-------------------
(Name of Small Business Issuer in its charter)
California 33-0328958
---------- ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
501 Deep Valley Drive, Suite 300
--------------------------------
Rolling Hills Estates, California 90274
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (310) 265-0721
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----
The issuer became a reporting company when its Form 10-SB registration statement
was cleared on August 12, 1996.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at June 30, 1998
----- ----------------------------
Common stock,
no par value 8,800,386
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
Geo Petroleum, Inc.
Unaudited Balance Sheets
<CAPTION>
June 30, December 31,
1998 1997(1)
----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (includes restricted cash of
$160,000 in 1997 and 1998) $ 104,304 $ 418,393
Accounts receivable:
Accrued oil and gas revenues (net of allowance for doubtful
accounts of $6,942 in 1997 and 1998) 18,486 53,204
Joint interest and other (net of allowance for doubtful
accounts of $48,835 in 1997 and 1998) 78,300 69,809
Prepaid expenses and other, net 127,464 127,718
----------------------------------
Total current assets 328,553 669,124
Due from Capitan Resources, Inc. (net of valuation allowance
of $500,000 in 1997 and 1998) 394,981 213,545
Property and equipment:
Oil and gas properties 6,440,999 6,342,986
Office furniture and equipment 159,500 155,338
----------------------------------
6,600,498 6,498,324
Accumulated depletion and depreciation (1,253,001) (1,201,602)
----------------------------------
5,347,498 5,296,722
----------------------------------
Total assets $ 6,071,032 $ 6,179,391
==================================
1
</TABLE>
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Unaudited Balance Sheets
<CAPTION>
June 30, December 31,
1998 1997(1)
-----------------------------------
<S> <C> <C>
Liabilities and stockholders' equity Current liabilities:
Accounts payable:
Accrued royalties $ 347,243 $ 361,326
Trade and other 439,623 258,193
Accrued expenses 139,504 139,504
Current portion of bank notes payable 615,000 622,500
Current portion of capitalized lease obligation 4,583 4,583
Notes payable to officers 185,000 240,000
Other notes payable 21,778 23,070
-----------------------------------
Total current liabilities 1,752,730 1,649,176
Long-term portion of notes payable 19,155 --
Capitalized lease obligation 13,747 13,747
10% convertible debentures 39,400 39,400
Stockholders' equity:
Common stock, no par value; authorized 50,000,000 shares; issued and outstanding
8,800,386 at June 30, 1998 and 7,900,432 shares at December 31, 1997 7,049,399 7,049,399
Accumulated deficit (2,803,400) (2,572,331)
-----------------------------------
Total stockholders' equity 4,245,999 4,477,068
-----------------------------------
Total liabilities and stockholders' equity $ 6,071,032 $ 6,179,391
===================================
2
</TABLE>
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Unaudited Statements of Operations
<CAPTION>
Three months ended June 30,
1998 1997(1)
--------- ---------
<S> <C> <C>
Revenues:
Oil and gas sales $ 31,349 $ 173,834
Waste disposal services (from related party) 144,232 54,405
Other revenue 3,200 105,379
Interest income 1,119 8,595
---------------------------------
179,900 342,213
Expenses:
Lease operating expenses 131,241 229,170
Depletion and depreciation 25,699 30,799
Amortization of financing & restructuring costs -- 6,988
General and administrative 177,548 114,915
Valuation allowance on receivable from related party -- 102,000
Interest expense 1,089 16,730
---------------------------------
335,578 500,602
---------------------------------
Loss before income taxes (155,678) (158,389)
Provision for income taxes -- --
---------------------------------
Net loss (155,678) (158,389)
Preferred stock dividends -- --
---------------------------------
Net loss applicable to common stock $(155,678) $(158,389)
=================================
Basic and diluted net loss per share of common stock $ (0.02) $ (0.02)
=================================
<FN>
(1) Restated per Ernst & Young LLP
</FN>
4
</TABLE>
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Unaudited Statements of Operations
<CAPTION>
Six months ended June 30,
1998 1997(1)
---------------------------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 145,388 $ 415,036
Waste disposal services (from related party) 249,939 117,925
Other revenue 11,922 148,852
Interest income 6,017 26,259
---------------------------------
413,265 708,072
Expenses:
Lease operating expenses 299,284 375,963
Depletion and depreciation 51,399 52,948
Amortization of financing & restructuring costs -- 10,785
General and administrative 266,296 260,886
Valuation allowance on receivable from related party -- 201,000
Interest expense 27,356 39,577
---------------------------------
644,335 941,159
---------------------------------
Loss before income taxes (231,070) (233,087)
Provision for income taxes -- --
---------------------------------
Net loss (231,070) (233,087)
