-----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, IrnTVxyi2Ku7IX4b6/nRxR8T25WFEFqoIX1SlcjrgemMJVivha9RE4QH6sNbIIz8 NSdvaB2rR0ZmHmhQwhEsDw== 0001018523-96-000003.txt : 19961118 0001018523-96-000003.hdr.sgml : 19961118 ACCESSION NUMBER: 0001018523-96-000003 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-20915 FILM NUMBER: 96665016 BUSINESS ADDRESS: STREET 1: 25660 CRENSHAW BLVD STREET 2: SUITE 201 CITY: TARRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 3105398191 MAIL ADDRESS: STREET 1: 25660 CRENSHAW BLVD STREET 2: SUITE 201 CITY: TORRANCE STATE: CA ZIP: 90505 10QSB 1 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 SEPTEMBER 30, 1996 BUSINESS ISSUERS Commission File Number 0-20915 ------------------------------ GEO PETROLEUM, INC. ------------------- (Name of Small Business Issuer in its charter) California ---------- (State or other jurisdiction of incorporation of organization) 25660 Crenshaw Boulevard, Suite 201 ----------------------------------- Torrance, California -------------------- (Address of principal executive offices) 33-0328958 ---------- (I.R.S. Employer Identification No.) 90505 ----- (Zip Code) (310) 539-8191 -------------- (Issuer's telephone number) 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 September 30, 1996 ----- --------------------------------- Common stock, no par value 5,203,787
PART 1 FINANCIAL INFORMATION Geo Petroleum, Inc. Unaudited Condensed Balance Sheet
September 30 December 31 1996 1995 ------------- ------------ Assets Current assets: Cash and cash equivalents $ 115,259 $ 100,565 Accounts receivable: Accrued oil and gas revenues 140,095 161,308 Joint interest and other 228,262 200,026 Prepaid expenses and other 52,413 52,413 ------------ ------------ Total current assets 536,029 514,312 Property and equipment: Oil and gas properties 4,961,222 4,698,877 Office furniture and equipment 68,629 65,948 ------------ ------------ 5,029,851 4,764,825 Accumulated depletion and depreciation (1,184,767) (1,037,404) ------------ ------------ 3,845,084 3,727,421 Total assets $ 4,381,114 $ 4,241,733 ============ ============
Geo Petroleum, Inc. Unaudited Condensed Balance Sheet
September 30 December 31 1996 1995 ------------ ------------- Liabilities and shareholders' equity Current liabilities: Accounts payable: Accrued royalties $ 477,508 $ 438,507 Trade and other 356,016 283,161 Dividends payable 28,143 20,120 Accrued expenses 128,639 107,821 Current portion of notes payable 587,315 1,968,063 ------------ ------------ Total current liabilities 1,577,621 2,817,672 Long term portion of notes payable 1,460,000 - Redeemable convertible preferred stock $1,000 par value; authorized 100,000 shares; issued and outstanding 347 shares at September 30, 1996 347,156 505,150 Stockholders' equity Common stock, no par value; authorized 50,000,000 shares; issued and outstanding 5,203,787 at September 30, 1996 2,512,983 2,157,702 Accumulated deficit (1,516,646) (1,238,791) ----------- ------------ Total stockholders' equity 996,337 918,911 ----------- ------------ Total liabilities and stockholders' equity $ 4,381,114 $ 4,241,733 ============ ============
Geo Petroleum, Inc. Unaudited Condensed Statements of Operations
Three Months Ended September 30, ------------------ 1996 1995 ---- ---- Revenues: Oil and gas sales $ 220,559 $ 287,958 Other revenue 164,431 101,784 Interest income 153 571 ------------ ------------ 385,144 390,313 Expenses: Lease operating expenses 213,086 173,762 Depletion and depreciation 49,121 35,925 Amortization of deferred loan costs - 6,750 General and administrative 65,682 74,232 Interest expense 77,825 69,577 ------------ ------------ Income (loss) before income taxes (20,570) 30,066 Provision for income taxes - - ------------- ------------ Net income (loss) (20,570) 30,066 Less preferred stock dividends (16,305) - ------------- ------------ Net income (loss) applicable to common stock $ (36,875) $ 30,066 ============= ============ Net income (loss) per share of common stock $ (0.01) $ 0.01 ============= ============ Weighted average number of common shares outstanding 5,203,787 4,477,913 ============= ============
Geo Petroleum, Inc. Unaudited Condensed Statements of Operations
Nine Months Ended September 30, ----------------- 1996 1995 ---- ---- Revenues: Oil and gas sales $ 646,756 $ 1,211,258 Other revenue 335,512 428,141 Interest income 4,382 2,404 ------------ ------------ 986,650 1,641,803 Expenses: Lease operating expenses 615,775 730,907 Depletion and depreciation 147,363 152,575 Amortization of deferred loan costs - 36,750 General and administrative 203,792 312,249 Interest expense 238,665 292,667 ------------ ------------ Income (loss) before income taxes (218,945) 116,653 Provision for income taxes - - ------------ ------------ Net income (loss) (218,945) 116,653 Less preferred stock dividends (44,346) - ------------ ------------ Net income (loss) applicable to common stock $ (263,291) $ 116,653 ============ ============ Net income (loss) per share of common stock $ (0.05) $ 0.03 ============ ============ Weighted average number of common shares outstanding 5,203,787 4,477,913 ============ ============
Geo Petroleum, Inc. Unaudited Condensed Statements of Cash Flows
