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
-----
<PAGE>
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.
<TABLE>
<CAPTION>
Class Outstanding at September 30, 1996
----- ---------------------------------
<S> <C>
Common stock, no par value 5,203,787
</TABLE>
<PAGE>
PART 1 FINANCIAL INFORMATION
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------- ------------
<S> <C> <C>
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
============ ============
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ -------------
<S> <C> <C>
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
============ ============
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------
1996 1995
---- ----
<S> <C> <C>
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
============= ============
</TABLE
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Operations
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
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
============ ============
</TABLE
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Cash Flows
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
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)
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
<PAGE>
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.
<PAGE>
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,
<PAGE>
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
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
September 30
1996
----
<S> <C>
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
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
September 30
1996
----
<S> <C>
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 $ -
============
</TABLE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
1996 1995
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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%
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended
September 30
-----------------
1996 1995
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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)
<TABLE>
<S> <C>
November 12, 1996
GERALD T. RAYDON ALYDA L. RAYDON
- ------------------------------- --------------------------
By Gerald T. Raydon By Alyda L. Raydon
(President and Chairman) (Chief Financial Officer)
</TABLE>
