SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the Quarter ended June 30, 1999.
_____ 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 - 0-8041
GeoResources, Inc.
(Exact name of Registrant as specified in its charter)
Colorado 84-0505444
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1407 West Dakota Parkway, Suite 1-B, Williston, North Dakota 58801
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code) (701) 572-2020
________________________________________
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 __X__ No _____.
________________________________________
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 July 30, 1999
Common Stock 4,023,352 shares
(par value $.01 per share)
GEORESOURCES, INC.
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
(June 30, 1999 and December 31, 1998)
Consolidated Statements of Operations 4
(Three months ended June 30, 1999 and 1998
and six months ended June 30, 1999 and 1998)
Consolidated Statements of Cash Flows 5
(Six months ended June 30, 1999 and 1998)
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure
about Market Risks 12
PART II. OTHER INFORMATION 12
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
GEORESOURCES, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1999 1998
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 242,422 $ 40,673
Trade receivables, net 621,539 524,132
Inventories 316,141 403,529
Prepaid expenses 27,484 26,468
Investments 59,174 4,319
Total current assets 1,266,760 999,121
PROPERTY, PLANT AND EQUIPMENT, at cost:
Oil and gas properties, using the
full cost method of accounting:
Properties being amortized 19,202,351 19,139,363
Properties not subject to amortization 141,488 141,019
Leonardite plant and equipment 3,206,217 3,206,217
Other 706,157 704,357
23,256,213 23,190,956
Less accumulated depreciation, depletion,
amortization and impairment (17,923,298) (17,635,373)
Net property, plant and
equipment 5,332,915 5,555,583
OTHER ASSETS:
Mortgage loan receivable, related party 103,321 103,321
Other 45,569 46,699
Total other assets 148,890 150,020
TOTAL ASSETS $ 6,748,565 $ 6,704,724
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 612,408 $ 472,345
Current maturities of long-term debt 220,000 316,000
Accrued expenses 98,370 99,261
Total current liabilities 930,778 887,606
LONG-TERM DEBT, less current maturities 1,697,506 1,625,004
DEFERRED INCOME TAXES 140,000 140,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued and
outstanding, 4,030,652 shares and
4,097,714 shares, respectively 40,306 40,717
Additional paid-in capital 804,750 846,787
Retained earnings 3,135,225 3,164,610
Total stockholders' equity 3,980,281 4,052,114
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,748,565 $ 6,704,724
See Notes to Consolidated Financial Statements.
GEORESOURCES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
OPERATING REVENUES:
Oil and gas sales $ 599,881 $ 447,763 $ 933,603 $ 878,686
Leonardite sales 158,888 209,237 254,021 391,426
758,769 657,000 1,187,624 1,270,112
OPERATING COSTS AND EXPENSES:
Oil and gas production 278,139 206,006 477,369 444,339
Cost of leonardite sold 116,091 136,617 241,487 301,441
Depreciation and depletion 142,558 252,927 287,925 429,022
Selling, general and
administrative 77,812 120,893 150,059 232,757
614,600 716,443 1,156,840 1,407,559
Operating income (loss) 144,169 (59,443) 30,784 (137,447)
OTHER INCOME (EXPENSE):
Interest expense (41,870) (29,796) (82,404) (55,739)
Interest income 4,521 6,256 7,569 12,448
Other income, net 6,841 5,874 14,666 11,230
(30,508) (17,666) (60,169) (32,061)
Income (loss) before
income taxes 113,661 (77,109) (29,385) (169,508)
Income tax (expense) benefit (10,000) -- -- 10,000
Net income (loss) $ 103,661 $ (77,109) $ (29,385) $ (159,508)
EARNINGS PER SHARE:
Net income (loss),
basic and diluted $ .03 $ (.02) $ (.01) $ (.04)
See Notes to Consolidated Financial Statements.