Preferred stock dividends -- --
---------------------------------
Net loss applicable to common stock $(231,070) $(233,087)
=================================
Basic and diluted net loss per share of common stock $ (0.03) $ (0.03)
=================================
<FN>
(1) Restated per Ernst & Young LLP
</FN>
5
</TABLE>
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Unaudited Statements of Cash Flows
<CAPTION>
June 30, December 31,
1998 1997
------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (231,070) $ (768,406)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depletion and depreciation 51,399 102,797
Amortization of deferred loan costs -- 43,063
Payment in common stock for services -- 151,645
Changes in operating assets and liabilities:
Accounts receivable 26,227 256,702
Due from Capitan Resources, Inc., net (181,436) (22,315)
Prepaid expenses and other 254 (117,905)
Accounts payable 167,347 (207,980)
Accrued expenses 0 19,861
------------------------------------
Net cash used in operating activities (167,279) (542,538)
Investing activities
Acquisition of Drake Investment Corp. -- --
Additions to property and equipment (98,013) (1,610,159)
Disposition of property -- 91,000
------------------------------------
Net cash used in investing activities (98,013) (1,519,159)
Financing activities
Proceeds from notes payable 16,287 385,078
Payments on notes payable (65,085) (265,908)
Payments in common stock for interest -- 72,037
Common stock sold in private placements -- 86,709
Preferred stock sold -- --
Dividends paid -- (750)
Preferred stock redeemed -- (27,702)
Warrants exercised -- 1,800
------------------------------------
Net cash provided by financing activities (48,798) 251,264
------------------------------------
Net (decrease) increase in cash and cash equivalents (314,089) (1,810,433)
Cash and cash equivalents at beginning of year 418,393 2,228,826
------------------------------------
Cash and cash equivalents at end of period $ 104,304 $ 418,393
====================================
6
</TABLE>
<PAGE>
1. Organization and Summary of Significant Accounting Policies
Organization
Geo Petroleum, Inc. (the Company) is an oil and gas production company founded
in 1986 and incorporated in the state of California. The Company engages in the
development, production and management of oil and gas properties located in
California. A well on one of the Company's oil properties is used for waste
disposal services. These operations are conducted by a related party (see Note
4) and the Company has a 75% revenue interest in such operations.
Common Stock Split
On April 30, 1996, the Company's common stock was split at a rate of
2.5505-for-1 in accordance with a resolution of the Company's Board of
Directors. All references to the number of common stock shares contained in
these financial statements have been adjusted to reflect the stock split.
Cash and Cash Equivalents
Cash equivalents include certificates of deposit with original maturity dates of
less than three months. The Company maintains a $100,000 certificate of deposit
for state of California authorization purposes to perform additional oil and gas
well recompletions and abandonments. These funds are subject to certain
withdrawal restrictions until completion of the work. The Company also has
$60,000 in restricted cash held in government bonds, $50,000 with the city of
Los Angeles and $10,000 with Ventura County, for the purposes of paying for any
future environmental liabilities that could arise.
Investment in Partnership
Included in oil and gas properties is an investment in a general partnership
that was created in 1991 to produce oil at a well located on one of the
Company's oil and gas properties. The Company is the managing partner in this
general partnership, and this investment is accounted for under the pro rata
consolidation method.
Property and Equipment
The Company follows the full-cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration
and development of oil and gas reserves are capitalized as incurred. The costs
of oil and gas properties are accumulated in a cost center and are subject to a
cost center ceiling which such costs do not exceed. The Company has not
capitalized any of its internal costs in oil and gas properties.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are depleted over the estimated useful lives
of the properties by application of the unit-of-production method using only
proved oil and gas reserves,
7
<PAGE>
excluding future estimated costs and related proved undeveloped oil reserves at
the Vaca Tar Sands property, which relate to a major development project
involving an enhanced recovery process. The evaluations of the oil and gas
reserves were prepared by Sherwin D. Yoelin, a petroleum engineer. Depletion
expense recorded for the year ended December 31, 1997 was $88,157.
Substantially all additions to oil and gas properties in 1998 and 1997 relate to
recompletions of existing producing or previously producing wells. During 1997,
the Company received proceeds of $91,000 from the sale of certain oil and gas
interests which were credited to property and equipment.
