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, 1997
BUSINESS ISSUERS
Commission File Number 0-20915
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GEO PETROLEUM, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (310) 265-0721
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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, 1997
----- ----------------------------
Common stock,
no par value 7,750,432
PART 1 FINANCIAL INFORMATION
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
September 30, December 31,
1997 1996
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 289,819 $ 2,228,826
Accounts receivable:
Accrued oil and gas revenues 30,635 151,586
Joint interest and other 805,277 419,361
Prepaid expenses and other 69,072 52,876
------------ ------------
Total current assets 1,194,803 2,852,649
Property and equipment:
Oil and gas properties 6,502,070 4,927,176
Office furniture and equipment 129,871 51,989
------------ ------------
6,631,942 4,979,165
Accumulated depletion and
depreciation (1,182,552) (1,098,805)
------------ ------------
5,449,390 3,880,360
------------ ------------
Total assets $ 6,644,192 $ 6,733,009
============ ============
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
September 30, December 31,
1997 1996
------------- ------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable:
Accrued royalties $ 359,666 $ 431,388
Trade and other 234,403 396,110
Dividends payable - 14,104
Accrued expenses 100,752 119,643
Current portion of notes payable 590,000 325,022
------------ ------------
Total current liabilities 1,284,821 1,286,267
Long term portion of notes payable 220,824 530,000
Redeemable convertible preferred stock
$1,000 par value; authorized 100,000
shares; no shares issued and
outstanding at September 30, 1997 - 101,289
Stockholders' equity
Common stock, no par value;
authorized 50,000,000 shares;
issued and outstanding
7,750,432 and 7,603,324 shares at
September 30, 1997 and
December 31, 1996, respectively 6,686,185 6,615,634
Accumulated deficit (1,547,638) (1,800,181)
------------ ------------
Total stockholders' equity 5,138,548 4,815,453
------------ ------------
Total liabilities and stockholders'
equity $ 6,644,192 $ 6,733,009
============ ============
Geo Petroleum, Inc.
Unaudited Condensed Statements of Operations
Three Months Ended
September 30,
-------------
1997 1996
------------ ------------
Revenues:
Oil and gas sales $ 149,450 $ 220,559
Other revenue 414,288 164,431
Interest income 7,795 153
------------ ------------
571,533 385,144
Expenses:
Lease operating expenses 106,038 213,086
Depletion, depreciation, and
amortization 37,787 49,121
General and administrative 84,090 65,682
Interest expense 18,798 77,825
------------ ------------
Income (loss) before income taxes 324,820 (20,570)
Provision for income taxes - -
------------ ------------
Net income (loss) 324,820 (20,570)
Less preferred stock dividends - (16,305)
------------ ------------
Net income (loss) applicable to
common stock $ 324,820 $ (36,875)
============ ============
Net income (loss) per share of
common stock $ 0.04 $ (0.01)
============ ============
Weighted average number of common
shares outstanding, assuming
warrant conversion 8,748,393 5,203,787
============ ============
Geo Petroleum, Inc.
Unaudited Condensed Statements of Operations
Nine Months Ended
September 30,
-------------
1997 1996
------------ ------------
Revenues:
Oil and gas sales $ 564,894 $ 646,756
Other revenue 640,814 335,512
Interest income 34,054 4,382
------------ ------------
1,239,763 986,650
Expenses:
Lease operating expenses 480,055 615,775
Depletion, depreciation, and
amortization 101,520 147,363
General and administrative 332,039 203,792
Interest expense 58,375 238,665
------------ ------------
Income (loss) before income taxes 267,775 (218,945)
Provision for income taxes - -
------------ ------------
Net income (loss) 267,775 (218,945)
Less preferred stock dividends - (44,346)
------------ ------------
Net income (loss) applicable to
common stock $ 267,775 $ (263,291)
============ ============
Net income (loss) per share of
common stock $ 0.03 $ (0.05)
============ ============
Weighted average number of common
shares outstanding, assuming
warrant conversion 8,748,393 5,203,787
============ ============
Geo Petroleum, Inc.
