UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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: 0-20915
GEO PETROLEUM, INC.
(Exact name of small business issuer as specified in its charter)
California 33-0328958
- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18281 Lemon Drive, Yorba Linda, California, 92886
- --------------------------------------------------------------------------------
(Address of principal executive offices)
714.779.9897
------------
(Issuer's Telephone Number)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date. As of September 30, 2002, there
were 22,353,801 shares of the issuer's no par value common stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
GEO PETROLEUM, INC.
TABLE OF CONTENTS
PART I Financial Information 1
Item 1. Financial Statements of Geo Petroleum, Inc.:
Balance Sheet (Unaudited) September 30, 2002 1
Statements of Operations (Unaudited) For Each of the Three and
Nine Month Periods Ended September 30, 2002 and 2001 3
Statements of Shareholders' Equity (Unaudited) For
the Nine Month Period Ended September 30, 2002 5
Statements of Cash Flows (Unaudited) For Each of the
Nine Month Periods Ended September 30, 2002 and 2001 6
Notes to the Financial Statements 8
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations. 14
PART II Other Information 18
SIGNATURES 19
CERTIFICATION OF STATEMENT 20
GEO PETROLEUM, INC.
BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and equivalents $ 3,144
Accounts receivable, no allowance for doubtful accounts 4,472
Prepaid legal and consulting fees 17,186
Other prepaid expenses 7,925
-----------------
Total current assets 32,727
-----------------
Restoration and utility deposits 272,030
-----------------
Property and equipment:
Oil and gas properties 304,375
Vehicles 36,884
-----------------
Total property and equipment 341,259
Less: accumulated depreciation and depletion (31,471)
-----------------
Total property and equipment, net 309,788
-----------------
TOTAL ASSETS $ 614,545
=================
The accompanying notes are an integral part of the financial statements.
1
GEO PETROLEUM, INC.
BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade and other $ 159,491
Accrued expenses 246,606
Line of credit - related party 34,539
Other liabilities 44,300
Note payable - other, current portion 31,400
-----------------
Total current liabilities 516,336
-----------------
TOTAL LIABILITIES 516,370
Shareholders' equity:
Preferred stock; no par value; 100,000 shares
authorized; no shares issued and outstanding at
September 30, 2002. -
Common stock; no par value; 50,000,000 shares
authorized; 22,353,801 shares issued and outstanding
at September 30, 2002. 12,237,175
Accumulated deficit (12,138,966)
-----------------
SHAREHOLDERS' EQUITY 98,209
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 614,579
=================
The accompanying notes are an integral part of the financial statements.
2
GEO PETROLEUM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
AS OF SEPTEMBER 30, 2002 AND
FOR EACH OF THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
For the Three-Month Period Ended For the Nine-Month Period Ended
-------------------------------- -------------------------------
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Revenues:
Oil and gas sales - 8,491 - $ 8,623
Waste water disposal services $ 1,486 $ 86,734 $ 118,721 208,631
Total revenues 1,486 95,225 118,721 217,254
---------------- --------------- ---------------- ----------------
Expenses:
Lease operating expenses 124,089 89,405 408,031 279,028
Lease environmental remediation expenses 21,116 1,500 45,239 1,500
Depletion and depreciation 1,882 5,138 12,304 15,414
Professional fees 26,884 56,482 127,152 227,611
General and administrative 36,038 68,792 105,917 245,778
Loss from asset impairment - - 159,851 -
---------------- --------------- ---------------- ----------------
Total expenses 210,009 221,317 858,494 769,331
---------------- --------------- ---------------- ----------------
Loss from operations (208,523) (126,092) (739,773) (552,077)
---------------- --------------- ---------------- ----------------
Reorganization items:
Professional fees 2,165 21,618 5,911 35,773
---------------- --------------- ---------------- ----------------
Total reorganization items 2,165 21,618 5,911 35,773
---------------- --------------- ---------------- ----------------
The accompanying notes are an integral part of the financial statements.