The Company's oil and gas producing properties are estimated by the Company's
independent petroleum engineer to have remaining producing lives in excess of 17
years. The Company's policy for accruing site restoration and environmental exit
costs related to its oil and gas production is that such costs are accounted for
in the Company's calculation of depletion expense.
Depreciation of office equipment and furniture is computed using the
straight-line method, with depreciation rates based upon their estimated useful
lives, which range between five and seven years. Depreciation expense was
$14,340 for the year ended December 31, 1997.
Revenue
Revenue from oil and gas sales is recognized upon delivery of the oil and gas to
the Company's customer. Such revenue is recorded net of royalties and certain
other costs that the Company incurs to bring the oil and gas into salable
condition.
The Company had two significant customers for its oil and gas production in 1998
and 1997 that accounted for approximately 88% and 82% of gross oil and gas
sales, respectively. All of the Company's revenue from waste disposal services
arises from a related party (see Note 4) which operates the Company's waste
disposal well. The Company recognizes its share of waste disposal revenues as
the services are provided by the related party.
Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings per
share adjusted for the stock split described above:
June 30, December 31,
1998 1997
----------- -----------
Numerator:
Net loss $ (231,070) $ (768,406)
Preferred stock dividends -- (3,744)
---------------------------
8
<PAGE>
Numerator for basic and diluted loss
per common share (231,070) (772,150)
Denominator:
Denominator for basic and diluted loss
per common share-weighted-average
shares 8,800,386 7,732,989
---------------------------
Basic and diluted loss per common shares $ (0.03) $ (0.10)
===========================
The following additional potential common shares were outstanding during 1998
and 1997, but were not included in the computation of diluted loss per share
because such assumptions are anti-dilutive:
At December 31, 1996, $101,289 of convertible preferred stock was
outstanding, convertible into shares of the Company's common stock at
$2.50 per share, or 40,516 shares. In addition, at the time the preferred
stock is converted, the shareholder also receives common stock warrants to
purchase shares totaling one-half of the number of common stock shares
converted, or 20,258 shares. At December 31, 1997, there was no
convertible preferred stock outstanding.
At December 31, 1996, $145,022 of notes payable to investors convertible
into shares of the Company's common stock at $2.50 per share or 58,009
shares were outstanding. In addition, at the time the notes are converted,
the shareholder also receives common stock warrants to purchase shares
totaling one-half of the number of common stock shares converted or 29,005
shares. At December 31, 1997, all of these notes had either been redeemed
or converted.
At December 31, 1997, $39,400 of convertible subordinated debentures were
outstanding. These debentures are convertible into the Company's common
stock at a 10% discount off the closing price at the date of these
debentures and mature in July 2000.
Options to purchase 500,000 shares of the Company's common stock at $2.07
per share and 125,000 shares of the Company's common stock at $4.125 per
share were outstanding during 1997.
At December 31, 1997 and 1996, the Company had an aggregate of 997,361 and
957,946 warrants outstanding, respectively, to purchase shares of its
common stock at $3.00 per share which expire at various dates during 1999
through 2001.
Subsequent to December 31, 1997, the Company has issued a total of 66,763 common
stock shares as compensation to its employees, officers, consultants and
vendors.
Use of Estimates in the Preparation of Financial Statements
9
<PAGE>
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Farm-Out of Vaca Tar Sands Property
On December 23, 1996, the Company entered into an agreement with Saba Petroleum,
Inc. (Saba) to farm-out two-thirds (2/3) of the Company's rights and interests
in the Vaca Tar Sands property in exchange for Saba to invest a minimum of
$10,000,000 in operating and developing the property over a two-year period from
the date of the agreement. Saba had the right to receive all revenues from the
properties until its costs are recouped. Subsequent thereto, the Company was to
participate as to its one-third (1/3) interest in the property and shall
co-operate the property with Saba.
If Saba did not invest the agreed sum of $10,000,000 within the two-year term or
ceased operations at the property for a period of 90 days after assuming
operations, Saba was to re-assign all interests in the property to the Company
except for any property interests acquired by Saba and spacing units, as defined
in the agreement, around each well Saba wishes to retain.
On November 1, 1997, the contract agreement with Saba was renegotiated and
modified so that the Company's interest would increase from one-third to
two-thirds, as Saba did not make the required operating and developing
investments. The modification requires Saba to pay for one-half of the operating
and developing costs until they expend $5,000,000. At that point, Saba will have
earned a one-third interest and the Company will retain a two-thirds interest in
the property and these two parties will share in the costs and revenues based on
their respective interests.