Unaudited Condensed Statements of Cash Flows
Nine Months Ended
September 30,
-------------
1997 1996
------------ -----------
Operating activities
Net income (loss) $ 267,775 $ (218,945)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depletion and depreciation 101,520 147,363
Gain on sale of property and
equipment 36,000 (166,000)
Changes in operating assets and
liabilities:
Accounts receivable (264,965) (9,365)
Prepaid expenses and other (16,196) -
Financing and restructuring - -
Accounts payable (247,533) 206,843
Accrued expenses (18,891) 27,758
------------ -------------
Net cash provided by (used in)
operating activities (142,289) (12,346)
Investing activities
Additions to property and equipment (1,824,468) (353,369)
Sale of property (36,000) 166,000
------------ -------------
Net cash used in investing activities (1,860,468) (187,369)
Financing activities
Proceeds from notes payable 221,143 151,246
Payments on notes payable (120,000) (66,994)
Bank overdraft (line of credit) (17,006) -
Common stock sold in private
placements 8,065 -
Preferred stock sold - 130,156
Dividends paid (750) -
Preferred stock redeemed (27,702) -
------------ -------------
Net cash provided by financing
activities 63,751 214,408
------------ -------------
Net increase (decrease) in cash and
cash equivalents (1,939,007) 14,694
Cash and cash equivalents at
beginning of period 2,228,826 100,565
------------ -------------
Cash and cash equivalents at
end of period $ 289,819 $ 115,259
============ =============
Supplemental disclosure of cash
flow information:
Cash paid during the period
for interest $ 58,375 $ 238,665
============ ============
Cash paid during the period for
income taxes $ - $ -
============ ============
Geo Petroleum, Inc.
Statements of Cash Flows
September 30, 1997 Supplemental disclosure of non-cash investing and
financing activities:
During the nine month period ended September 30, 1997, the Company
issued 29,326 shares of the Company's common stock and 14,663
three-year warrants for the purchase of restricted common stock
at $3 per share in exchange for the retirement of certain notes
payable aggregating $73,314. During the nine-month period ended
September 30, 1997, the Company redeemed $28,452 in preferred stock.
The Company issued 29,135 shares of the Company's stock and
14,567 three-year warrants for the purchase of restricted common
stock at $3 per share in exchange for the retirement of 73
shares of the Company's redeemable convertible preferred stock
aggregating $72,837. The common stock in said transactions is
currently a non-marketable security. The common stock cannot be
sold in the public market for a period of one year from the date
of conversion, or until the registration of the common stock in
a Secondary Public Offering, whichever occurs first.
Geo Petroleum, Inc.
Notes to Unaudited Condensed Financial Statements
September 30, 1997
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.
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 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. 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 Oil Sands property.
The evaluations of the oil and gas reserves were prepared by
Sherwin D. Yoelin, a petroleum engineer. Depletion expense
recorded for the years ended December 31, 1996 and 1995 was
$83,417 and $196,484, respectively.
Substantially all additions to oil and gas properties in 1997
and 1996 relate to recompletions of existing producing or
previously producing wells. During 1996, the Company received
$166,000 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 $5,179 and $5,198 for the years
ended December 31, 1996 and 1995, respectively.
REVENUE
Revenue from oil and gas sales is recognized upon delivery of
the oil and gas to the Company's customers. 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 one significant customer in 1997 and 1996 which
comprised approximately 82% and 53% of gross oil and gas sales,
respectively.
EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) per common share is based upon average number
of outstanding common shares, adjusted for the stock split
described above, during each year (8,748,393 shares in 1997 and
7,603,324 shares in 1996). Such calculations for 1997
assume exercise of outstanding warrants into common stock.
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.