3
GEO PETROLEUM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
AS OF SEPTEMBER 30, 2002 AND
FOR EACH OF THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
For the Three-Month Period Ended For the Nine-Month Period Ended
-------------------------------- -------------------------------
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Other income (expense):
Interest income $ 718 $ 1,522 $ 4,197 $ 7,904
Interest expense (357) (4,684) (3,986) (9,958)
------------------ ------------------ ------------------ -----------------
Total other income (expense) 361 (3,162) 211 (2,054)
------------------ ------------------ ------------------ -----------------
Loss before provision for income taxes (210,327) (150,872) (745,473) (589,904)
Provision for income taxes - - 800 440
------------------ ------------------ ------------------ -----------------
NET LOSS $(210,327) $ (150,872) $ (746,273) $ (590,344)
================== ================== ================== =================
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.01) $ (0.01) $ (0.04) $ (0.03)
================== ================== ================== =================
The accompanying notes are an integral part of the financial statements.
4
GEO PETROLEUM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
Common Common Accumulated
Shares Stock Deficit Total
--------------- ---------------- ----------------- ------------
BALANCE, DECEMBER 31, 2001 19,211,955 11,667,182 (11,392,693) 274,489
Common shares issued in a private placement 2,848,498 427,276 - 427,276
Common shares issued in satisfaction of a liability 173,500 54,805 - 54,805
Common shares issued for services 374,550 87,912 - 87,912
Common shares retired that were originally issued
pursuant to the confirmed plan of reorganization
but that were not required (254,702) - - -
Net loss - - (746,273) (746,273)
--------------- --------------- ------------------ ------------
BALANCE, SEPTEMBER 30, 2002 22,353,801 $ 12,237,175 $ (12,138,966) $ 98,209
The accompanying notes are an integral part of the financial statements.
5
GEO PETROLEUM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR EACH OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
For the For the
Nine-Month Nine-Month
Period Ended Period ended
September 30, 2002 September 30, 2001
----------------------- ---------------------
Cash flows from operating activities:
Net loss $ (746,273) $(590,344)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 12,304 15,414
Loss from asset impairment 159,851 -
Common shares issued for services 87,912 48,500
Common shares issued for satisfaction of liability 54,805 -
Decrease (increase) in assets:
Accounts receivable 63,810 (16,528)
Prepaid legal and consulting fees (17,186) 148,147
Other prepaid expenses 43,944 9,000
Restoration and utility deposits (500) 19,544
Increase (decrease) in liabilities:
Trade and other (113,909) 104,860
Accounts payable, related party (54,805) -
Accrued expenses 141,372 -
Line of credit - related party (87,263) -
Other liabilities 40,000 (19,974)
Note payable - other, current portion 31,400 -
Net cash used in operating activities (384,538) (281,415)
----------------------- ---------------------
Cash flows provided by (used in) investing activities:
Purchase of facilities and equipment - (972)
Capital expenditures on oil and gas properties (40,000) (43,940)
Payments on notes receivable - 7,100
----------------------- ---------------------
Net cash used in investing activities (40,000) (37,812)
----------------------- ---------------------
The accompanying notes are an integral part of the financial statements.
6
GEO PETROLEUM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR EACH OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
For the For the
Nine-Month Nine-Month
Period Ended Period ended
September 30, 2002 September 30, 2001
----------------------- ---------------------
Cash flows provided by (used in) financing activities:
Payments on line of credit - related party - $ 30,000
Payments on notes payable - (23,670)
Net proceeds from the issuance of common stock $ 427,276 242,690
----------------------- ---------------------
Cash provided by financing activities 427,276 249,020
----------------------- ---------------------
Net increase (decrease) in cash 2,738 (70,207)
Cash and equivalents at beginning of year 406 70,173
----------------------- ---------------------
Cash and equivalents at end of year $ 3,144 $ (34)
======================= =====================
Supplemental Disclosures of Cash Flow Information
Interest paid $ 3,986 $ 2,654
Income taxes paid $ 800 $ 800
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Issuance of common stock for prepaid legal fees:
Prepaid legal and consulting fees - $ 50,000
Common stock - $(50,000)
Purchase of land for note:
Oil and gas properties $ 40,000 -
Notes payable, current portion $ (40,000) -
Issuance of common stock for satisfaction of liability:
Account payable - related party $ 54,805 -
Common stock $ (54,805) -
Issuance of common stock for services:
Engineering and consulting expense 87,912 -
Common stock (87,912) -
The accompanying notes are an integral part of the financial statements.
7
GEO PETROLEUM, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
AS OF SEPTEMBER 30, 2002 AND
FOR EACH OF THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE COMPANY'S BUSINESS
-------------------------------------
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. All of the Company's properties are located in California.
Certain of the wells on one of the Company's properties are used for waste
water disposal services.