3. Notes Payable
Notes payable consist of the following:
June 30, December 31,
1998 1997
-----------------------
Note payable to bank $615,000 $622,500
Notes payable to investors 10,000 10,000
Notes payable to officers 185,000 240,000
10% convertible debentures 39,400 39,400
Long-term portion of notes payable 19,155 --
Automobile loan 11,778 13,070
-----------------------
880,333 924,970
Less current portion 821,778 885,570
-----------------------
Total long-term debt $ 58,555 $ 39,400
=======================
10
<PAGE>
Note Payable to Bank
In 1990, the Company issued 273,669 shares of common stock, an option to
purchase 180,660 additional shares of common stock at $2.35 per share and a
recorded deed of trust on 20% of the Company's interest in its Vaca Tar Sands
property to certain parties in exchange for those parties providing the
collateral, 35,000 shares of Union Pacific Corp. common stock, for the Company's
note payable to a bank. The consideration issued was valued at $300,000, its
estimated fair market value, and was amortized as additional loan costs over
five years. The 35,000 shares of Union Pacific Corp. common stock are held in a
trust and had an approximate value of $2,191,875 at December 31, 1997. In the
event of default on the bank note payable, the parties providing the collateral
may take steps to recover from the Company the value of any collateral taken by
the bank. The collateral agreements and the stock purchase option expired on
September 11, 1995. During 1997, in connection with the extension of the
maturity date of the bank note payable to January 1, 1998, the collateral
agreement was extended to January 1, 1998. As compensation for this extension,
the Company issued 51,040 shares of the Company's common stock to the owners of
the collateral. The parties agreed that the stock issued had a value of $53,592
or $1.05 per share. During 1997, the recorded deed of trust on the Company's
interest in its Vaca Tar Sands property to certain parties in exchange for those
parties providing the collateral was changed to 33% of the Company's interest.
The note payable to bank bears interest at prime plus 3.0%. At December 31,
1997, the prime rate was 8.50%. Interest payments are due monthly. During 1997
and 1996, the bank extended the maturity of the note several times. On October
11, 1996, retroactive to June 15, 1996, the bank amended certain terms and
extended the maturity date of the note from June 15, 1996 to January 1, 1998,
including a $750,000 principal payment due January 15, 1997, and subsequent
principal payments in the amount of $20,000 per month due on the 15th of each
month beginning April 15, 1997. In October 1997, the bank amended the monthly
payments from $20,000 per month to $7,500 per month.
On January 30, 1998, the Company signed an extension agreement with the bank
that extended the due date of the note to either June 30, 1998, or December 1,
1998, if the Company receives certain investment capital by June 30, 1998. The
extension agreement requires the Company to make monthly payments of $10,000
starting February 1, 1998 through May 1, 1998, and a lump-sum principal paydown
of 30% of the net investment proceeds received by the Company from any capital
financing. Unless the entire obligation becomes due and payable on June 30,
1998, the remaining principal balance is to be repaid in six equal installments
starting July 1, 1998. As compensation for the extension of this note, the
Company issued 25,000 shares of the Company's common stock to the owners of the
collateral. On January 30, 1998, the date of the extension agreement, the
Company's stock had a market price of $1 per share valuing the 25,000 shares at
a cost of $25,000.
During 1998, the bank also released 27,500 shares of the Union Pacific Corp.
common stock used as collateral reducing the collateral to 7,500 shares. In
addition to the 7,500 shares of Union Pacific Corp. common stock, the loan is
also secured by 7,642 shares of
11
<PAGE>
Union Pacific Resource common stock which was spun-off from Union Pacific Corp.
and $328,260 in cumulative dividends earned on these two stocks.
Notes Payable to Investors
The Company at various times has issued notes payable to various investors
bearing an interest rate of 10% and a guaranteed oil and gas production payment
equal to 20% of the outstanding principal amount per annum. The holders of
certain of the notes had extended the maturities of the notes to various dates
in 1997, and all of the notes were secured by interests in the Company's oil and
gas properties. During 1997, $71,300 of new notes payable to investors was
issued, $179,181 of notes payable was repaid, and $102,428 of notes payable and
accrued interest was exchanged for shares of the Company's common stock.
Officer Loans
During 1997, the Company borrowed $240,000 from two of its officers. A loan of
$50,000 from one of the officers bears interest at a rate of 8.25% with the
principal and accrued interest due on demand. The Company received the other
loan of $190,000 from the other officer which bears interest at a rate of
10.25%, accrued interest due monthly commencing January 1, 1998, and principal
and any unpaid interest due on or before July 1, 1998.