2. ACQUISITION OF DRAKE INVESTMENT CORP.
On April 9, 1996, the Company acquired all of the outstanding
common stock of Drake Investment Corp. ("Drake") in exchange for
497,546 shares of the Company's common stock. The primary
purpose of the acquisition was to expand the base of the
Company's stockholders. Drake's net assets were comprised
primarily of cash and cash equivalents. This transaction was
accounted for as a purchase in accordance with Accounting
Principles Bulletin No. 16, "Business Combinations," and the
transaction was recorded at the fair value, $20,000, of the
assets received for the Company's common stock.
3. FARM-OUT OF VACA OIL 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 Oil 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 has the right to receive
all revenues from the properties until its costs are recouped.
Subsequent thereto, the Company shall participate as to its one-
third (1/3) interest in the property and shall co-operate the
property with Saba.
If Saba does not expend the agreed sum of $10,000,000 within the
two year term or ceases operations at the property for a period
of 90 days after assuming operations, Saba shall 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.
The agreement calls for Saba to attempt to acquire certain other
interests in the property not previously acquired by the
Company. The Company has the option to participate as to a one-
third (1/3) interest in such acquisitions by reimbursing Saba
for one-third (1/3) of its acquisition cost.
4. NOTES PAYABLE
Notes payable consist of the following:
September 30,
1997
-------------
Note payable to bank $ 605,173
Convertible subordinated debentures 205,650
------------
810,823
Less current portion (590,000)
------------
Total long-term debt $ 220,824
============
CONVERTIBLE SUBORDINATED DEBENTURES
During the nine month period ended September 30, 1997, the Company
Issued $205,650 in convertible subordinated debentures. $166,250 of
these debentures were issued to Gerald and Alyda Raydon, principals of
the Company, in exchange for cash. The debentures are transferable
only on the books of the Corporation by the holder in person or by
Attorney upon surrender of the debenture certificate properly endorsed.
Said debentures are issued under the following terms:
Term: three years.
Yield: 10% per year.
Interest payments: monthly.
Conversion rights: convertible into common stock for a period
of three years.
Conversion price: $4.50 (10% discount off the closing price at
the date of the debenture).
Registration rights: on demand on sixty days' notice.
Maturity: principal and any accrued interest will be paid in
full at the end of three years.
Corporate obligation: the debentures are the unconditional
corporate obligations of Geo Petroleum, Inc.
During the nine month period ended September 30, 1997, the Company
issued 29,326 shares of the Company's common stock and 14,663
three-year warrants for the purchase of restricted common stock
at $3 per share in exchange for the retirement of certain notes
payable aggregating $73,314. The common stock in said
transactions is currently a non-marketable security. The common
stock cannot be sold in the public market for a period of one
year from the date of conversion, or until the registration of
the common stock in a Secondary Public Offering, whichever
occurs first. At September 30, 1997, there were no notes payable by
the Company to investors.
During 1996, $171,246 of new notes payable to investors were
issued, $325,178 of notes payable were repaid, $142,863 of notes
payable were exchanged for shares of the Company's common stock,
and $66,246 of notes payable were exchanged for shares of the
Company's redeemable convertible preferred stock.
NOTE PAYABLE TO BANK
The note payable to bank bears interest at prime plus 2.0%. At
September 30, 1997 and December 31, 1996, the prime rate was 8.5%.
Interest payments are due monthly. During
1996 and 1995, 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. On
December 13, 1996, the Company made the principal payment of
$750,000. As of September 30, 1997, the Company was in compliance
with all loan covenants.
During most of 1995 and 1996, the Company was not in compliance
with certain loan covenants, including restrictions on incurring
additional debt and failure to make certain payments to outside
vendors on a timely basis. While the bank did not take any
action regarding such noncompliance, the covenants were not
waived through this period. As a result, the bank note payable
was classified as current at December 31, 1995.
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 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 is held in a trust
and had an approximate value of $2,041,000 at September 30, 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 1996, 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.
5. RELATED PARTY TRANSACTIONS
The Company has entered into agreements with another entity to
sell gas and offer 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 $339,838 and $127,000
in 1997 and 1996, respectively. At September 30, 1997 and December
31, 1996, the Company had a net receivable balance of $595,986
and $191,230, respectively, from the other entity.