2. BASIS OF PRESENTATION
---------------------
In the opinion of the management of Geo Petroleum, Inc., the accompanying
unaudited condensed financial statements contain all adjustments,
consisting of only normal recurring adjustments, necessary to present
fairly its financial position as of September 30, 2002, the results of its
operations, shareholders' equity, and cash flows for each of the
nine-month periods ended September 30, 2002 and 2001. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted principles have been
condensed or omitted pursuant to the rules and regulations promulgated by
the Securities and Exchange Commission. The statements should be read in
conjunction with the financial statements and footnotes for the year ended
December 31, 2001 included in the Company's Form 10K-SB. The results of
operations for the interim period are not necessarily indicative of the
results to be expected for the full year.
3. NOTE PAYABLE
------------
In January 2002, the Company acquired land in the area of its Rosecrans
oil and gas properties for $5,000 in cash and a noninterest bearing note
payable of $35,000 secured by the property. The note had a final balloon
payment of $32,000 that was due on July 1, 2002 and has not as of yet been
paid. The Company is now in default on the note.
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Litigation
The Company is a defendant in a criminal action filed by the State of
California arising out of the Company's failure to plug and abandon two
oil well sites located in the Rosecrans Oil Fields in Los Angeles County.
To date, one of the two oil wells has been plugged, and plans are underway
to plug the second oil well and complete the abandonment process. The
Company has accrued at September 30, 2002, $35,000, which it estimates is
necessary to complete the work required on this matter. The Company
8
4. COMMITMENTS AND CONTINGENCIES, CONTINUED
----------------------------------------
LITIGATION, CONTINUED
believes that the remaining work can be completed and the criminal
proceedings dismissed prior to the trial setting conference on this
matter, which is scheduled in January 2003.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash
equivalents and accounts receivable. The Company places its cash and cash
equivalents with high quality financial institutions. Exposure to losses
on accounts receivable is principally dependent on the individual
customer's financial condition, as credit sales are not collateralized.
The Company monitors its exposure to credit loss and reserves those
accounts receivable that it deems to be uncollectible.
CASH IN EXCESS OF FEDERAL DEPOSIT INSURANCE CORPORATION INSURED LIMITS
The Company maintains its cash in bank deposit accounts, which, at times,
may exceed federally insured limits. Accounts are guaranteed by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At
September 30, 2002, the Company does not have any funds in excess of FDIC
insured limits. The Company has not experienced any losses in such
accounts.
RISKS OF THE INDUSTRY IN WHICH THE COMPANY OPERATES
The Company participates in an industry that is characterized by
competitive pressure, changes in the prices of oil and gas on a world-wide
basis, federal, state, and local regulations governing production and
development of its oil and gas reserves and compliance with various
environmental laws and regulations. The Company's results of operations
are affected by a wide variety of factors, including world events, general
economic conditions, changes in average selling prices over the productive
life of oil and gas reserves, the timing of production from new and
existing proved developed and undeveloped reserves by the Company, its
competitors, and others, the ability to produce sufficient quantities of
oil and gas reserves in a timely manner, and the timely implementation of
new and alternative reserve recovery process technologies. Based on the
factors noted herein, the Company may experience substantial
period-to-period fluctuations in future operating results.
9
GEO PETROLEUM, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
AS OF SEPTEMBER 30, 2002 AND
FOR EACH OF THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
4. COMMITMENTS AND CONTINGENCIES, CONTINUED
----------------------------------------
MINIMUM ROYALTIES
The Company has commitments for minimum royalty payments on certain of its
oil and gas properties, which total approximately $36,000 annually.
PROPERTY LEASE RISKS
The Company's oil and gas leases on its Vaca Tar Sands and Rosecrans
properties contain provisions, which provide for minimum production
requirements and periods. The Company's failure to meet those minimum
requirements could result in a termination of the lease(s) and loss of all
its rights thereunder. However, the Company believes it is in compliance
with the lease(s) provisions and has not received notification from anyone
to the contrary.
5. INCOME TAXES
------------
Reconciliation of the effective tax rate to the U.S. statutory rate for
the three and nine month periods ended September 30, 2002 and 2001 is as
follows:
2002 2001
-------------- --------------
Tax expense at U.S. statutory rate 34.0% 34.0%
Valuation allowance (34.0) (34.0)
-------------- --------------
EFFECTIVE INCOME TAX RATE - % - %
-------------- ==============
6. RELATED PARTY TRANSACTIONS
--------------------------
The Company rents its office facilities on a month-to-month basis at
$5,000 per month from an entity that is wholly-owned by a company officer,
who is a major shareholder.