Convertible Debentures
During 1997, the Company issued 10% convertible subordinated debentures totaling
$39,400 to various investors which are due in July 2000. These debentures are
convertible into shares of the Company's common stock convertible at a 10%
discount off the closing price at the date of these debentures. Interest
payments are due monthly.
4. Related Party Transactions
Capitan Resources, Inc.
The Company has certain agreements with Capitan Resources, Inc. (Capitan) to
sell gas produced from wells owned by the Company and to offer waste disposal
services on sites owned by the Company. The principal officer/shareholder of the
Company is also the principal officer/shareholder of Capitan. Under the
agreements, the Company is to receive 70% of Capitan's gross revenues from gas
sales and 75% of Capitan's gross revenues from waste disposal services. The
waste disposal services are operated by Capitan and the costs of gas production
and of operating the waste disposal services are borne by Capitan.
As of December 31, 1997, Capitan does not have sufficient liquidity to pay the
entire amounts due the Company in the foreseeable future. Although the Company's
management believes that the fair market value of Capitan's net assets, which
consists primarily of Capitan's revenue interests in the Company's properties,
exceeds amounts owed to the Company, the Company has recorded a valuation
allowance of $500,000
12
<PAGE>
during the year ended December 31, 1997, to reduce the carrying value of the
accounts receivable due from Capitan.
Other
During 1997 and 1996, notes payable by the Company to a relative of the
principal officer/shareholder totaling $12,014 and $121,850, respectively, were
converted into 4,806 and 48,740 shares, respectively, of the Company's common
stock aggregating $12,014 and $121,850, respectively. Additionally, 24,505 and
23,740 warrants, respectively, were issued to purchase a share of the Company's
common stock at $3.00 per share, which expire at various dates during 1999
through 2001.
At December 31, 1997, the Company had notes payable and convertible debentures
to relatives of the principal officer/shareholder totaling $24,000.
5. Redeemable Convertible Preferred Stock
During 1994, the Company authorized 100,000 shares of preferred stock with a par
value of $1,000 per share. The series of preferred stock issued, carrying an
annual dividend of 30%, was callable by the Company at par at any time on notice
to the holder. If the Company has not called the preferred stock for redemption
by January 1, 1997, the holder may require the Company to redeem the preferred
stock. As originally issued, the preferred stock was convertible into common
stock, at the option of the holder, at a price equal to 80% of the price at
which the common stock may be sold in an initial public offering of the common
stock of the Company. During the year ended December 31, 1996, the Company and
the holders of the preferred stock agreed that each share of the preferred stock
could be converted into 400 shares of the Company's common stock and 200
warrants to purchase a share of the Company's common stock at $3.00 per share
which expire at various dates during 1999.
In January 1996, the Company issued 23.5 shares of its redeemable convertible
preferred stock to two investors for cash totaling $23,500.
During 1996, three holders of notes payable totaling $66,250 converted such
notes into 66.25 shares of the Company's redeemable convertible preferred stock.
During 1997 and 1996, 91.18 and 347.69 shares, respectively, of the Company's
redeemable convertible preferred stock totaling $91,183 and $347,668,
respectively, were converted into 36,473 and 139,067 shares, respectively, of
the Company's common stock and 14,717 and 69,534 warrants, respectively, to
purchase a share of the Company's common stock at $3.00 per share which expire
at various dates during 1999 through 2001.
During 1997 and 1996, accrued dividends on the Company's redeemable convertible
preferred stock totaling $17,596 and $44,204, respectively, were converted into
7,038 and 17,682 shares, respectively, of the Company's common stock and 3,519
and 8,841 warrants to purchase a share of the Company's common stock at $3.00
per share which
13
<PAGE>
expire at various dates during 1999 through 2001.
6. Common Stock
During 1996, the Company's Articles of Incorporation were amended to provide for
an authorized capital of fifty million shares of common stock.
In December 1996, the Company sold 522,000 shares of the Company's common stock
attached with 522,000 warrants to purchase a share of the Company's common stock
at $3.00 per share, which expire at various dates during 1999 and 2000, at a
price of $2.50 per share for cash totaling $1,305,000, before related
commissions, costs and expenses of $187,301.
On December 31, 1996, the Company sold 1,764,000 shares of the Company's common
stock to private parties at a price of $1.50 per share for cash totaling
$2,646,000, before related costs and expenses of $155,659. The Company sold
300,000 warrants at a price of $15,000, in connection with services provided to
the Company related to the sale of the stock. Each warrant provides for the
purchase of a share of the Company's common stock at $3.00 per share and expires
on December 31, 1999.