GEORESOURCES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (29,385) $ (159,508)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and depletion 287,925 429,022
Deferred income taxes -- (10,000)
Other 1,130 3,998
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables (97,407) 10,942
Inventories 87,388 (62,184)
Prepaid expenses and other (1,016) 6,511
Investments (54,855) (37,184)
Increase (decrease) in:
Accounts payable 157,504 138,523
Accrued expenses (891) (5,105)
Net cash provided by
operating activities 350,393 315,015
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (82,698) (1,301,268)
Net cash used in investing activities (82,698) (1,301,268)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 160,000 850,000
Principal payments on long-term debt (183,498) (229,098)
Debt issue costs -- (8,627)
Purchase of stock for retirement (42,448) (59,018)
Issuance of stock -- 47,000
Net cash provided by (used in)
financing activities (65,946) 600,257
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 201,749 (385,996)
CASH AND EQUIVALENTS, beginning of period 40,673 490,385
CASH AND EQUIVALENTS, end of period $ 242,422 $ 104,389
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 82,404 $ 55,739
Income taxes 1,325 960
See Notes to Consolidated Financial Statements.
GEORESOURCES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of the management of GeoResources, Inc. (the
"Company"), the accompanying unaudited financial statements contain
all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position of the Company as
of June 30, 1999, and the results of operations and cash flows for
the three months and six months ended June 30, 1999, and 1998.
The results of operations for the periods ended June 30, 1999, are
not necessarily indicative of the results to be expected for the full
fiscal year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Therefore, it
is suggested that these financial statements be read in connection
with the audited consolidated financial statements and the notes
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
2. Certain accounts in the prior-year financial statements have been
reclassified for comparative purposes to conform with the
presentation in the current-year financial statements.
3. The Company assesses performance and allocates resources based upon
its products and the nature of its production processes which consist
principally of oil and gas exploration and production and the mining and
processing of leonardite. There are no sales or other transactions
between these two operating segments, and all operations are conducted
within the United States. Certain corporate costs, assets and capital
expenditures that are considered to benefit the entire organization are
not allocated to the Company's operating segments. Interest income,
interest expense and income taxes are also not allocated to operating
segments. There are no significant accounting differences between
internal segment reporting and consolidated external reporting.
Presented below are the Company's identifiable net assets as of June
30, 1999, and December 31, 1998:
1999 1998
Oil and gas $ 4,657,712 $ 4,702,417
Leonardite 1,242,324 1,347,521
General corporate activities 848,529 654,786
$ 6,748,565 $ 6,704,724
Presented below is information concerning the Company's operating
segments for the three- and six-month periods ended June 30, 1999, and
1998:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenue:
Oil and gas $ 599,881 $ 447,763 $ 933,603 $ 878,686
Leonardite 158,888 209,237 254,021 391,426
$ 758,769 $ 657,000 $1,187,624 $1,270,112
Income (loss) before
income taxes:
Oil and gas $ 208,313 $ 18,779 $ 226,667 $ 65,226
Leonardite 11,918 40,489 (47,437) 27,636
General corporate
activities (76,062) (118,711) (148,446) (230,309)
Other income and
expenses (30,508) (17,666) (60,169) (32,061)
$ 113,661 $ (77,109) $ (29,385) $ (169,508)
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Information contained in the following discussion of results of
operations and financial condition of the Company contains forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 which can be identified by the use of words such as "may,"
"will," "expect," "anticipate," "estimate," or "continue," or variations
thereon or comparable terminology. In addition, all statements other than
statements of historical facts that address activities, events or
developments that the Company expects, believes or anticipates, will or
may occur in the future, and other such matters, are forward-looking
statements.
The following discussion should be read in conjunction with the
Company's consolidated financial statements and related notes included
elsewhere herein. The Company's future operating results may be affected
by various trends and factors which are beyond the Company's control.
These include, among other factors, the competitive environment in which
the Company operates, prices for oil, both domestically and
internationally, demand for leonardite in the drilling industry,
dependence upon key management personnel, the speculative nature of the
oil and gas business in general, availability of drilling equipment and
other uncertain business conditions that may affect the Company's
business.
The Company cautions the reader that a number of important factors
discussed herein, and in other reports filed with the Securities and
Exchange Commission, particularly the Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1998, could affect the Company's actual
results and cause actual results to differ materially from those discussed
in forward-looking statements.