7. LOSS PER SHARE
--------------
Basic and diluted loss per common share has been computed by dividing the
loss available to common shareholders by the weighted-average number of
common shares for the period.
10
GEO PETROLEUM, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
AS OF SEPTEMBER 30, 2002 AND
FOR EACH OF THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
7. LOSS PER SHARE, CONTINUED
-------------------------
The computations of basic and diluted loss per common share are as follows:
For the For the
Three-Month Three-Month
Period Ended Period Ended
September 30, 2002 September 30, 2001
-------------------- -------------------
Numerator:
Net loss available to common shareholders $ (210,327) $ (150,872)
Denominator:
Weighted-average shares basic and diluted 21,917,026 18,890,133
LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.01) $ (0.01)
=================== ====================
Numerator:
Net loss available to common shareholders $ (746,273) $ (590,344)
Denominator:
Weighted-average shares basic and diluted 21,090,888 18,775,795
LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.04) $ (0.03)
=================== =====================
The following additional potential common shares were outstanding during
2002 and 2001, but were not included in the computation of diluted loss
per share, because to do so would have been antidilutive for the periods
presented.
For the Three For the Three
and Nine-Month and Nine-Month
Periods Ended Periods Ended
September 30, 2002 September 30, 2001
----------------------- -------------------
Shares of common stock issuable under:
Warrants $ 455,151 $ 655,151
Options 4,000,000 4,000,000
Total shares of common stock issuable 4,455,151 4,655,151
================== =====================
11
GEO PETROLEUM, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
AS OF SEPTEMBER 30, 2002 AND
FOR EACH OF THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
8. STOCK AND WARRANT TRANSACTIONS
------------------------------
COMMON SHARES SOLD IN A PRIVATE PLACEMENT
During the nine-month period ended September 30, 2001, the Company sold
322,500 shares of its common stock at $0.50 per share to private investors
and received total cash proceeds of $161,249. In September 2001, the
Company sold 312,926 shares of its common stock to private investors and
received cash proceeds of $46,939.
During the nine-month period ended September 30, 2002, the Company sold
2,178,499 shares of its common stock at $0.15 per share to private
investors and received total cash proceeds of $326,775. During the
three-month period ended September 30, 2002, the Company sold 669,999
shares of its common stock in a private placement for total cash proceeds
of $100,500.
COMMON SHARES ISSUED FOR SERVICES
The Company issued 100,000 shares of its common stock for legal services
for the period from January 2001 through December 2001. The shares were
valued at the market price of the stock at the date the services were
agreed to be provided. In addition, the Company issued 90,000 common
shares that were valued at the fair value of the services of $36,000.
Also, the Company issued 25,000 common shares for services, which were
valued based on the market value of the shares at the date of issuance
totaling $12,500. During the three month period ended September 30, 2002
the Company also issued 294,550 shares of its common stock for services
valued at $68,912.
COMMON SHARES ISSUED IN SATISFACTION OF DEBT
During the nine-month period ended September 30, 2002, the Company issued
173,500 shares of common stock in satisfaction of amounts due a related
party of $54,805.
9. ORDER BY THE STATE OF CALIFORNIA
--------------------------------
The Company's waste water disposal well located in the Vaca Tar Sands
region of the Oxnard Oil Fields had been the subject of an ongoing dispute
between the Company and the California Department of Conservation (the
"State"). The basis for the dispute centered on the Company's use of its
waste water disposal well and whether their injection of waste water was
damaging the production of wells operated on adjacent leases.
12
9. ORDER BY THE STATE OF CALIFORNIA, CONTINUED
-------------------------------------------
In July 2002, the State issued an order directing the Company to cease
injecting waste water brought from outside the Oxnard Oil Field and
revoked the Company's state-issued waste water disposal permit for the
Vaca Tar Sands region, thereby terminating the Company's only current
source of revenue. Based on what the Company currently has knowledge of,
it does not believe there is a reasonable likely chance that its actions
related to the waste water well or the July 2002 State order will result
in any significant environmental liability.
