Form 10-SB/A/4
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
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
- ----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (310) 539-8191
--------------
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Inapplicable Inapplicable
Securities to be registered under Section 12(g) of the Act:
Common shares
----------------
(Title of Class)
<PAGE>
PART II
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On January 26, 1996, the Company notified Deloitte & Touche LLP, its
independent accountants, that it had replaced such firm as its independent
accountants with the firm of Ernst & Young LLP, effective for the fiscal year
1995. Deloitte & Touche LLP had audited Geo's financial statements for the year
ended December 31, 1994, and issued its audit report thereon dated June 28,
1995; except for Notes 2 and 8 for which the date is November 29, 1995 (which
report expressed an unqualified opinion and included an explanatory paragraph
relating to the Company's ability to continue as a going concern). Deloitte &
Touche's said report, included in the Financial Statements section hereof, as
well as their report for fiscal 1993, together comprising the reports on the two
most recent fiscal years (1993 and 1994) prior to the change of accountants, did
not contain an adverse opinion or disclaimer of opinion, nor were modified as to
audit scope, or accounting principles. The report on these financial statements
did include an uncertainty modification as to the Company's ability to continue
as a going concern. There were no disagreements with Deloitte & Touche LLP
respecting accounting or auditing matters for these or other years. The change
of accountants was made by Geo as a matter of business judgment. The Board of
Directors by resolution authorized the said change of independent accountants.
Geo has provided a copy of this disclosure to its present and its former
accountants and has requested both to review such disclosure. A letter
confirming the foregoing from Deloitte & Touche LLP has been filed as an exhibit
to this registration statement. Geo did not discuss the application of
accounting principles to any specific transaction or the type of audit opinion
that might be rendered, prior to engaging its new accounting firm.
<PAGE>
PART F/S
Geo Petroleum, Inc.
Index to Financial Statements
Report of Ernst & Young LLP, Independent Auditors............................F-2
Report of Deloitte & Touche LLP, Independent Auditors........................F-3
Balance Sheets at December 31, 1995 and 1994.................................F-4
Statements of Operations
for the years ended December 31, 1995 and 1994............................F-6
Statements of Stockholders' Equity
for the years ended December 31, 1995 and 1994............................F-7
Statements of Cash Flows
for the years ended December 31, 1995 and 1994............................F-8
Notes to Financial Statements...............................................F-10
F-1
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Geo Petroleum, Inc.
We have audited the accompanying balance sheet of Geo Petroleum, Inc. as of
December 31, 1995, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Geo Petroleum, Inc. at
December 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had incurred recurring losses from operations
through December 31, 1994, and had an accumulated deficit and negative working
capital at December 31, 1995. In addition, the Company has defaulted on a loan
agreement with a bank and has not complied with certain related covenants. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Ernst & Young LLP
Los Angeles, California
April 30, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
GEO Petroleum, Inc.
Torrance, California
We have audited the accompanying balance sheet of GEO Petroleum, Inc. ("the
Company") as of December 31, 1994, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and had an accumulated deficit and negative working capital at December 31,
1994. These conditions raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Deloitte & Touche LLP
Los Angeles, California
June 28, 1995, except for Notes 2 and 8
for which the date is November 29, 1995
F-3
<PAGE>
Geo Petroleum, Inc.
Balance Sheets
December 31
1995 1994
-------------------------
Assets
Current assets:
Cash and cash equivalents (Note 1) $ 100,565 $ 139,874
Accounts receivable:
Accrued oil and gas revenues (net of allowances
for doubtful accounts of $17,775 in 1995 and
$6,430 in 1994) 161,308 121,194
Joint interest and other (Note 3) 200,026 132,514
Prepaid expenses and other 52,413 5,794
-------------------------
Total current assets 514,312 399,376
Property and equipment (Notes 1 and 3):
Oil and gas properties 4,698,877 4,262,003
Office furniture and equipment 65,948 51,271
-------------------------
4,764,825 4,313,274
Accumulated depletion and depreciation (1,037,404) (840,920)
-------------------------
3,727,421 3,472,354
Deferred charge, net (Note 1) -- 45,000
-------------------------
Total assets $4,241,733 $ 3,916,730
=========================
F-4
<PAGE>
December 31
1995 1994
--------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable:
Accrued royalties $ 438,507 $ 289,076
Trade and other (Note 3) 283,161 510,512
Bank overdraft -- 26,002
Dividends payable 20,120 --
Accrued expenses 107,821 78,697
Current portion of notes payable (Note 2) 1,968,063 1,636,000
--------------------------
Total current liabilities 2,817,672 2,540,287
Notes payable (Note 2) -- 600,813
Redeemable convertible preferred stock,
$1,000 par value; authorized 100,000
shares; issued and outstanding 505.15
shares at December 31, 1995 (Note 4) 505,150 --
Stockholders' equity (Notes 2, 3 and 5)
Common stock, no par value; authorized
50,000,000 shares; issued and
outstanding 4,477,913 and 4,288,454
shares at December 31, 1995 and 1994,
respectively
2,157,702 2,147,702
Accumulated deficit (1,238,791) (1,372,072)
--------------------------
Total stockholders' equity 918,911 775,630
--------------------------
Total liabilities and stockholders' equity $ 4,241,733 $ 3,916,730
==========================
See accompanying notes.