During 1996, notes payable by the Company to a relative of the
principal officer/shareholder totaling $46,250 were converted
into 46.25 shares of the Company's redeemable convertible
preferred stock aggregating $46,250 (see Note 6).
During 1996, notes payable by the Company to a relative of the
principal officer/shareholder totaling $121,850 were converted
into 48,740 shares of the Company's common stock aggregating
$121,850 (see Note 7). Additionally, 24,370 warrants were issued
to purchase a share of the Company's common stock at $3.00 per
share which expire at various dates during 1999.
During the first nine-month period of 1997, notes payable by the
Company to a relative of the principal officer/shareholder
totaling $52,212 were converted into: $40,197 in cash; $9,014
into 3,606 shares of the Company's common stock (see Note 7);
and $3,000 in Net Profit Interests in the Vaca Oil Sand
Property. Additionally, 1,803 warrants were issued to purchase a
share of the Company's common stock at $3.00 per share which
expire at various dates during 2000. The common stock in said
transactions is currently a non-marketable security. The common
stock cannot be sold in the public market for a period of one
year from the date of conversion, or until the registration of
the common stock in a Secondary Public Offering, whichever
occurs first. At September 30, 1997, there were no notes payable by
the Company to a relative of the principal officer/shareholder.
During the nine month period ended September 30, 1997, the Company
Issued $205,650 in convertible subordinated debentures. $166,250 of
these debentures were issued to Gerald and Alyda Raydon, principals of
the Company, in exchange for cash (See Note 4).
6. 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%, 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 (see Note 10). 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 1996, 347.69 shares of the Company's redeemable
convertible preferred stock totaling $347,668 were converted
into 139,067 shares of the Company's common stock and 69,534
warrants to purchase a share of the Company's common stock at
$3.00 per share which expire at various dates during 1999.
During 1996, accrued dividends on the Company's redeemable
convertible preferred stock totaling $44,204 were converted into
17,682 shares of the Company's common stock 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.
During the nine-month period ended September 30, 1997, the Company
redeemed $28,452 in preferred stock. The Company issued 29,135
shares of the Company's stock and 14,567 three-year warrants for
the purchase of restricted common stock at $3 per share in
exchange for the retirement of 73 shares of the Company's
redeemable convertible preferred stock aggregating $72,837. The
common stock in said transactions is currently a non-marketable
security. The common stock cannot be sold in the public market
for a period of one year from the date of conversion, or until
the registration of the common stock in a Secondary Public
Offering, whichever occurs first. At September 30, 1997, there was
no preferred stock issued by the Company that hadn't been
redeemed or retired.
The Company believes that the fair value of its issued
redeemable convertible preferred stock, at its date of issuance,
approximates its carrying value in the Company's balance sheets.
This is based upon the sales of shares of the preferred stock at
par value for an equivalent amount of cash in December 1995 and
during 1996, to unrelated parties in arm's length transactions.
7. 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, 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 (see Note 3),
before related costs and expenses of $63,159. The Company also
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, 1996, an aggregate of 957,946 warrants to
purchase a share of the Company's common stock at $3.00 per
share which expire at various dates during 1999 were outstanding.
At September 30, 1997, an aggregate of 997,961 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 were
outstanding.
During the nine month period ended September 30, 1997, the Company
issued $205,650 in convertible subordinated debentures. $166,250 of
these debentures were issued to Gerald and Alyda Raydon, principals of
the Company, in exchange for cash (See Note 4).
Said debentures are issued under the following terms:
Term: three years.
Yield: 10% per year.
Interest payments: monthly.
Conversion rights: convertible into common stock for a period
of three years.
Conversion price: $4.50 (10% discount off the closing price at
the date of the debenture).
Registration rights: on demand on sixty days' notice.
Maturity: principal and any accrued interest will be paid in
full at the end of three years.
Corporate obligation: the debentures are the unconditional
corporate obligations of Geo Petroleum, Inc.