As a result of the State order, the Company has determined that an
impairment now exists to the value of the Vaca waste water well facilities
and equipment and accordingly has recognized a loss from asset impairment
of $159,851 in the quarter ended September 30, 2002.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The purpose of this section is to discuss and analyze the Company's results of
operations, liquidity and capital resources. This section should be read in
conjunction with the financial statements and notes thereto included in Item 1
to this Quarterly Report, and the annual report on Form 10-KSB.
THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF
MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT
ESTIMATE THE HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL FACT.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY, SUCH AS "MAY", "SHALL", "WILL", "COULD", "EXPECT", "ESTIMATE",
"ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR
SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN
COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND
CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS,
HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY
IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN
THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT
TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND
OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA
AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM
AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE
EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY
FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED
ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
OUR BUSINESS. Geo Petroleum, Inc. is a California corporation formed in 1986
primarily to develop a large tar sand deposit in Ventura County, California and
to engage in the oil field waste disposal business. We are a minor factor in the
California oil and gas industry and face competition from numerous companies,
which have considerably more financial resources, property and manpower, than do
we. We are in a weak financial condition and must rely upon third party sources
of funds to conduct our proposed operations. Essentially, our only revenue
producing operations are expected to be our Vaca Tar Sands and Rosecrans
properties, each of which require significant cash expenditures to operate and
develop. We are in the process of ratifying existing lease agreements and taking
new leases with respect to Rosecrans mineral owners and we hope to make a
capital investment of approximately $750,000 to bring 18 to 20 idle wells into
full production on the Rosecrans property. The results of our operations for the
second quarter of 2002 are discussed below.
In 1998, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
In December 1999 we emerged from bankruptcy under a plan which, among other
things, provided for the issuance of approximately 1,900,000 shares of our
common stock to our creditors and a change in our management. Present management
was installed as part of our reorganization. At the time of our bankruptcy
filing, we had sold or otherwise transferred a substantial portion of our oil
and gas holdings and had interests in approximately 2,230 gross acres (2,030 net
acres) of oil and gas leases or mineral rights, of which approximately 1,630
gross acres (1,410 net acres) were developed for oil and gas production and
approximately 600 gross and net acres were undeveloped. After emerging from
bankruptcy, our oil and gas holdings were approximately 2,000 gross and 1,830
net acres.
Since we emerged from bankruptcy, our income from operations has not been
sufficient to maintain the Company.
On July 10, 2002, an Order was issued by the state of California Oil and Gas
Supervisor of the California Department of Conservation directing us to cease
injecting waste water brought from outside the Oxnard Oil Fuel into the Monterey
and/or Pliocene Vaca Tar Sands. Additionally, that Order revoked the Vaca Tar
Sands Unit Class II Commercial Waste Water Disposal Permit granted to us and
dated June 16, 2000.
14
It was determined that the volume of waste water injected into our VTSU 3-1 Well
is directly reflected in, and responsible for, the increase in volume of water
produced by the wells on a lease adjacent to our lease. Additionally it was
concluded that the waste water was injected into the Monterey Formation is
invading the Vaca Tar Sands, and chemically and physically is damaging to the
production horizon because of its salinity variances and particulate content, is
mechanically damaging to the production of the wells operated on a lease
adjacent to our lease and injection wells in that these wells become plugged
with imported tank bottom material, thereby unduly inhibiting and preventing the
economic production of oil from the Vaca Tar Sands reservoir.
As a result of that Order, we have no source of revenue. Therefore, the only
source of cash available to us at this time is from the sale of our securities.
RESULTS OF OPERATIONS.
QUARTER ENDED SEPTEMBER 30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001;
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001. During the quarter ended September 30, 2002, Geo had a net loss of
$210,327 compared to a net loss of $150,872 for the comparable 2001 period. For
the nine months ended September 30, 2002, Geo had a net loss of $746,473
compared to a net loss of $590,344 for the same period in 2001. Revenues from
waste disposal operations decreased from $86,734 for the third quarter of 2001,
to $1,486 for the three months ended September 30, 2002. The nine-month period
ended September 30, 2002 also reflected a decrease in waste disposal revenues
from $208,631 in 2001 to $118,721 in 2002. These increased net losses and
decreased revenues are due primarily to the fact that the waste disposal
property has ceased operation due to an order by the California Department of
Conservation in July directing Geo to cease injecting waste into Vaca disposal
wells. Further, this Order revoked the Vaca Tar Sands Unit Class H Commercial
Waste Water Disposal Permit granted to us and dated June 16, 2000. This action
by the Department of Conservation caused the serious impairment of the waste
disposal property and it was written off in the quarter ended June 30, 2002.