Nine Months Ended September 30, ----------------- 1996 1995 ---- ---- Operating activities Net income (loss) $ (218,945) $ 116,653 Adjustments to reconcile net income (loss) to net cash provided By (used in) operating activities: Depletion and depreciation 147,363 152,575 Amortization of deferred loan costs - 36,750 Fees paid in stock - 3,447 Gain on sale of property and equipment (166,000) - Changes in operating assets and liabilities: Accounts receivable (9,365) (65,659) Prepaid expenses and other - (9,542) Accounts payable 206,843 (15,949) Accrued expenses 27,758 5,961 ------------- ------------ Net cash provided by (used in) operating activities (12,346) 224,237 Investing activities Additions to property and equipment (353,369) (92,123) Proceeds on sale of property and equipment 166,000 - ------------- ------------ Net cash used in investing activities (187,369) (92,123)
Geo Petroleum, Inc. Unaudited Condensed Statements of Cash Flows (Continued)
Nine Months Ended September 30, ----------------- 1996 1995 ---- ---- Financing activities Proceeds from notes payable 151,246 105,816 Payments on notes payable (66,994) (6,358) Bank overdraft - 4,039 Preferred stock issued 130,156 25,200 ------------ ------------ Net cash provided by financing activities 214,408 128,696 ------------ ------------ Net increase (decrease) in cash and cash equivalents 14,694 260,809 Cash and cash equivalents at beginning of period 100,565 (38,496) ----------- ------------ Cash and cash equivalents at end of period $ 115,259 $ 222,314 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 238,665 $ 292,667 ============ ============ Cash paid during the period for income taxes $ - $ 400 ============ ============
Geo Petroleum, Inc. Statements of Cash Flows September 30, 1996 Supplemental disclosure of noncash investing and financing activities: Dividends on the Company's redeemable convertible preferred stock, amounting to $24,028, were declared during the quarter ended September 30, 1996. However, $7,723 of said dividends were automatically reinvested into additional shares of preferred stock. During the interim nine month period ended September 30, 1996, the Company issued 20 shares of the Company's redeemable convertible preferred stock in exchange for the retirement of certain notes payable aggregating $20,000. Dividends on the Company's redeemable convertible preferred stock, amounting to $70,252, were declared during the nine month period ended September 30, 1996. However, $25,906 of said dividends were automatically reinvested into additional shares of preferred stock. Geo Petroleum, Inc. Notes to Condensed Financial Statements 1. Organization and Summary of Significant Accounting Policies Organization Geo Petroleum, Inc. (the Company) is a private oil and gas production company that was founded in 1986 in the state of California. The Company engages in the development, production and management of oil and gas properties located in California. On April 9, 1996, a proposed merger with Drake Investment Corp. (Drake) became effective after approval by the Company's Board of Directors and by Shareholders. On June 21, 1996, the Company filed a Form 10-SB General Form for Registration of Securities of Small Business Issuers with the Securities and Exchange Commission, under Section 12 (b) or (g) of the Securities Exchange Act of 1934. The issuer became a reporting company when its Form 10-SB registration statement was cleared on August 12, 1996. On September 5, 1996, the Company became a listed company on the NASDAQ OTC Bulletin Board, symbol GOPL. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with Item 310 of Regulation S-B and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the financial statements and notes thereto included in Form 10-SB filed June 21, 1996, which is available without cost from Geo Petroleum, Inc. upon request. The accompanying unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, as of September 30, 1996, the Company's accumulated deficit totaled $1,516,646, and current liabilities exceeded current assets by $1,041,592. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its current obligations on a timely basis, to obtain additional financing, Geo Petroleum, Inc. Notes to Condensed Financial Statements 1. Organization and Summary of Significant Accounting Policies (continued) and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations. These potential alternatives include, among other things, a private and public placement of debt or equity, extending or refinancing the bank loan using oil and gas properties as collateral, sale of oil and gas properties, and obtaining an advance on future production from an end user. As a first step in a potential public or private offering, the Company has merged with Drake Investment Corporation. There can be no assurance that any of these potential alternatives will materialize. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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. 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. 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 Geo Petroleum, Inc. Notes to Condensed Financial Statements 1. Organization and Summary of Significant Accounting Policies (continued) 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 Oil 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. Substantially all additions to oil and gas properties during the quarter ended September 30, 1996, relate to recompletions of existing producing or previously producing wells and the purchase of equipment. 