At December 31, 1997 and 1996, an aggregate of 997,361 and 957,946 warrants,
respectively, to purchase a share of the Company's common stock at $3.00 per
share which expire at various dates during 1999 through 2001 were outstanding.
7. Income Taxes
Deferred income taxes result from temporary differences in the recognition of
revenues and expenses for financial accounting and tax reporting purposes. Net
deferred income taxes were composed of the following:
December 31, 1997
------------------
Deferred income tax asset - operating loss
carryforwards $ 2,000,000
Deferred income tax liability - differences between
book and tax basis of property (1,100,000)
Valuation allowance (900,000)
------------------
Net deferred income taxes $ --
==================
As of December 31, 1997, the Company had estimated net operating loss
carryforwards available in future periods to reduce income taxes that may be
payable at those dates. For federal income tax purposes, net operating loss
carryforwards amounted to approximately $5,100,000 for 1997, and expire during
the years 2001 through 2009. For state income tax purposes, net operating loss
carryforwards amounted to approximately $3,400,000 for 1997, and expire during
the years 2004 through 2010. Due to the "change in
14
<PAGE>
ownership" provisions of the Tax Reform Act of 1986, utilization of the
Company's net operating loss carryforwards may be subject to a substantial
limitation if a greater than 50% ownership change, as defined, occurs subsequent
to the incurrence of the losses. The Company is delinquent in filing its 1995
and 1996 income tax returns.
8. Commitments and Contingencies
Future Minimum Rental Payments
Total rental expense incurred under all lease agreements was $78,368 for the
year ended December 31, 1997. At June 30, 1998, the Company had the following
future lease commitments:
1998 $ 25,200
1999 33,600
2000 33,600
2001 33,600
2002 8,400
------------------
Total $ 134,400
==================
The Company is currently delinquent in paying their 1994/1995, 1995/1996 and
1996/1997 property taxes.
Litigation
The Company is involved in certain legal matters in the ordinary course of
business. In one particular case, an interlocutory judgment was awarded against
the Company by the court hearing litigation in which the Company is a defendant.
The judgment requires the Company to incur the expense of clean up and
abandonment of two idle wells. Additionally, if the Company fails to do so the
courts may also award damages for these costs including attorneys' fees. These
costs are not possible to determine at this time, but the plaintiff has
requested damages of up to $300,000. The Company is considering whether to
appeal the decision of the court.
9. Events Subsequent to December 31, 1997
Extension of Officer Loan
The $190,000 loan from an officer due on or before July 1, 1998 was subsequently
extended to July 1, 1999. No other changes to the terms or conditions of this
officer loan have been made.
Litigation
During July 1998, the court hearing litigation issued a final judgment against
the Company requiring it to clean up and abandon two idle wells and to pay
$32,000 in damages to the plaintiff. The Company plans to proceed with the well
clean up and
15
<PAGE>
abandonment; however, it has filed an appeal with respect to the damages awarded
the plaintiff.
Shut-in of Certain Oil and Gas Production
During June 1998, the Company decided to shut-in its oil and gas production at
all of its property locations except for the Vaca Tar Sands property. The
Company plans to focus its resources on the development of the Vaca Tar Sands
property and other waste disposal projects.
Planned Merger with Capitan Resources, Inc.
The Company is planning for the merger of Capitan into the Company by December
31, 1998. Capitan is an entity under common control of the principal
officer/shareholder of the Company. The only compensation related to the
transaction would be the issuance of approximately 70,000 shares of the
Company's common stock to an unrelated third party in exchange for the
cancellation of their overriding net profits interest in Capitan and their
$28,000 note due from Capitan. No other compensation is to be paid to the
shareholders of Capitan. If this transaction is consummated as planned, the
assets and liabilities of Capitan will be recorded on the Company's books at
their historical cost.
The Company's valuation of the discounted present value of Capitan's revenue
interests in the Company's gas wells, based upon the estimates included in the
Company's independent petroleum engineer's report, and in the Company's waste
disposal well is in excess of $1,000,000.
