-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AiC867cegEWSc0lOmhoLwoVQL1GeLb2xgMB2SL5qVr1K1El/d7dI39l6EQyhwBOk NZhaig3t1vgHufd31POL2A== 0000950005-98-000785.txt : 19981007 0000950005-98-000785.hdr.sgml : 19981007 ACCESSION NUMBER: 0000950005-98-000785 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19981006 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEO PETROLEUM INC CENTRAL INDEX KEY: 0001016275 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 330328958 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-20915 FILM NUMBER: 98721520 BUSINESS ADDRESS: STREET 1: 501 DEEP VALLEY DRIVE STREET 2: SUITE 300 CITY: ROLLING HILLS STATE: CA ZIP: 90274 BUSINESS PHONE: 3102650721 MAIL ADDRESS: STREET 1: 501 DEEP VALLEY DRIVE STREET 2: SUITE 300 CITY: ROLLING HILLS STATE: CA ZIP: 90274 10QSB 1 FORM 10QSB 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 MARCH 31, 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 March 31, 1998 ----- ---------------------------- Common stock, no par value 8,243,323 PART I. FINANCIAL INFORMATION Geo Petroleum, Inc. unaudited Balance Sheets March 31, December 31, 1998 1997 --------------------------- Assets Current assets: Cash and cash equivalents $ 177,410 $ 418,393 (includes restricted cash of $160,000 in 1998 and 1997) Accounts receivable: Accrued oil and gas revenues (net of 46,939 53,204 allowance for doubtful accounts of $6,942 in 1998 and 1997) Joint interest and other (net of 74,116 69,809 allowance for doubtful accounts of $48,835 in 1998 and 1997) Prepaid expenses and other, net 129,088 127,718 --------------------------- Total current assets 427,554 669,124 Due from Capitan Resources, Inc. 308,179 213,545 (net of valuation allowance of $500,000 in 1998 and 1997) Property and equipment: Oil and gas properties 6,432,306 6,342,986 Office furniture and equipment 156,127 155,338 --------------------------- 6,588,433 6,498,324 Accumulated depletion and depreciation (1,227,302) (1,201,602) --------------------------- 5,361,132 5,296,722 Total assets $ 6,096,865 $ 6,179,391 =========== ============ 2 Geo Petroleum, Inc. unaudited Balance Sheets
March 31, December 31, 1998 1997 ---------------------------- Liabilities and stockholders' equity Current liabilities: Accounts payable: Accrued royalties $ 361,313 $ 361,326 Trade and other 335,405 258,193 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 22,466 23,070 ---------------------------- Total current liabilities 1,663,271 1,649,176 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 7,049,399 7,049,399 shares; issued and outstanding 8,243,323 at March 31, 1998 and 7,900,432 shares at December 31, 1997 Accumulated deficit (2,668,953) (2,572,331) ---------------------------- Total stockholders' equity 4,380,447 4,477,068 ---------------------------- Total liabilities and stockholders' equity $ 6,096,865 $ 6,179,391 ============ ============
3 Geo Petroleum, Inc. Unaudited Statements of Operations Quarter ended March 31 1998 1997 1 ------------------------ Revenues: Oil and gas sales $ 97,517 $ 241,203 Waste disposal services (from related party) 105,707 63,520 Other revenue 8,722 43,472 Interest income 4,898 17,664 ------------------------ 216,844 365,859 Expenses: Lease operating expenses 172,752 150,751 Depletion and depreciation 25,699 22,149 General and administrative 88,748 145,811 Valuation allowance on receivable - 99,000 from related party Interest expense 26,267 22,846 ------------------------ 313,466 440,557 ------------------------ Loss before income taxes (96,622) (74,698) Provision for income taxes - - ------------------------ Net loss (96,622) (74,698) Preferred stock dividends - - ------------------------ Net loss applicable to common stock $ (96,622) $ (74,698) ========= ========= Basic and diluted net loss per share of common stock $ (0.01) $ (0.01) ========= ========= 1 Restated per Ernst & Young LLP 4 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. 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, excluding future estimated costs and related proved undeveloped oil reserves at the Vaca 5 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: March 31, December 31, 1998 1997 ----------------------------- Numerator: Net loss $ (96,622) $ (768,406) Preferred stock dividends - (3,744) ----------------------------- Numerator for basic and diluted loss per common share (96,622) (772,150) 6 Denominator: Denominator for basic and diluted loss per common share-weighted-average shares 8,243,323 7,732,989 ----------------------------- Basic and diluted loss per common shares $ (0.01) $ (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 antidilutive: 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 7 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 expend 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 expend 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 expenditures. 