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. Revenue 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 during the quarters ended September 30, 1996, and 1995, which comprised approximately 75% and 65% of gross oil and gas sales, respectively. Earnings Per Common Share Net income (loss) per common share for all periods presented is based upon average outstanding common shares, adjusted for the stock split described herein. Such calculations do not assume any conversion of the redeemable convertible preferred stock into common stock because determination of the conversion price is subject to future events. Use of Estimates in the Preparation of Financial Statements 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. Geo Petroleum, Inc. Notes to Condensed Financial Statements 1. Organization and Summary of Significant Accounting Policies (continued) Reclassifications Certain prior year amounts in the financial statements have been reclassified to conform to current year presentation. 2. Notes Payable Notes payable consisted of the following:
September 30 1996 ---- Note payable to bank $ 1,460,000 Notes payable to investors 587,315 ------------ 2,047,315 Less current portion (587,315) ------------ Total long-term debt $ 1,460,000
The Company 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 the notes have extended the maturities of the notes either to 1997 or on a month to month basis, and all of the notes are secured by interests in the Company's oil and gas properties. The note payable to a bank bears interest at prime plus 2.0%. At September 30, 1996, the prime rate was 8.25%. Interest payments are due monthly, and the outstanding principal amount and all unpaid interest is due on January 1, 1998, contingent upon the payment to the bank of $750,000 out of the proceeds of an institutional stock offering now in progress. If said offering does not close, the Company will seek to negotiate another extension. The bank has indicated that it will not seek to foreclose on the note, so long as negotiations for a further extension continue on a good faith basis and progress is being made in obtaining financing. Geo Petroleum, Inc. Notes to Condensed Financial Statements 2. Notes Payable (continued) In 1990, the Company issued 273,669 shares of common stock, an option to purchase 180,660 additional shares of common stock at $6 per share, and a recorded deed of trust on 20% of the Company's interest in its Vaca Oil 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 $2,563,750 at September 30, 1996. 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 have been extended subject to the same conditions as the bank loan. 3. Related Party Transactions The Company has entered into agreements with another entity to sell gas and offer industrial waste disposal services at certain locations. The principal officer/shareholder of the Company is also the principal officer/shareholder of the other entity. Total revenue to the Company from these agreements was $30,387 during the quarter ended September 30, 1996. At September 30, 1996, the Company had a net receivable balance of $142,608 from the other entity. At September 30, 1996, the Company had notes payable to relatives of the principal officer/shareholder totaling $162,315. The principal officer/shareholder of the Company has not taken a salary since inception of the Company. 4. Redeemable Convertible Preferred Stock Dividends on the Company's redeemable convertible preferred stock, amounting to $24,028, were declared during the quarter ended September 30, 1996. However, $7,723 of said dividends were automatically reinvested into additional shares of preferred stock. Geo Petroleum, Inc. Notes to Condensed Financial Statements 4. Redeemable Convertible Preferred Stock (continued) The series of preferred stock issued, carrying an annual dividend of 30%, is 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. The preferred stock is 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. Additionally, the preferred stock is convertible, at the option of the holder, into the common stock at a price of $2.50 per common share in lieu of converting based upon the IPO price. In addition, for every two shares of common stock acquired through said conversion, holder shall receive one warrant for the purchase of common stock at $3 per share. 5. Common Stock In June 1995, the Company issued 185,498 shares of common stock to a consulting company as payment for services that were performed in 1994 and 1995. The parties agreed that the stock issued had a value of $10,000 and that approximately 80% of the services were performed at December 31, 1994. Accordingly, at December 31, 1994, the Company had a payable balance of $8,000 relating to these services. On November 17, 1995, the Company's Articles of Incorporation were amended to provide for an authorized capital of fifty million shares of common stock. In connection with the merger with Drake, the outstanding shares, including those issued in connection with the acquisition, were split at the rate of 2.5505 to 1. Geo Petroleum, Inc. Notes to Condensed Financial Statements 6. 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:
