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 JUNE 30, 1996
BUSINESS ISSUERS
Commission File Number 0-20915
GEO PETROLEUM, INC.
--------------------------------------------
(Name of Small Business Issuer in its charter)
California 33-0328958
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25660 Crenshaw Boulevard, Suite 201
Torrance, California 90505
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (310) 539-8191
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 No X
---
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 June 30, 1996
----- ----------------------------
Common stock, no par value 5,116,156
<PAGE>
PART 1 FINANCIAL INFORMATION
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
June 30 December 31
1996 1995
---- ----
Assets
Current assets:
Cash and cash equivalents $ 141,804 $ 100,565
Accounts receivable:
Accrued oil and gas revenues 249,526 161,308
Joint interest and other 90,181 200,026
Prepaid expenses and other 52,413 52,413
----------- ------------
Total current assets 533,925 514,312
Property and equipment:
Oil and gas properties 4,835,876 4,698,877
Office furniture and equipment 68,629 65,948
----------- ------------
4,904,505 4,764,825
Accumulated depletion and depreciation (1,037,404) (1,135,646)
----------- ------------
3,768,859 3,727,421
Total assets $ 4,302,785 $ 4,241,733
=========== ===========
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
June 30 December 31
1996 1995
---- ----
Liabilities and shareholders' equity
Current liabilities:
Accounts payable:
Accrued royalties $ 468,002 $ 438,507
Trade and other 311,514 283,161
Dividends payable 14,394 20,120
Accrued expenses 96,590 107,821
Current portion of notes payable 2,052,315 1,968,063
----------- -----------
Total current liabilities 2,942,815 2,817,672
Redeemable convertible preferred stock
$1,000 par value; authorized 100,000
shares; issued and outstanding 375 shares
at June 30, 1996 374,994 505,150
Stockholders' equity
Common stock, no par value; authorized
50,000,000 shares; issued and outstanding
5,141,156 at June 30, 1996 2,448,929 2,157,702
Accumulated deficit (1,463,954) (1,238,791)
----------- -----------
Total stockholders' equity 984,975 918,911
----------- -----------
Total liabilities and stockholders' equity $ 4,302,785 $ 4,241,733
=========== ===========
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Operations
Three Months Ended
June 30,
--------
1996 1995
--------- ---------
Revenues:
Oil and gas sales $ 199,384 $ 485,602
Other revenue 44,451 171,645
Interest income 2,611 964
--------- ---------
246,445 658,211
Expenses:
Lease operating expenses 144,862 293,026
Depletion and depreciation 49,121 61,037
Amortization of deferred loan costs -- 15,000
General and administrative 87,033 125,183
Interest expense 89,659 117,333
--------- ---------
Income (loss) before income taxes (124,230) 46,632
Provision for income taxes -- --
--------- ---------
Net income (loss) (124,230) 46,632
Less preferred stock dividends (7,268) --
--------- ---------
Net income (loss) applicable to common stock $(131,498) $ 46,632
========= =========
Net income (loss) per share of common stock $ (0.03) $ 0.01
========= =========
Weighted average number of common shares outstanding 5,141,156 4,477,913
========= =========
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Operations
Six Months Ended
June 30,
--------
1996 1995
--------- ---------
Revenues:
Oil and gas sales $ 425,534 $ 923,300
Other revenue 171,081 326,357
Interest income 4,229 1,832
--------- ---------
600,844 1,251,490
Expenses:
Lease operating expenses 401,089 557,146
Depletion and depreciation 98,242 116,650
Amortization of deferred loan costs -- 30,000
General and administrative 138,110 238,017
Interest expense 159,817 223,090
--------- ---------
Income (loss) before income taxes (196,414) 86,587
Provision for income taxes -- --
--------- ---------
Net income (loss) (196,414) 86,587
Less preferred stock dividends (5,726) --
--------- ---------
Net income (loss) applicable to common stock $(202,140) $ 86,587
========= =========
Net income (loss) per share of common stock $ (0.04) $ 0.02
========= =========
Weighted average number of common shares outstanding 5,141,156 4,477,913
========= =========
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Cash Flows
Six Months Ended
June 30,
--------
1996 1995
--------- ---------
Operating activities
Net income (loss) $(196,414) $ 86,587
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion and depreciation 98,242 116,650
Amortization of deferred loan costs -- 30,000
Fees paid in stock -- 3,106
Gain on sale of property and equipment (36,000) --
Changes in operating assets and liabilities:
Accounts receivable (32,459) 23,692
Prepaid expenses and other (5,285) (27,535)
Accounts payable 7,187 (46,022)
Accrued expenses 191 17,202
--------- ---------
Net cash provided by (used in) operating activities (164,537) 203,680
Investing activities
Additions to property and equipment (96,124) (267,304)
Proceeds on sale of property and equipment 40,000 --
--------- ---------
Net cash used in investing activities (56,124) (267,304)