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: March 31, 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 Automobile loan 12,466 13,070 -------------------------------- 861,866 924,970 Less current portion 822,466 885,570 -------------------------------- Total long-term debt $ 39,400 $ 39,400 ========= ========= Note Payable to Bank 8 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 2.0%. 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 Union Pacific Resource common stock which was spun-off from Union Pacific Corp. and $328,260 in cumulative dividends earned on these two stocks. 9 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 during the year ended December 31, 1997, to reduce the carrying value of the accounts receivable due from Capitan. 10 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 expire at various dates during 1999 through 2001. 11 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 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 12 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 March 31, 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 abandonment; however, it has filed an appeal with respect to the damages awarded the plaintiff. 13 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 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:
Three Months ended March 31, 1997 ------------------------------------------------- As Originally Restated Reported Adjustment Amount ---------------- ---------------- --------------- 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)
14
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
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. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis for the two quarters ended March 31, 1998, and March 31, 1997, are to be read in combination with the Financial Statements presented elsewhere herein. RESULTS OF OPERATIONS FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997 During the quarter ended March 31, 1998, Geo had a net loss of $96,622 compared to a net loss of $74,698 for the comparable 1997 period. Oil and gas revenues decreased to $97,517 for the 1998 period, compared to $241,203 for the 1997 period. This was attributable to a significant drop in the price of oil. 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 increased to $172,752, as compared to $150,751 in the comparable 1997 period, as the result of increased repairs and maintenance and increased insurance coverage and costs. The Company's provision for depletion and depreciation increased to $25,699 for the first quarter of 1998, as compared to $22,149 for the 1997 period. This was due to higher depreciation associated with the heavy infrastructure investments the Company made in 1997. General and administrative expenses for the 1998 first quarter were $88,748, as compared to $145,811 for the 1997 period. The decrease was largely due to an extensive cost cutting program and decreased executive compensation, primarily to Gerald T. Raydon, who has voluntarily taken a 50% reduction in his compensation. Interest expense for the 1998 first quarter was $26,267, as compared to $22,846 for the comparable 1997 period. This increase was due primarily to interest costs associated with the leasing of certain field vehicles. CAPITAL RESOURCES AND LIQUIDITY FINANCIAL POSITION At March 31, 1998, the Company had a working capital deficiency of $1,235,717, 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 Bank Notes Payable is due either June 30, 1998, or December 1, 1998, if the Company receives certain investment capital by June 30, 1998. 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 16 in its operations, and the sale of certain non-strategic assets and equipment. 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 $30,472 and $153,972, respectively. This decrease is due to a significant drop in oil prices. 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. 17 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) September 28, 1998 /s/ GERALD T. RAYDON --------------------------- By Gerald T. Raydon, Chairman and CEO /s/ ALYDA L. RAYDON --------------------------- By Alyda L. Raydon, Secretary and Treasurer EX-27 2 FINANCIAL DATA SCHEDULE
5 UNAUDITED CONDENSED FINANCIAL STATEMENTS AT 3/31/98 0001016275 GEO PETROLEUM, INC. 3-MOS DEC-31-1998 JAN-1-1998 MAR-31-1998 177,410 0 250,144 308,179 0 427,554 6,588,433 (1,227,302) 6,096,865 1,663,271 0 0 0 7,049,399 (2,615,806) 6,096,865 203,224 216,844 172,752 114,447 0 0 26,267 (96,622) 0 0 0 0 0 (96,622) (0.01) (0.01)
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