There were no significant revenues from oil and gas operations during the first
nine months of 2002 or 2001. A small amount of revenue from the sale of oil in
the amount of $8,491 was recognized in the third quarter of 2001. There has been
no production or sales of oil in 2002.
Lease operating expenses for the three and nine months ended September 30, 2002
increased to $124,089 and $408,031, respectively, from $89,405 and $279,028 for
the three and nine months ended September 30, 2001.This increase is due
primarily to costs incurred during 2002 to plug and abandon a well located on
the Rosecrans property and additional lease rentals on the Rosecrans property
incurred in connection with settlement to plug and abandon two wells. Also,
additional costs were incurred for consulting in connection with leases on the
Rosecrans property. These cost increases were partly offset by reductions in
salaries and wages, repairs, and utilities.
Lease environmental costs for the three and nine months ended September 30, 2002
increased to $21,116 and $45,239, respectively, from $1,500 for both the three
and nine months ended September 30, 2001.This increase represents additional
costs incurred to continue cleaning up the Rosecrans property and the cost
associated with a fire that occurred on the Rosecrans property during the third
quarter of 2002.
Professional fees decreased from $56,482 and $227,611 for the three and nine
months ended September 30, 2001 to $26,884 and $127,152 for the periods in 2002.
This decrease is due to efforts made by management to decrease Geo's
administrative costs. Some fees paid in 2001 to accounting and law firms were
either not repeated in 2002 or the amount of services rendered was decreased.
General and administrative expenses decreased from $68,792 and $246,250 for the
three and nine months ended September 30, 2001 to $36,038 and $105,917 for the
same periods in 2002. This decrease is due primarily to ongoing efforts made by
management to decrease Geo's administrative expenses.
15
A loss from impairment in the amount of $159,851 was recorded in the second
quarter of 2002 to write off the remaining cost basis of the waste disposal
property. As discussed above, this asset was seriously impaired by the order
from the California Department of Conservation to cease operations.
Reorganization items decreased from $21,618 and $35,773 for the three and nine
months ended September 30, 2001 to $2,165 and $5,911 for the periods in 2002.
Reorganization items represent the minimal ongoing costs incurred in connection
with the bankruptcy filings and reorganization of the Company. These costs
should decrease to zero in the near future.
CAPITAL RESOURCES AND LIQUIDITY.
FINANCIAL POSITION. As of September 30, 2002 the Company had cash or cash
equivalents of $3,144 and current assets of $32,727 and total assets of
$614,545. Although cash increased a small amount from $406 as of December 31,
2001 to $3,144 on September 30, 2002, current assets and total assets decreased
by $87,830 and $219,485, respectively. The decrease in current assets is the
results of the collection of receivables and the expensing of prepaid assets.
Total assets decreased primarily due to the write-off of the waste disposal
property. As of September 30, 2002, the Company had current liabilities totaling
$516,370. This represents a decrease of $43,171 due primarily to the pay down of
a line of credit owed to a related party. This related party liability decreased
from $121,802 at December 31, 2001 to $34,539 at September 30, 2002. This
decrease was partially offset by the incursion of additional liabilities related
to the Rosecrans property in the amount of $31,400 and additional accrued
expenses.
Geo continues to operate at a deficit and as of September 30, 2002, had an
accumulated deficit of $12,138,966. For the nine months ended September 30,
2002, Geo had negative cash flows from operating activities of $384,538. This
includes expenditures for lease operations, payroll, professional fees,
impairment of assets and general and administrative expenses.
Investing activities during the nine months ended September 30, 2002 was
comprised of the incurrence of a liability in the amount of $40,000 in
connection with the purchase of a fee interest in land related to the Rosecrans
property. This land holds one well that is not producing.
Management does not believe that current assets provide the necessary liquidity
and capital to fund current growth plans. Geo is actively seeking additional
debt and/or equity financing to continue operations and fund future growth. The
need for additional capital in the future is greater without revenue from the
waste disposal property.