Results of Operations - Three Months and Six Months Ended June 30, 1999,
compared to Three Months and Six Months Ended June
30, 1998
Information concerning the Company's oil and gas operations for the
three months and six months ended June 30, 1999, is set forth in the table
below:
Oil and Gas Operations
% Increase % Increase
Three Months (Decrease) Six Months (Decrease)
Ended From 1998 Ended From 1998
June 30, 1999 Period June 30, 1999 Period
Oil and gas production
sold (BOE) 49,685 7% 88,543 --
Average price per BOE $ 12.07 25% $ 10.54 6%
Oil and gas revenue $ 599,881 34% $ 933,603 6%
Production costs $ 278,139 35% $ 477,369 7%
Average production cost
per BOE $ 5.60 26% $ 5.39 7%
Oil and gas production sold for the three months ended June 30,
1999, increased 3,200 barrels or 7% compared to the same period in 1998.
Production sold for the six months ended June 30, 1999, was essentially
equal to production sold for the same period in 1998. The increase in
1999 second quarter production sold was primarily due to sales of oil from
inventory that had been held in lease tanks from periods of much lower oil
prices that existed in portions of 1998 and the first quarter of 1999.
These sales of inventory barrels also brought production sold for the 1999
six-months period back up to the equivalent level that existed during the
same period in 1998. During the second quarter of 1999, the Company also
began returning previously "shut-in" wells to production and by June 30,
1999, it had re-established production, from essentially all its wells that
had been shut in due to low oil. This did not have a material effect on
second quarter 1999 production sold, but it should help maintain production
in the last half of 1999. The increased second quarter 1999 production
sold was also sold at substantially higher oil prices than those that
existed in the same period in 1998. The average oil price for the second
quarter 1999 advanced to $12.07 per BOE or 25% higher than the same period
in 1998 which brought the 1999 first half average oil price up to $10.54
or 6% above the prior year.
Oil and gas revenue increased $152,000 or 34% for the three months
ended June 30, 1999, compared to the same period in 1998. This increase
was due to the 25% higher average price per BOE, and the 7% higher volumes
sold, previously discussed. Oil and gas revenue for the six months ended
June 30, 1999, increased $55,000 or 6% compared to the same period in
1998. This increase was also due to the higher oil price and volume sold
in the second quarter 1999. The fluctuation in oil prices for the three-
and six-month periods ended June 30, 1999, resulted from substantially
increasing world oil prices primarily during the second quarter of 1999.
The average price the Company received for its oil in the first quarter
1999 was $8.59 per BOE compared to $12.07 per BOE for the second quarter 1999.
Since the end of the second quarter, the average oil price the Company
receives has increased even further to more than $15.00 per BOE. The
Company expects its average oil price for future 1999 quarters to increase
above the second quarter level if West Texas Intermediate continues to
trade on NYMEX around the $20 per barrel level.
Production costs for the three months ended June 30, 1999,
increased $72,000 or 35% compared to the same period in 1998 due primarily
to the production costs associated with inventory barrels, which costs
were transferred from inventories to oil and gas production costs upon the
sale of the barrels in the second quarter. Production costs were also
somewhat higher due to higher revenue, which increased state production
taxes, and to production costs associated with previously "shut-in" wells
now returned to production. Production costs for the 1999 six-month
period increased $33,000 or 7% over the same period in 1998 for the same
reasons the three-month period costs were higher, but they increased to a
lesser extent because first quarter 1999 production costs were
substantially lower. Production costs expressed on a per equivalent
barrel basis for the three- and six-month periods were 26% and 7% higher,
respectively, due to the production costs factors discussed above. As oil
selling prices increase, the Company is able to sell more of its higher
production cost oil at a positive cash flow.
Through June 30, 1999, the Company had not initiated any drilling
for the year, however, it plans to drill two vertical wells before the end
of 1999. These two wells would complete the South Starbuck Madison Unit
(SSMU) project in Bottineau County, ND, which is a secondary recovery
waterflood designed to increase production from one of the fields the
Company acquired in 1998.