8. 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,
1997
-------------
Deferred income tax asset - operating
loss carryforwards $ 1,500,000
Deferred income tax liability -
differences between book and tax
basis of property (1,120,000)
Valuation allowance (380,000)
------------
Net deferred income taxes $ -
============
As of December 31, 1996, 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 $4,290,000 for 1996, and expire during
the years 2001 through 2009. For state income tax purposes, net
operating loss carryforwards amounted to approximately
$2,680,000 for 1996, 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 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.
9. COMMITMENTS
Total rental expense incurred under all lease agreements was
$50,455 and $43,598 for the period ended September 30, 1997 and year
ended December 31, 1996, respectively. At September 30, 1997, all of
the Company's leases were on a month-to-month basis, except for
its office space, which is on a five-year lease, at $2,800 per
month, commencing August 1, 1997, and terminating June 15, 2002.
10. OTHER REVENUE
In September, 1997, the Company obtained a judgment for $213,629
against a contractor who had negligently damaged its facilities.
Geo is now taking action to collect the amounts owing. The Company
estimates, after considering legal fees and costs and the timing of
collection of such amounts, that the estimated net present value of
the judgment is $100,000. Any amounts collected in excess of such
value will be booked as received.
Geo Petroleum, Inc.
Notes to Unaudited Condensed Financial Statements
September 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis for the two quarters ended
September 30, 1997, and September 30, 1996, are to be read in combination
with the Financial Statements presented elsewhere herein.
Results of Operations
Third quarter 1997 compared with third quarter 1996
Recurring sources of Other Revenue consist of sales of interests
in future net profits, miscellaneous income, and waste disposal
fees. Other sources include proceeds from the rental of a
wellhead and related facilities for use in an exploratory well
that Geo is a participant in.
Other Revenues for the three-month periods ended September 30, 1997
and September 30, 1996 are itemized as follows:
Three Months Ended
September 30,
-------------
1997 1996
------------ -----------
Other revenue
Net Profits Interests $ 14,600 $ 7,200
Miscellaneous Income 21,471 6,704
Industrial Waste Disposal 187,217 20,527
Legal Settlement 100,000 -
Gain on Sale of Assets - 130,000
Income - Other 91,000 -
------------ -----------
Total $ 414,288 $ 164,431
============ ===========
The reasons for the increase in Other Revenues from the three
months ended September 30, 1996 to the comparable 1997 period are as
follows:
a) Net Profits Interests: 1997 sales of these interests
were higher than 1996 sales, due to intensified
marketing and sales efforts.
b) Miscellaneous Income: Represents primarily management
fees and royalties earned by the Company which were
higher in 1997 than in 1996 due to fees generated by a
joint venture with Southwest Petroleum, Inc.
c) Waste Disposal: 1997 volumes of wastes received
were much higher than in 1996. Additionally, in 1997 the
Company obtained regulatory approval to dispose of tank
bottoms and other produced fluids associated with the
production of oil and gas. The disposal of these
substances contributed significantly to waste disposal
revenues in 1997. No such revenue existed in the
comparable 1996 period.
d) Legal Settlement: In 1997, Geo was awarded a judgment against a
contractor whom Geo had sued for negligence. No such income
existed in the comparable 1996 period.
e) Gain on Sale of Assets: Geo did not realize any such income in
the 1997 period.
f) Income-other: In 1997, Geo received $91,000 in profits on a
turnkey joint venture with T.D. and Associates, an independent
oil and gas company. Geo did not receive any such income in 1996.
During the quarter ended September 30, 1997, Geo had a net income of
$324,820 compared to a net loss of $20,570 for the comparable
1996 period. Oil and gas revenues decreased to $149,450 for the
1997 period, compared to $220,559 for the 1996 period. This was
attributable to an increase in the number of wells that Geo has
taken off production as part of an extensive rework and
recompletion program in the Rosecrans and East Los
Angeles/Bandini Fields, and do to decrease oil prices. Average oil
prices decreased to $17.39 per barrel in the 1997 period, compared to
$20.65 per barrel in the comparable 1996 period, while gas prices
increased from $2.09 to $2.45 per Mcf.