Financing activities
Proceeds from notes payable 151,246 95,368
Payments on notes payable (66,994) (108,283)
Bank overdraft -- (34,079)
Preferred stock issued 130,156 --
--------- ---------
Net cash provided by financing activities 214,408 (46,994)
--------- ---------
Net increase (decrease) in cash and cash equivalents (6,253) (110,619)
Cash and cash equivalents at beginning of period 148,057 72,123
--------- ---------
Cash and cash equivalents at end of period $ 141,804 $ (38,496)
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 159,817 $ 223,090
========= =========
Cash paid during the period for income taxes $ -- $ --
========= =========
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows
June 30, 1996
Supplemental disclosure of noncash investing and financing activities: During
the quarter ended June 30, 1996, the Company issued 10 shares of the
Company's redeemable convertible preferred stock in exchange
for the retirement of a certain note payable aggregating
$10,000. Dividends on the Company's redeemable convertible
preferred stock, amounting to $25,736.30, were declared during
the quarter ended June 30, 1996. However, $12,421.23 of said
dividends were automatically reinvested into additional shares
of preferred stock.
During the interim six month period ended June 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
$50,423.63, were declared during the six month period ended
June 30, 1996. However, $23,744.18 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.
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 June 30, 1996, the Company's accumulated deficit totaled
$1,463,954, and current liabilities exceeded current assets by $2,408,890. 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, 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.
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
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 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
June 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.
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
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 June 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.
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:
June 30
1996
-------------
Note payable to bank $ 1,460,000
Notes payable to investors 592,315
-------------
2,052,315
Less current portion (2,052,315)
-------------
Total long-term debt $ --
=============
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
2. Notes Payable (continued)
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 to various dates in 1996, and all of the notes are
secured by interests in the Company's oil and gas properties.
The note payable to bank bears interest at prime plus 2.0%. At June 30, 1996,
the prime rate was 8.25%. Interest payments are due monthly, and the outstanding
principal amount and all unpaid interest was due on October 15, 1995. In October
1995, the bank extended the maturity date of the note payable to April 15, 1996.
In June 1996, the bank further extended the maturity date of the note payable to
July 15, 1996, and then on an indefinite basis. 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. The Company was not in compliance with
certain loan covenants at and subsequent to June 30, 1996, including
restrictions on incurring additional debt and failure to make certain payments
to outside vendors on a timely basis. While the bank has not taken any action
regarding such noncompliance, the covenants have not been waived through the
extended maturity date. As a result, the note is classified as current at June
30, 1996. The Company is engaged in discussions with the bank to further extend
the maturity of the note for up to one year from August 15, 1996.
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 $2,467,500 at June 30, 1996.
In the event of default on the bank note payable, the parties providing the
collateral may take steps to recover from the Company the value of any
collateral taken by the bank. The collateral agreements and the stock purchase
option expired on September 11, 1995. In connection with the extension of the
maturity date of the bank note payable, the collateral agreement was extended to
July 15, 1996. However, the parties providing the collateral have indicated that
they will not foreclose on the collateral, so long as negotiations continue on a
good faith basis. No additional consideration was given for this extension.
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
3. Related Party Transactions
The Company has entered into agreements with another entity to sell gas and
offer water 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
$14,293.40 during the quarter ended June 30, 1996. At June 30, 1996, the Company
had a net receivable balance of $166,127.22 from the other entity.
At June 30, 1996, the Company had notes payable to relatives of the principal
officer/shareholder totaling $162,315.03.
The principal officer/shareholder of the Company has not taken a salary since
inception of the Company.