10. Quarterly Financial Information
<TABLE>
As of December 31, 1997, the Company has recorded a valuation allowance of
$500,000 to reduce the carrying value of the accounts receivable due from
Capitan. The recording of this valuation allowance results in certain quarterly
information previously reported by the Company during fiscal 1997 under Form
10-QSB to be different. Such amounts are as follows:
<CAPTION>
Three Months ended March 31, 1997
-----------------------------------------------------
As Originally Restated
Reported Adjustment Amount
-----------------------------------------------------
<S> <C> <C> <C>
Revenues $ 365,859 $ -- $ 365,859
Gross profit (loss) 90,452 -- 90,452
Valuation allowance on receivable from related
party - (99,000) (99,000)
Net income (loss) 24,302 (99,000) (74,698)
Net income (loss) applicable to common stock
24,302 (99,000) (74,698)
Net income (loss) per share of common stock
$ 0.00 $ (0.01) $ (0.01)
16
<PAGE>
Three Months ended June 30, 1997
-------------------------------------------------------
As Originally Restated
Reported Adjustment Amount
------------------- ----------------- -----------------
Revenues $ 342,213 $ -- $ 342,213
Gross profit (loss) (55,337) -- (55,337)
Valuation allowance on receivable from
related party - (102,000) (102,000)
Net income (loss) (56,389) (102,000) (158,389)
Net income (loss) applicable to common stock
(56,389) (102,000) (158,389)
Net income (loss) per share of common stock
$ (0.01) $ (0.01) $ (0.02)
Three Months ended September 30, 1997
-------------------------------------------------------
As Originally Restated
Reported Adjustment Amount
------------------- ----------------- -----------------
Revenues $ 571,533 $ -- $ 571,533
Gross profit (loss) 43,412 -- 43,412
Valuation allowance on receivable from
related party -- (195,000) (195,000)
Net income (loss) 324,820 (195,000) 129,820
Net income (loss) applicable to common stock 324,820 (195,000) 129,820
Net income (loss) per share of common stock $ 0.04 $ (0.02) $ 0.02
</TABLE>
11. Year 2000 Issue
The Company's accounting software and other applications used in its operations
were purchased from outside vendors. It is management's understanding that these
applications are Year 2000 compliant. As a result, management of the Company
does not believe that the Year 2000 will have an impact on its financial
statements or on its operations.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis for the two quarters ended June 30, 1998,
and June 30, 1997, are to be read in combination with the Financial Statements
presented elsewhere herein.
RESULTS OF OPERATIONS
SECOND QUARTER 1998 COMPARED WITH SECOND QUARTER 1997
During the quarter ended June 30, 1998, Geo had a net loss of $155,678 compared
to a net loss of $158,389 for the comparable 1997 period. Oil and gas revenues
decreased to $31,349 for the 1998 period, compared to $173,834 for the 1997
period. During June 1998, the Company decided to shut-in its oil and gas
production at all of its property locations except for the Vaca Tar Sands
property. The Company plans to focus its resources on the development of the
Vaca Tar Sands property and other waste disposal projects. Additionally, average
oil prices decreased to $13.44 per barrel in the 1998 period, compared to $22.05
per barrel in the 1997 period.
Lease operating expenses for the first quarter of 1998 decreased to $131,241, as
compared to $229,170 in the comparable 1997 period, as the result of the shut-in
of its oil and gas production at all of its property locations except for the
Vaca Tar Sands property.
The Company's provision for depletion and depreciation decreased to $25,699 for
the first quarter of 1998, as compared to $30,799 for the 1997 period. This was
due to lower depreciation associated with the sale of certain equipment.
General and administrative expenses for the 1998 first quarter were $177,548, as
compared to $114,915 for the 1997 period. The increase was largely due to legal
fees associated with a dispute over well-abandonments.
Interest expense for the 1998 first quarter was $1,089, as compared to $16,730
for the comparable 1997 period. This decrease was due primarily to a delay in
booking bank note interest due to ongoing negotiations with the bank.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL POSITION
At June 30, 1998, the Company had a working capital deficiency of $1,424,177,
compared to a working capital deficiency of $980,052 at December 31, 1997. The
increase was due primarily to an increase in trade debt.
The net cash flow from the properties of the Company has been insufficient to
fund its costs of operations and its debt servicing requirements.
The Company's primary sources of liquidity and capital resources in the near
term will consist of working capital derived from its oil and gas production and
industrial waste disposal operations, augmented by any such funds as may be
derived from the sale of equity in the Company and of participating interests in
its operations, and the sale of certain non-strategic assets and equipment.
18
<PAGE>
The Company's net revenues from industrial waste disposal and oil and gas sales
in excess of production and operating expenses during the three-month period of
1998 and 1997 were $44,340 and $(931), respectively. This increase is due to an
increase in disposal revenues and a decrease in operating costs.