September 30 1996 ---- Deferred income tax asset - operating loss carryforwards $ 1,470,000 Deferred income tax liability - differences between book and tax basis of property (1,050,000) Valuation allowance (420,000) ------------ Net deferred income taxes $ - ============
As of September 30, 1996, the Company, based on 1995 information, had 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 at September 30, 1996, amounted to approximately $3,800,000, and expire during the years 2001 through 2010. For state income tax purposes, net operating loss carryforwards at September 30, 1996 amounted to approximately $2,000,000, and expire during the years 2004 through 2011. The Company is delinquent in filing its 1994 income tax returns, but there will be no taxes owing. 7. Commitments The Company leases office space under a month-to-month lease agreement which may be terminated on 30-days' notice. The Company also leases equipment under month-to-month leases. 8. Events Subsequent to September 30, 1996 The Company's bank debt of $1,460,000, due June 15, 1996, was extended to January 1, 1998. Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis for the interim nine months periods ended September 30, 1996 and September 30, 1995, and for the two quarters ended September 30, 1996, and September 30, 1995, are to be read in combination with the Financial Statements presented elsewhere herein. Results of Operations Nine months 1996 compared with nine months 1995. During the nine months ended September 30, 1996, Geo had a net loss of $218,945, and cash used in operations of $12,346, compared to a net profit of $116,653 and cash provided by operations of $224,237 for the nine months ended September 30, 1995. Oil and gas revenues decreased 47% to $646,756 for the 1996 period, compared to $1,211,258 for the 1995 period. This was due mostly to a reduction in the number of wells on production in the Rosecrans and East Los Angeles/Bandini Fields, temporary interruptions in production due to shut-down of surface facilities for repairs, and due to predicted, normal declines. The well reduction occurred because of mechanical malfunctions which the Company is in the process of repairing. Average oil prices increased to $19.65 per barrel in the 1996 period, compared to $16.45 per barrel in the comparable 1995 period. Gas prices increased from $1.35 in the 1995 period to $1.81 in the comparable 1996 period. Average production costs per barrel of oil and equivalents increased to $12.60 in the 1996 period from $7.01 in the 1995 period. This was the result of increased repair costs and because fixed costs increased. Lease operating expenses for the nine-month 1996 period amounted to $615,775, as compared to $730,907 for the 1995 period, a 16% decrease, reflecting the fewer number of wells on production and the lower level of production. In addition to the normal operating expenses of existing wells during the 1996 period, expenses were incurred in repairing and recompleting wells to ready them for production, repairing facilities damaged by a contractor's negligence, and completing construction and testing of automated custody transfer facilities necessary for shipping oil by pipeline. Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations (Continued) General and administrative expenses for the 1996 period were $203,792, as compared to $312,249 for the 1995 period, a decrease of 35% due to lower legal and accounting costs, and to lower administrative costs related to lower production. Lower engineering and investment banking costs were incurred in the 1996 period in connection with equity offerings. Interest expense for the 1996 period was $238,665, as compared to $292,667 for the 1995 period, a decrease of 18%. This decrease was due to a reduction in short-term notes outstanding. The Company's provision for depletion and depreciation decreased to $147,363 for the 1996 period, as compared to $152,575 for the 1995 period, a decrease of 3%. This decrease was due to lower production rates of oil and gas. Capital Resources and Liquidity Financial Position. At September 30, 1996, the Company's total assets increased by approximately $139,381 over December 31, 1995, primarily as a result of additions to oil and gas properties due to the recompletion and equipping of idle wells on its East Los Angeles and Bandini properties to bring them on production, and installation of gas processing equipment. At September 30, 1996, the Company had a working capital deficiency of $1,041,592, which deficiency is less by $1,261,768 over such deficiency at December 31, 1995. The Company's $1,460,000 bank loan is with City National Bank, 606 S. Olive Street, Los Angeles, California 90014. City National acquired First Los Angeles Bank, the original lender to Geo. The maturity date of the loan is January 1, 1998, contingent upon an interim payment of $750,000 from the proceeds of an institutional stock offering now in progress. As stated in "Financial Condition" above, the "going concern" reference set forth in the independent auditor's report on the Company's financial statements is largely a result of the fact that the Company's bank