Information concerning the Company's leonardite operations for the
three months and six months ended June 30, 1999, is set forth in the table
below:
Leonardite Operations
% Increase % Increase
Three Months (Decrease) Six Months (Decrease)
Ended From 1998 Ended From 1998
June 30, 1999 Period June 30, 1999 Period
Leonardite production
sold (tons) 1,793 (22%) 2,972 (25%)
Average revenue per ton $ 88.62 (3%) $ 85.47 (13%)
Leonardite revenue $ 158,888 (24%) $ 254,021 (35%)
Cost of leonardite sold $ 116,091 (15%) $ 241,487 (20%)
Average production cost
per ton $ 64.75 9% $ 81.25 7%
Leonardite production sold decreased 497 tons or 22% and 1,004 tons
or 25%, respectively, for the three- and six-month periods ended June 30,
1999, compared to the equivalent periods in 1998. Although the tons sold
lagged behind the 1998 levels, they were substantially better in the 1999
second quarter than they were in first quarter 1999 when only 1,179 tons
were sold. The lower demand for the Company's oil and gas drilling mud
products is attributable to lower drilling rig utilization rates, which
have not rebounded as quickly as oil prices. Typically when oil prices
change very quickly it takes a number of months for drilling demand to
increase.
Leonardite revenue declined $50,000 or 24% and $137,000 or 35%,
respectively, for the three- and six-month periods ended June 30, 1999.
These decreases are due primarily to the lower sales discussed above.
Revenue per ton for the three months ended June 30, 1999, was essentially
stable with the same period in 1998, but for the six-month period, it was
lower due to essentially all of the Company's first quarter 1999
leonardite sales being basic products which have lower selling prices.
Cost of leonardite sold decreased $21,000 or 15% and $60,000 or 20%
for the three- and six-month periods, respectively. These decreases were
basically following the tonnage of production sold discussed above.
Average per ton production costs for the three months ended June 30, 1999,
increased $5 per ton or 9% due to the decrease in sales which spread fixed
costs over somewhat fewer tons sold. Average per ton production costs for
the six months ended June 30, 1998, also increased $5 per ton or 7%, again
due to the effects of fixed costs on lower sales levels.
Although leonardite production did not reach the levels attained
during the first half of 1998, which were relatively strong, it did
recover substantially from the first quarter of 1999 and also returned to
a positive cash flow for both the three- and six-month periods
ended June 30, 1999. The Company's management believes that if oil prices
stay above $18.00 on the NYMEX, drilling rig utilization rates for oil and
gas exploration and development will also increase, creating more demand
for the Company's leonardite products.
Consolidated Analysis
Total operating revenues increased $102,000 or 15% for the three
months ended June 30, 1999, compared to the same period in 1998. This
increase was due to the larger volumes of oil sold at higher oil prices.
The decrease of $82,000 or 6% for the six months ended June 30, 1999,
compared to the same period in 1998 was due to the lower leonardite sales.
Total operating expenses decreased $102,000 or 14% and $251,000 or 18% for
the three- and six-month periods of 1999, respectively, compared to the
same periods in 1998. These decreases were primarily due to lower oil and
gas depletion resulting from a non-cash write-down of the Company's full-
cost pool at year-end 1998. The Company achieved an operating income of
$144,000 for the three months ended June 30, 1999, compared to an
operating loss of $59,000 for the same quarter in 1998 and an operating
income of $31,000 compared to an operating loss of $137,000 for the six-
month periods ended 1999 and 1998, respectively.
Non-operating expenses increased $13,000 and $28,000,
respectively, for the three months and six months ended June 30, 1999.
These increases were primarily due to higher interest expenses associated
with increased long-term debt. After provisions for the non-operating
expenses and income taxes, the result of consolidated operations attained
a net income of $104,000 or $.03 per share for the second quarter of 1999
compared to a net loss of $77,000 or $.02 per share for the second quarter
1998. The net loss for the first half of 1999 was reduced to $29,000 or
$.01 per share compared to a net loss of $160,000 or $.04 per share for
the first half of 1998. The net loss for the first quarter of 1999 was
$133,000, therefore, the second quarter's net income came very close to
returning the Company to profitability for the year. If oil prices stay
near current levels, Management believes the Company will be profitable for
1999 by the end of the third quarter.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of $336,000
compared to working capital of $112,000 at December 31, 1998, and working
capital of $128,000 at March 31, 1999. The Company's current ratio was
1.36 to 1 at June 30, 1999, compared to 1.13 to 1 at year-end 1998.