Lease operating expenses for the third quarter of 1997
decreased to $106,038, as compared to $213,086 in the comparable
1996 period, as the result of an aggressive cost cutting program and
the decrease in production of oil and gas.
Average production costs per barrel of oil and equivalents increased
to $11.75 in the 1997 period from $9.83 in the 1996 period.
This was the result of the decrease in production of oil and gas.
General and administrative expenses for the 1997 third quarter
were $84,090, as compared to $65,682 for the 1996 period.
The increase was largely due to increased
legal and accounting costs associated with the reporting
requirements of a public company, increased public and investor
relations costs, and increased executive compensation, primarily
to Gerald T. Raydon, who in December 1996 began drawing a
regular salary for the first time since inception of the
Company.
Interest expense for the 1997 third quarter was $18,798, as
compared to $77,825 for the comparable 1996 period.
This decrease was due primarily to the marked decrease in notes
payable to bank and others and the resultant drop in interest payments.
The Company's provision for depletion, depreciation and amortization
decreased to $37,787 for the third quarter of 1997, as compared to
$49,121 for the 1996 period. This was due to decreased production of
oil and gas as a result of an increase in the number of wells that
Geo has taken off production as part of an extensive rework and
recompletion program in the Rosecrans and East Los Angeles/Bandini
Fields.
Results of Operations
The nine-month period ended September 30, 1997 compared with the
nine-month period ended September 30, 1996.
Recurring sources of Other Revenue consist of sales of interests
in future net profits, miscellaneous income, and waste disposal
fees. Other sources include proceeds from the rental of a
wellhead and related facilities for use in an exploratory well
that Geo is a participant in, and the settlement of a lawsuit
against a contractor for negligence.
Other Revenues for the nine-month periods ended September 30, 1997
and September 30, 1996 are itemized as follows:
Nine Months Ended
September 30,
-------------
1997 1996
------------ ------------
Other revenue
Net Profits Interests $ 58,800 $ 31,700
Miscellaneous Income 34,872 22,582
Industrial Waste Disposal 305,142 50,231
Legal Settlement 115,000 45,000
Gain on Sale of Assets - 166,000
Proceeds from Merger - 20,000
Income - Other 127,000 -
------------ ------------
Total $ 640,814 $ 335,512
============ ============
The reasons for the increase in Other Revenues from the nine
months ended September 30, 1996 to the comparable 1997 period are as
follows:
a) Net Profits Interests: 1997 sales of these interests
were higher than 1996 sales, due to intensified
marketing and sales efforts.
b) Miscellaneous Income: Represents primarily management
fees and royalties earned by the Company which were
higher in 1997 than in 1996 due to a joint venture with
Southwest Petroleum, Inc.
c) Waste Disposal: 1997 volumes of wastes received
were much higher than in 1996. Additionally, in 1997 the
Company obtained regulatory approval to dispose of tank
bottoms and other produced fluids associated with the
production of oil and gas. The disposal of these
substances contributed significantly to waste disposal
revenues in 1997. No such revenue existed in the
comparable 1996 period.
d) Legal Settlement: In 1997, Geo was awarded judgments against
contractors whom Geo had sued for negligence. A similar judgment
for a smaller amount existed in the comparable 1996 period.
e) Gain on Sale of Assets: No such revenue occurred in 1997.
f) Income-other: In 1997, Geo received $91,000 in profits on a
turnkey joint venture with T.D. and Associates, an independent
oil and gas company. Geo did not receive any such income in
1996. Other sources include proceeds from the rental of a wellhead
and related facilities for use in an exploratory well that Geo
is a participant in.