loan is due January 1, 1998, contingent upon the successful closing of an institutional offering, and that the Company currently does not have cash reserves or income sufficient to pay it off. The Company is seeking to extend the loan for a period sufficient to enable it to complete one or more equity financings, joint ventures, or, if Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity (continued) such measures are not adequate, property sales. Based on the evaluations of an independent petroleum engineer and of its investment banker, and due to firm oil and gas prices, the Company expects that it can find financing sufficient to develop and rework its properties, thereby obtaining the cash flow necessary to pay off its bank loan. The engineering evaluations support the Company's belief that the sale of a portion of its properties would enable it to pay off the loan. The Company is discussing proposed financings from individual and institutional investors, and from large oil companies. Recurring sources of Other Revenue consist of sales of interests in future net profits; rent; miscellaneous income; and industrial waste disposal fees. Other sources include proceeds from the settlement of legal actions, gains on sales of assets, and proceeds from Geo's merger with Drake. Other Revenues for the nine-month periods ended September 30, 1996 and September 30, 1995 are itemized as follows:
Nine Months Ended September 30 ----------------- 1996 1995 ---- ---- Other revenue Net Profits Interests $ 31,700 $ 88,416 Rent 3,650 5,831 Miscellaneous Income 18,932 38,206 Industrial Waste Disposal 50,231 77,078 Legal Settlement 45,000 218,610 Gain on Sale of Assets 166,000 - Proceeds from Merger 20,000 - ------------ ------------ Total $ 335,512 $ 428,141 ============ ============
Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity (continued) The reasons for the decrease in Other Revenues from the nine months ended September 30, 1995 to the comparable 1996 period are as follows: a) Net Profits Interests: 1995 sales of these interests were higher than 1996 sales. b) Rent: 1995 rent charges were higher than in 1996. c) Miscellaneous Income: Represents primarily management fees and royalties earned by the Company which were higher in 1995 than in 1996 due to higher production rates of oil and gas and higher prices for oil. d) Industrial Waste Disposal: 1995 volumes of waste water received were higher than in 1996. e) Legal Settlement: In 1995, Geo received $250,000 from the settlement of a lawsuit against a contractor for damages incurred while performing services on one of the Company's oil and gas properties. In 1996, Geo received $45,000 from the settlement of a lawsuit against an adjacent property owner for damages to Company property incurred while trespassing on a Company easement. f) Geo did not realize any gains on the sale of assets in 1995. g) Proceeds from Merger: Geo completed its merger with Drake in April 1996. Geo did not receive any such income in 1995. In the event of noncompliance with the Bank's loan payment requirements, the Company will be required to allocate the proceeds of any financing first to the payment of the loan. If such funds are not available, the Company would sell off sufficient assets to pay the loan. If the Bank foreclosed on the pledgors' collateral, which had a market value as of September 30, 1996, of more than 176% of the amount of the loan, the pledgors could seek to collect the amount paid by them by foreclosing on a 40% interest in Geo's Vaca Tar Sands property. Historically, the net cash flow from the properties of the Company has been sufficient to fund its costs of operations but insufficient to fund such costs and its debt servicing requirements. Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity (continued) 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 interest in its operations. The Company's net revenues from oil and gas sales in excess of production and operating expenses during the nine months ended September 30, 1996 and 1995 were $30,981 and $480,351, respectively. With respect to the long-term development of its Vaca Oil Sands properties in the Oxnard Field, a plan for the development of the property using the same enhanced recovery process presently in use on the producing Vaca Oil Sands wells has been deemed feasible by the Company's independent petroleum engineer. The future costs for the complete development of the property are estimated by the independent petroleum engineer to be $66,650,000 with net cash flow before income taxes estimated to be $169,977,000 on an undiscounted basis or $69,879,000 discounted to present value at 10%. The Company does not now have the capital resources adequate to pay these development costs. At such time as the Company obtains equity financing, it intends to commence the development to the extent that it obtains such funds. Part of the future costs may be paid out of revenues derived from the initial development work. Full development will require large amounts of equity financing. The Company alternatively may offer participation in a joint venture to larger companies in return for the necessary capital. A significant uncertainty remains involving the financial ability of the Company to develop the reserves. Cash used in operations for the nine months ended September 30, 1996, was $12,346 compared to cash provided by operations of $224,237 for the nine months ended September 30, 1995. This decrease in cash provided by operations of $236,583 is primarily a result of decreased oil and gas production and revenues and the recovery in 1995 in a lawsuit of a net $183,000 for damages to a Company well, but no comparable recovery in 1996. Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity (continued) Geo is seeking long-term equity financing. The first step in obtaining it was a merger with Drake Investment Corporation, which closed on April 9, 1996, as provided for in the Agreement of Merger filed by the Company with its Form 10-SB. This was for the purpose of increased access to capital sources. The Company plans now to sell additional shares of its common or preferred stock in equity offerings, which, if successfully completed, will permit it to eliminate its working capital deficiency, debt and interest obligations, to perform improvement and remedial work on its existing properties, to acquire additional properties, and to drill a large number of wells on its properties. All of these activities are expected to substantially increase the revenues of the Company and permit it to operate on a positive cash flow basis. Sources of Capital Resources. On October 11, 1996, retroactive to June 15, 1996, the Company was able to extend the maturity date of its bank credit facility in the amount of $1,460,000 from June 15, 1996 to January 1, 1998. The conditions of the extension are set forth under Capital Resources and Liquidity. At September 30, 1996, the decrease in the Company's working capital deficiency from December 31, 1995 was primarily due to the classification of its bank debt as long term. Historically, 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 cash used in investing activities, primarily additions to its oil and gas properties, was $187,369 in the nine months ended 1996 and $92,123 in the nine months ended 1995. This was financed in the 1995 and 1996 period by cash provided by operations and the proceeds from the issuance of additional notes payable and preferred stock. Cash provided by financing activities amounted to $214,408 in the 1996 period and $128,696 in the 1995 period. This cash was primarily the net proceeds from the issuance of notes payable in both periods. During the 1996 period, holders of $20,000 of notes payable exchanged such notes for $20,000 of redeemable convertible preferred stock. Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations Third quarter 1996 compared with third quarter 1995. During the quarter ended September 30, 1996, Geo had a net loss of $20,570 and cash used in operations of $47,334, compared to net income of $30,066 and cash provided by operations of $7,056 for the comparable 1995 period. Oil and gas revenues declined to $220,559 for the 1996 period, compared to $287,958 for the 1995 period. This was attributable mostly to normal declines and to a reduction of the number of wells on production in the Rosecrans and East Los Angeles/Bandini Fields as a result of temporary mechanical malfunctions. Average oil prices increased to $20.65 per barrel in the 1996 period, compared to $15.92 per barrel in the comparable 1995 period, while gas prices increased from $1.32 to $2.09 per mcf. Lease operating expenses for the third quarter of 1996 increased to $213,086, as compared to $173,762 in the comparable 1995 period, an 18% increase reflecting the fewer number of wells on production and numerous repair and maintenance expenditures. Average production costs per barrel of oil and equivalents increased to $13.96 in the 1996 period from $7.01 in the 1995 period. This was the result of increased repair costs and because fixed costs increased. In addition to the normal operating expenses of existing wells, expenses were incurred in repairing and recompleting wells to bring them on production, performing repairs on wells and facilities damaged by a fire caused by contractor negligence, and putting into service automated custody transfer facilities necessary for the delivery of oil into a refiner's pipeline. General and administrative expenses for the 1996 third quarter were $65,682, as compared to $74,232 for the 1995 period, a decrease of 12%. The decrease was largely due to a reduction in legal costs and fees after substantially resolving two lawsuits successfully, and due to lower accounting and consulting fees. Interest expense for the 1996 quarter was $77,825, as compared to $69,577 for the comparable 1995 period, an increase of 11%. This increase was due primarily to the issuance of additional short-term loans. The Company's provision for depletion and depreciation increased to $49,121 for the third quarter of 1996, as compared to $35,925 for the 1995 period, an increase of 27% Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity Financial Position At September 30, 1996, the Company had a working capital deficiency of $1,041,592, which deficiency is less by $1,261,768 over such deficiency at December 31, 1995. The Company's $1,460,000 bank loan is due January 1, 1998, contingent upon matters set forth above. Historically, the net cash flow from the properties of the