Net cash provided by operating activities was $350,000 for the six
months ended June 30, 1999, compared to $315,000 for the same period in
1998. Cash provided by operations and bank borrowings were utilized to
make payments of $83,000 for additions to property, plant and equipment,
$183,000 for payments on long-term debt and $42,000 for stock
repurchases.
Management believes the Company's cash requirements for the
foreseeable future can be met by cash flows from operations. The Company
also has cash available from its existing line of credit if an unforeseen
need should arise. For the short term, while oil prices are relatively
high, the Company expects to use cash to further strengthen its balance
sheet by reducing payables and possible reductions in long-term debt ahead
of scheduled repayments. Future cash requirements might also be provided
by possible forward sales of oil reserves or additional debt or equity
financing. By the end of the third quarter 1999, the Company expects to
have the capital resources available to drill two vertical wells that will
complete its South Starbuck Madison Unit (SSMU) project.
Year 2000 Readiness
The Company expects to complete the review, resolution and testing
of all its internal computer systems prior to December 1, 1999, so that it
is Year 2000 compliant. Essentially all of the Company's office computer
systems are desktop computers, including its accounting system. The maker
of the Company's accounting software has represented that it has run a
2000 compliant version in house for over a year, and the Company expects
to upgrade to that version before the end of the third quarter. All other
office desktop systems are either already Year 2000 compliant or will be
upgraded before December 1, 1999. The Company does not expect that the
cost of upgrading any of its computer systems will have a material impact
on the Company's financial position, results of operations or cash flows
in future periods. The Company's oil and gas production operations
equipment and its leonardite processing operations equipment are both not
dependent on any material amount of in-house computerized controls or
embedded chip devices and as such are not deemed to be affected by Year
2000 compliance issues. Both of these operational segments are, however,
significantly dependent on the Year 2000 readiness of their respective
customers and on supplies provided by third parties, particularly for
energy in the form of electricity and natural gas. The Company is
developing a plan under worst case scenario and expects to complete the
plan by late summer 1999. The Company has begun contacting significant
suppliers, purchasers and other key business relations to ascertain their
Year 2000 readiness to assess the extent to which the Company's operations
may be impacted should their organization not become Year 2000 compliant.
The Company cannot guarantee that there will not be material adverse
effects to the Company if customers or utilities and other of the
Company's suppliers have difficulties related to Year 2000 readiness. The
Company believes the availability of supplies and services from third
parties to be the most significant risk related to the Year 2000 issue.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risks
Because the Company qualifies as a small business issuer, disclosure
regarding this item is not required.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 12, 1989, the Company filed an action in Burleigh County
District Court, North Dakota, against MDU Resources Group, Inc., a
Delaware corporation, and Williston Basin Interstate Pipeline Company, a
Delaware corporation. The Complaint related to, among other things,
breaches of a take or pay natural gas contract and attempts by the
defendants to coerce the Company into modifying the contract. The
defendants answered the Complaint on June 1, 1989. Afterward, no further
materials were filed with the court, but the Company believed that the
case remained pending. The Company contacted the attorney who filed the
action to assess the status and request further prosecution of the case.
After several months of inaction regarding the case, the Company contacted
the court in September 1996 and was informed by the court that the case
had been dismissed in 1991. On January 15, 1997, the Company refiled its
action against MDU Resources Group, Inc. Management cannot predict the
outcome of this action, although the Company intends to pursue its
available remedies.
Other than the foregoing legal proceeding, the Company is not a
party, nor is any of its property subject to, any pending material legal
proceedings. The Company knows of no legal proceedings contemplated or
threatened against it.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Securities Holders.
The Annual Meeting of the Registrant was held on June 10, 1999.
Directors elected were Duane Ashley, Dennis Hoffelt, Paul Krile,
Cathy Kruse, and J. P. Vickers.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) For a list of exhibits of the Company, see Item 14(c) of its Annual
Report on Form 10K for the fiscal year ended December 31, 1998, which is
specifically incorporated herein by reference. A financial data schedule
(Exhibit 27) is attached hereto. All other required exhibits are
inapplicable or information required thereby is readily apparent in the
Form 10-Q.
(b) No reports on Form 8-K were filed during the fiscal quarter ended
June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GEORESOURCES, INC.
August 10, 1999
/S/ J. P. Vickers
J. P. Vickers
Chief Executive Officer
Chief Financial Officer