During the nine month period ended September 30, 1997, Geo had a net
income of $267,775 compared to a net loss of $218,945 for the
comparable 1996 period. Oil and gas revenues decreased to
$564,894 for the 1997 period, compared to $646,756 for the 1996
period. Additionally, during the 1997 period, net cash used in
operating activities was $142,289, versus net cash used in
operating activities of $12,346 for the 1996 period. This was
attributable to an increase in the number of wells that Geo has
taken off production as part of an extensive rework and
recompletion program in the Rosecrans and East Los
Angeles/Bandini Fields, and a decrease in oil prices.
Average oil prices decreased to $19.24 per barrel in the 1997 period,
compared to $19.65 per barrel in the comparable 1996 period, while
gas prices increased from $1.81 to $2.54 per Mcf.
Lease operating expenses for the 1997 nine-month period
decreased to $480,055, as compared to $615,775 in the comparable
1996 period. Average production costs per barrel of oil and equivalents
increased to $14.35 in the 1997 period from $12.60 in the 1996 period.
This was the result of an increase in the number of wells that
Geo has taken off production as part of an extensive rework and
recompletion program in the Rosecrans and East Los
Angeles/Bandini Fields, and the resultant drop in production.
General and administrative expenses for the 1997 nine month
period were $332,039, as compared to $203,792 for the 1996
period. The increase was largely due to increased legal and
accounting costs associated with the reporting requirements of
a public company, increased public and investor relations costs,
and increased executive compensation, primarily to Gerald T. Raydon,
who in December 1996 began drawing a regular salary for the first
time since inception of the Company.
Interest expense for the 1997 nine-month period was $58,375, as
compared to $238,665 for the comparable 1996 period.
This decrease was due primarily to the marked decrease in notes
payable to bank and others and the resultant drop in interest payments.
The Company's provision for depletion and depreciation decreased
to $101,520 for the nine month period of 1997, as compared
to $147,363 for the 1996 period. This was due to decreased
production of oil and gas as a result of an extensive rework and
recompletion program in the Rosecrans and East Los Angeles/Bandini
Fields.
Capital Resources and Liquidity
Financial Position
At September 30, 1997, the Company had a working capital deficiency of
$90,018, compared to a working capital deficiency of $1,041,592
at September 30, 1996. The Company's $590,000 bank loan is due January 1,
1998. Principal is reduced monthly by principal payments of
$20,000.
The net cash flow from the properties of the Company has been
sufficient to fund its costs of operations and its debt
servicing requirements.
The Company's primary sources of liquidity and capital resources
in the near term will consist of working capital derived from
its oil and gas production and industrial waste disposal
operations, augmented by any such funds as may be derived from
the sale of equity in the Company and of participating interests
in its operations. The Company's net revenues from industrial waste
disposal and oil and gas sales in excess of production and operating
expenses during the nine month period of 1997 and 1996 were $389,982
and $82,775, respectively. This increase is due to increased
waste disposal sales and aggressive cost cutting.
Sources of Capital Resources
The status of the Company's bank loan is discussed above in this
Item. Net cash provide by financing activities was $63,751 for
the 1997 period, versus net cash provided by financing
activities of $214,408 for the 1996 period. 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.
Inflation
In recent years inflation has not had a significant impact on
the Company, its operations or financial condition.
Trends
Since the Company completed its equity offerings, the Company
anticipates that it will be able to increase its revenues by
investing a majority portion of the proceeds in remedial and
recompletion operations, development and exploratory drilling
and planned acquisitions. As a result of an increase in
activities, the Company anticipates that its general and
administrative expenses will measurably increase, since the
Company is contemplating hiring additional personnel and
increasing compensation to its existing staff, including its
president.
During the first nine months of 1997, crude oil prices have
decreased by an average of $.41 per barrel over prices in 1996.
During the first nine months of 1997, natural gas prices have
increased by an average of $.73 per Mcf over prices in 1996.
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 Unaudited Condensed Financial Statements
September 30, 1997
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 13, 1997
/s/ GERALD T. RAYDON
---------------------------
By Gerald T. Raydon, President
and Chairman
/s/ ALYDA L. RAYDON
---------------------------
By Alyda L. Raydon, Chief
Financial Officer