Company has been sufficient to fund its costs of operations but insufficient to fund such costs 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. The Company's net revenues from oil and gas sales in excess of production and operating expenses during the third quarter of 1996 and 1995 were $7,473 and $114,196, respectively. This decline is primarily attributable to the drop in revenues in the third quarter 1996 which was previously discussed. Cash used in operations for the quarter ended September 30, 1996, was $47,334 compared to cash provided by operations of $7,056 for the period ended September 30, 1995. This decrease in cash provided by operations of $54,390 is primarily a result of decreased oil and gas production and revenues, increased costs per unit of production, and costs of repair of fire damage and lease facilities. Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity Financial Position (continued) Other Revenue for the quarters ended September 30, 1996 and September 30, 1995 is itemized as follows:
Three Months Ended September 30 ----------------- 1996 1995 ---- ---- Other revenue Net Profits Interests $ 7,200 $ 21,020 Rent 1,250 1,386 Miscellaneous Income 5,454 9,083 Industrial Waste Disposal 20,527 18,324 Legal Settlement - 51,971 Gain on Sale of Assets 130,000 - ------------ ------------ Total $ 164,431 $ 101,784 ============ ============
The reasons for the increase in Other Revenues from the three months ended September 30, 1995 to the comparable 1996 period are as follows: a) Net Profits Interests: 1995 sales of these interests were higher than 1996 sales. b) Rent: 1995 rent charges were higher than in 1996. c) Miscellaneous Income: Represents primarily management fees and royalties earned by the Company which were higher in 1995 than in 1996 due to higher production rates of oil and gas and higher prices for oil. d) Industrial Waste Disposal: 1996 volumes of waste water received were higher than in 1995. Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity Financial Position (continued) e) Legal Settlement: In 1995, Geo received $250,000 from the settlement of a lawsuit against a contractor for damages incurred while performing services on one of the Company's oil and gas properties. Geo did not receive any such income in the 1996 three month period. f) Gain on Sale of Assets: Geo completed the sale of part of its Orcutt lease to another independent operator in September 1996. Geo did not receive any such income in 1995. Geo is seeking long-term equity financing, as set forth above in this Item, to permit it to continue to operate on a positive cash flow basis. Sources of Capital Resources. The status of the Company's bank loan is discussed above in this Item. A portion of the proceeds from the planned equity offering will be dedicated to the repayment of such indebtedness. The Company's cash used in investing activities, primarily additions to its oil and gas properties, net of any sales or disposals, was $8,754 in the third quarter of 1996 and $175,181 for the comparable 1995 period. Inflation In recent years inflation has not had a significant impact on the Company, its operations or financial condition. Trends. Although there is no assurance that the Company will be able to successfully complete its planned equity offering, the Company believes that if it is successful, the Company will be able to increase its revenues by investing a portion of the anticipated proceeds in remedial and recompletion operations, development and exploratory drilling and planned acquisitions. As a result of any increase in activities, the Company anticipates that its general and administrative expenses will measurably increase, since the Company is contemplating hiring additional personnel, expanding its administrative offices and increasing compensation to its existing staff, including its president. Geo Petroleum, Inc. Notes to Condensed Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity Financial Position Inflation (continued) Legislation has been enacted which permits the export of Alaskan North Slope crude oil, primarily to the Far East. Previously, large quantities of such crude were shipped to California for refining and sale, which depressed prices paid for crude oil produced in California. The major producer of Alaskan oil has begun delivery of a large portion of its oil production from Alaska to the Far East in 1996. As the predicted reduction of Alaskan supplies to the West Coast occurs, it is expected to have, and may already be creating, a positive effect upon the price paid for California crude oil. During the first nine months of 1996, crude oil prices have increased by an average of $3.20 per barrel over prices in 1995. Geo anticipates that there will be a gradual strengthening in the prices for both its oil and gas production, but that periods of unstable pricing may occur. 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. Geo Petroleum, Inc. Notes to Condensed Financial Statements 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) November 12, 1996 GERALD T. RAYDON ALYDA L. RAYDON - ------------------------------- -------------------------- By Gerald T. Raydon By Alyda L. Raydon (President and Chairman) (Chief Financial Officer)
-----END PRIVACY-ENHANCED MESSAGE-----