4. Redeemable Convertible Preferred Stock
During the quarter ended June 30, 1996, the Company issued 10 shares of its
redeemable convertible preferred stock in exchange for the retirement of a
certain note payable aggregating $10,000.
During the quarter ended June 30, 1996, dividends on the Company's redeemable
convertible preferred stock amounting to $25,736.30 were declared. However,
$12,421.23 of said dividends were automatically reinvested into additional
shares of the preferred stock.
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.
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
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
5. Common Stock (continued)
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.
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:
June 30
1996
--------------
Deferred income tax asset - operating loss
carryforwards $ 1,470,000
Deferred income tax liability - differences between
book and tax basis of property (1,050,000)
Valuation allowance (420,000)
--------------
Net deferred income taxes $ --
==============
As of June 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 June 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 June 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 June 30, 1996
Not applicable.
<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 six months
periods ended June 30, 1996 and June 30, 1995, and for the two quarters ended
June 30, 1996, and June 30, 1995, are to be read in combination with the
Financial Statements presented elsewhere herein.
Results of Operations
Six months 1996 compared with six months 1995. During the six months
ended June 30, 1996, GEO had a net loss of $196,414, and cash used in operations
of $164,537, compared to a net profit of $86,587 and cash provided by operations
of $203,680 for the six months ended June 30, 1995. Oil and gas revenues
decreased 54% to $425,534 for the 1996 period, compared to $923,300 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 $17.25 per barrel in the 1996 period, compared to $16.23 per
barrel in the comparable 1995 period. Gas prices increased from $1.48 in the
1995 period to $1.60 in the comparable 1996 period.
Average production costs per barrel of oil and equivalents increased to
$13.97 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 six-month 1996 period amounted to
$401,089, as compared to $557,146 for the 1995 period, a 28% 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.
General and administrative expenses for the 1996 period were $138,110,
as compared to $238,017 for the 1995 period, a decrease of 42%, 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 $159,817, as compared to
$223,090 for the 1995 period, a decrease of 28%. This decrease was due to a
reduction in short-term notes outstanding. The Company's provision for depletion
and depreciation decreased to $98,242 for the 1996
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
period, as compared to $116,650 for the 1995 period, a decrease of 16 %. This
decrease was due to lower production rates of oil and gas.
Capital Resources and Liquidity
Financial Position. At June 30, 1996, the Company's total assets
increased by approximately $61,000 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 June 30, 1996, the
Company had a working capital deficiency of $2,408,890, which deficiency is
greater by $105,530 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 was
April 15, 1996, since extended formally to July 15, 1996, and indefinitely
thereafter while the Bank, and those Geo shareholders who had provided the
collateral for the loan, have been negotiating to extend the loan for at least
one year. A third party, introduced by Geo's investment bankers, has stated an
interest in assuming the loan and extending its term to at least August 1, 1997.
The Company is current in payment of interest and fees, and no default has been
declared by the Bank, while negotiations continue.
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
currently 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 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 waste water 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 six-month periods ended June 30, 1996 and June 30, 1995 are itemized as
follows:
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
Six Months Ended
June 30, 1996
1996 1995
-------- --------
Other revenue
Net Profits Interests $ 24,500 $ 67,396
Rent 2,400 4,445
Miscellaneous Income 13,478 29,123
Waste Water Disposal 29,703 58,754
Legal Settlement 45,000 166,639
Gain on Sale of Asset 36,000 --
Proceeds from Merger 20,000 --
-------- --------
Total $171,081 $326,357
======== ========
The reasons for the decrease in Other Revenues from the six months ended June
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 was 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) Waste Water 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 June 30, 1996, of
more than 165% of the amount of the loan, the pledgors could seek to collect the
amount paid by them by foreclosing on a 20% 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
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 water 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 six months ended June 30, 1996 and
1995 were $24,445 and $366,154, 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 six months ended June 30, 1996, was
$164,537 compared to cash provided by operations of $203,680 for the six months
ended June 30, 1995. This decrease in cash provided by operations of $368,217 is
primarily a result of decreased oil and gas production and revenues and the
recovery in 1995 in a lawsuit of a net $183,000 for damages to a Company well,
but no comparable recovery in 1996.