Another potential source of liquidity is the future cash flow from the Kentucky
property. During the first quarter of 2002, Geo and its partners funded and
began the completion of a deep test well located in the southern part of the
Illinois Basin in Kentucky, the J.H. Brooks No. 1. Completion of the well was
delayed by severe weather in the area and other factors; the well is now in the
process of undergoing testing and completion. Management expects the well to
begin generating revenue sometime in the first quarter of 2003. Geo owns an
option for a 25% carried working interest in the J.H. Brooks #1. The well is
located on the Hammonville-Magnolia lease block, which extends over a fifty
thousand acre area of interest. Geo expects to participate in another deep gas
well in sometime during 2003. Cash flow from these wells will provide Geo
necessary operating capital in the future.
Other than as described above, there are no trends, events, or uncertainties
that are likely to have a material impact on the short or long term liquidity of
the Company. There are no known trends, events or uncertainties reasonably
expected to have a material impact on the revenues or income from continuing
operations of the Company. Any income or loss generated will be from continuing
operations.
16
INFLATION. In recent years inflation has not had a significant impact on us, our
operations or our financial condition.
TRENDS. During 2001, oil prices declined to a low of $17.48 per barrel (West
Texas Intermediate spot price) in November 2001. Although recent spot prices for
WTI have recovered to approximately $26 per barrel, they have not approached the
high price of $34.12 experienced in March 2000. This decrease has affected the
operational viability of Geo's existing oil properties. In addition, 2001 saw
the average price of natural gas fall from $6.37 per MCF in the first quarter of
2001 to $2.51 by the end of the year. Despite these downward trends, prices seem
to have stabilized and it is unlikely that they will fall to former lows seen in
earlier years. Forecasts published by the DOE Energy Information Administration
project prices for WTI to range between $27 and $30 per barrel while natural gas
prices are projected to range between $3 and $4 per MCF during the next twelve
months. The average price for WTI in September 2002 was approximately $27 while
spot wellhead prices for natural gas have been weaving above and below $3.50 per
MCF since mid-September. This sharp price volatility, which occurred over the
spring and early summer months, has recently become calmer now that the summer
is more than half over and a clearer picture of the likely winter storage
situation emerges.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are a defendant in a criminal action filed by the State of California arising
out of our failure to plug and abandon two oil well sites located in the
Rosecrans Oil Fields in Los Angeles County. To date, one of the two oil wells
has been plugged, and plans are underway to plug the second oil well and
complete the abandonment process. We estimate that this work will cost $35,000.
We believe that the remaining work can be completed and the criminal proceedings
dismissed prior to the trial setting conference on this matter, which is
scheduled in January 2003.
From time to time, we may be involved in other legal proceedings, including
those arising from our operations and the amounts due suppliers or royalty
owners. None of such proceedings are generally considered material to our
operations or financial condition.
ITEM 2. CHANGES IN SECURITIES.
During the three-month period ended September 30, 2002, we sold 669,999 shares
of our common stock at $.15 per share in a private placement for total cash
proceeds of $100,500. These shares were issued pursuant to the provisions of
Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
promulgated by the Securities and Exchange Commission pursuant thereto. These
shares were offered to purchasers whom we believe are "accredited investors", as
that term is defined in Rule 501 of Regulation D, and who have the
qualifications necessary to permit these shares to be offered and sold in
reliance upon an exemption from registration pursuant to the Act for
transactions not involving any public offering.
During the three-month period ended September 30, 2002 we also issued 294,550
shares of our common stock for services valued at $68,912. These shares were
issued pursuant to the provisions of Section 4(2) of the Securities Act of 1933
and Rule 506 of Regulation D promulgated by the Securities and Exchange
Commission pursuant thereto.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In January 2002, we acquired land in the area of its Rosecrans oil and gas
properties for $5,000 in cash and a noninterest bearing note payable of $35,000
secured by the property. The note had a final balloon payment of $32,000 that
was due on July 1, 2002 and has not as of yet been paid. We are now in default
on the note.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On August 7, 2002, we filed a Current Report on Form 8-K to disclose the
order by the California Department of Conservation directing us to cease
injecting waste into Vaca disposal wells.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Geo Petroleum, Inc.,
a California corporation
November 13, 2002 By: /s/ Dennis Timpe
--------------------------
Dennis Timpe
Its: President and a Director
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of GEO Petroleum Inc., a California
corporation (the "Company"), on form 10-Q for the period ending September 30,
2002, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Dennis Timpe, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and (2) The information contained in the
Report, fairly presents, in all material respects, the financial condition and
result of operations of the Company.
November 13, 2002 By: /s/ Dennis Timpe
--------------------------
Dennis Timpe
Its:Chief Executive Officer
20