INFLATION
In recent years inflation has not had a significant impact on the Company, its
operations or financial condition.
TRENDS
The collapse of the Asian and Russian economies has had a significant and
prolonged negative impact on oil prices. Average oil prices decreased $8.61 per
barrel to $13.44 per barrel in the 1998 period, compared to $22.05 per barrel in
the 1997 period. This weak product price structure will have a negative impact
on oil and gas revenues.
The weakness in oil prices has caused widespread consolidation in the oil
industry. Geo is actively pursuing merger and acquisition opportunities.
The Company will be subject to variations in cash flow depending upon changes in
prices paid for oil and gas. Based upon historical swings in prices, the Company
does not envision a situation where reductions in prices will create an
operating loss from its properties at the field level. Severe drops in prices
would, however, strain the Company's ability to conduct remedial work using its
revenues.
FIRST HALF 1998 COMPARED WITH FIRST HALF 1997
During the first half ended June 30, 1998, Geo had a net loss of $231,070
compared to a net loss of $233,087 for the comparable 1997 period. Oil and gas
revenues decreased to $145,388 for the 1998 period, compared to $415,036 for the
1997 period. During June 1998, the Company decided to shut-in its oil and gas
production at all of its property locations except for the Vaca Tar Sands
property. The Company plans to focus its resources on the development of the
Vaca Tar Sands property and other waste disposal projects. Additionally, average
oil prices decreased to $13.44 per barrel in the 1998 period, compared to $22.05
per barrel in the 1997 period.
Lease operating expenses for the first half of 1998 decreased to $299,284, as
compared to $375,963 in the comparable 1997 period, as the result of the shut-in
of its oil and gas production at all of its property locations except for the
Vaca Tar Sands property.
The Company's provision for depletion and depreciation decreased to $51,399 for
the first half of 1998, as compared to $52,948 for the 1997 period. This was due
to lower depreciation associated with the sale of certain equipment.
General and administrative expenses for the 1998 first half were $266,296, as
compared to $260,886 for the 1997 period. The increase was largely due to legal
fees associated with a dispute over well-abandonments.
Interest expense for the 1998 first half was $27,356, as compared to $39,577 for
the comparable 1997 period.
19
<PAGE>
This decrease was due primarily to a delay in booking bank note interest due to
ongoing negotiations with the bank.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL POSITION
The Company's net revenues from industrial waste disposal and oil and gas sales
in excess of production and operating expenses during the six-month period of
1998 and 1997 were $96,043 and $156,998, respectively. This decrease is due to a
decrease in oil and gas revenues.
20
<PAGE>
PART II. OTHER INFORMATION
The Company hereby incorporates by reference its discussion in Form 10-SB, Part
I, Item 1, Description of Business of the Agreement to Merger dated December 20,
1995, between it and Drake Investment Corporation.
Geo's Articles of Incorporation were amended December 5, 1995, authorizing an
increase in the number of preferred shares to 100,000 and the common shares to
50,000,000, and the split of each outstanding common share into 2.5505 shares.
The Boards of Directors and Shareholders of both companies approved the merger
on April 9, 1996, which was the effective date of the merger. The merger was
authorized by a Permit issued by the Department of Corporations, State of
California. The merger had no significant or appreciable effect on the Company,
its operations, or financial condition.
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GEO PETROLEUM, INC.
(Registrant)
October 21, 1998
/s/ GERALD T. RAYDON
---------------------------
By Gerald T. Raydon, Chairman and CEO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
UNAUDITED CONDENSED FINANCIAL STATEMENTS AT 6/30/98
</LEGEND>
<CIK> 0001016275
<NAME> GEO PETROLEUM, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 104,304
<SECURITIES> 0
<RECEIVABLES> 96,786
<ALLOWANCES> 522,444
<INVENTORY> 0
<CURRENT-ASSETS> 328,553
<PP&E> 6,600,498
<DEPRECIATION> (1,253,001)
<TOTAL-ASSETS> 6,071,032
<CURRENT-LIABILITIES> 1,752,730
<BONDS> 0
<COMMON> 7,049,399
0
0
<OTHER-SE> (2,731,098)
<TOTAL-LIABILITY-AND-EQUITY> 6,071,032
<SALES> 175,581
<TOTAL-REVENUES> 179,900
<CGS> 131,241
<TOTAL-COSTS> 203,247
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,089
<INCOME-PRETAX> (155,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155,678)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