GEO 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. During the six months ended June 30,
1996, the Company was able to extend the maturity date of its bank credit
facility in the amount of $1,460,000 from January 15, 1995, to April 15, 1996
(later extended to June 15, 1996 and then indefinitely). This facility is
secured by collateral pledged by minority shareholders of the Company and is not
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
secured by any of the assets of the Company. A portion of the proceeds from the
planned equity offering will be dedicated to the repayment of such indebtedness.
At June 30, 1996, the increase in the Company's working capital
deficiency from December 31, 1995 was primarily due to the classification of a
portion of its debt due to investors as short-term, and to costs incurred in
connection with the Company's planned acquisitions and a proposed financing of
equity. 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 $56,124 in the six months ended 1996 and
$267,304 in the six 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 (used in) financing activities amounted to $214,408 in
the 1996 period and ($46,994) 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.
Results of Operations
Second quarter 1996 compared with second quarter 1995.
During the quarter ended June 30, 1996, GEO had a net loss of $124,230
and cash used in operations of $120,754, compared to net income of $46,632 and
cash provided by operations of $47,702 for the comparable 1995 period. Oil and
gas revenues declined to $199,384 for the 1996 period, compared to $485,602 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 Fields/Bandini Fields as a result of temporary mechanical malfunctions.
Average oil prices increased to $17.25 per barrel in the 1996 period, compared
to $16.23 per barrel in the comparable 1995 period, while gas prices increased
from $1.48 to $1.60 per mcf.
Lease operating expenses for the second quarter of 1996 declined to
$144,862, as compared to $293,026 in the comparable 1995 period, a 51% decrease
reflecting the fewer number of wells on production and use of additional
cost-cutting measures. Average production costs per barrel of oil and
equivalents increased to $13.97 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.
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
General and administrative expenses for the 1996 second quarter were
$87,033, as compared to $125,183 for the 1995 period, a decrease of 31%. 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 $89,659, as compared to
$117,333 for the comparable 1995 period, a decrease of 24%. This decrease was
due primarily to the exchange of short-term loans for the Company's preferred
stock. The Company's provision for depletion and depreciation decreased to
$49,121 for the second quarter of 1996, as compared to $61,037 for the 1995
period, a decrease of 20%.
Capital Resources and Liquidity
Financial Position
At June 30, 1996, the Company had a working capital deficiency of
$2,408,890, which deficiency is greater by $105,530 over such deficiency at
December 31, 1995. The Company has requested a one year extension of its bank
loan of $1,460,000 which was due June 15, 1996, extended to July 15, 1996 (and
to the present). Negotiations are continuing and the Bank has temporarily and
informally extended the loan during such negotiations.
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 water 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 second quarter of 1996 and 1995
were $54,522 and $192,576, respectively. This decline is primarily attributable
to the drop in revenues in the second quarter 1996 which was previously
discussed.
Cash used in operations for the quarter ended June 30, 1996, was
$120,754 compared to cash provided by operations of $47,702 for the period ended
June 30, 1995. This decrease in cash provided by operations of $168,456 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.
Other Revenue for the quarters ended June 30, 1996 and June 30, 1995 is itemized
as follows:
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
Three Months Ended
June 30, 1996
1996 1995
-------- --------
Other revenue
Net Profits Interests $ 3,800 $ 35,447
Rent 1,200 2,338
Miscellaneous Income 5,613 15,317
Waste Water Disposal 13,837 39,901
Legal Settlement -- 87,643
Proceeds from Merger 20,000 --
-------- --------
Total $ 44,451 $171,645
======== ========
The reasons for the decrease in Other Revenues from the three months ended June
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 was higher in 1995 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) Waste Water 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. Geo
did not receive any such income in the 1996 three month period.
f) Proceeds from Merger: Geo completed its merger with Drake in
April 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 $25,951 in the
second quarter of 1996 and $140,272 for the comparable 1995 period.
Inflation
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
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.
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 six months of 1996, crude oil prices have increased by an
average of $1.02 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 Merge 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 of 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)
August 12, 1996
- -------------------------------- --------------------------------
By Gerald T. Raydon, President By Alyda L. Raydon, Chief Financial
and Chairman Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Unaudited Condensed Financial Statements at 6/30/96
</LEGEND>
<CIK> 0001016275
<NAME> Geo Petroleum, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
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