F-5
<PAGE>
Geo Petroleum, Inc.
Statements of Operations
Year ended December 31
1995 1994
---------------------------
Revenues (Notes 1 and 3):
Oil and gas sales $ 1,563,206 $ 1,053,036
Other revenue 552,544 137,648
Interest income 3,102 4,868
---------------------------
2,118,852 1,195,552
Expenses:
Lease operating expenses 943,283 907,713
Depletion and depreciation 196,484 222,453
Amortization of deferred loan costs (Note 1) 45,000 60,000
General and administrative 402,978 256,519
Interest expense 377,706 307,333
---------------------------
Income (loss) before income taxes 153,401 (558,466)
Provision for income taxes (Note 6) -- --
---------------------------
Net income (loss) 153,401 (558,466)
Less preferred stock dividends (20,120) --
---------------------------
Net income (loss) applicable to common stock $ 133,281 $ (558,466)
===========================
Net income (loss) per share of common stock $ 0.03 $ (0.13)
===========================
See accompanying notes.
F-6
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Statements of Stockholders' Equity
<CAPTION>
Number of
Common
Shares Common Accumulated
Outstanding Stock Deficit Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 3,063,597 $ 2,034,275 $ (813,606) $ 1,220,669
Net loss -- -- (558,466) (558,466)
Issuance of stock 1,224,857 113,427 -- 113,427
---------------------------------------------------------------------------
Balance at December 31, 1994 4,288,454 2,147,702 (1,372,072) 775,630
Net income -- -- 153,401 153,401
Issuance of stock 189,459 10,000 -- 10,000
Preferred stock dividends -- -- (20,120) (20,120)
---------------------------------------------------------------------------
Balance at December 31, 1995 4,477,913 $ 2,157,702 $ (1,238,791 $ 918,911
===========================================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-7
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Statements of Cash Flows
<CAPTION>
Year ended December 31
1995 1994
--------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 153,401 $(558,466)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depletion and depreciation 196,484 222,453
Amortization of deferred loan costs 45,000 60,000
Fees paid in stock 10,000 4,000
Changes in operating assets and liabilities:
Accounts receivable (107,626) (114,683)
Prepaid expenses and other (46,619) 22,543
Accounts payable (77,920) 88,138
Accrued expenses 29,124 73,830
--------------------------------
Net cash provided by (used in) operating activities 201,844 (202,185)
Investing activities
Additions to property and equipment (451,551) (613,611)
--------------------------------
Net cash used in investing activities (451,551) (613,611)
Financing activities
Proceeds from notes payable 307,000 776,813
Payments on notes payable (121,000) --
Bank overdraft (26,002) 26,002
Preferred stock issued 50,400 --
--------------------------------
Net cash provided by financing activities 210,398 802,815
--------------------------------
Net decrease in cash and cash equivalents (39,309) (12,981)
Cash and cash equivalents at beginning of year 139,874 152,855
--------------------------------
Cash and cash equivalents at end of year $ 100,565 $ 139,874
================================
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 414,821 $ 188,816
================================
Cash paid during the year for income taxes $ 800 $ --
================================
</TABLE>
F-8
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows (continued)
Supplemental disclosure of noncash investing and financing activities:
During 1995, the Company issued 454.75 shares of the Company's redeemable
convertible preferred stock in exchange for the retirement of certain notes
payable aggregating $454,750. Additionally, the Company issued 2.4 shares
of the Company's redeemable convertible preferred stock to an individual as
a finder's fee payment for services rendered in 1995. In connection with
the issuance of the Company's redeemable convertible preferred stock,
fourth quarter dividends amounting to $20,120 were declared and payable as
of December 31, 1995. Also, the Company issued 185,498 shares of common
stock to a consulting company as payment for services that were performed
in 1994 and 1995.
During 1994, the Company issued 1,214,655 shares of common stock and forgave
accounts receivable in the amounts of $32,358 in exchange for certain oil
and gas property interests valued at $141,785.
See accompanying notes.
F-9
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1995
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, the Company's Board of Directors approved the proposed merger
with Drake Investment Corp. (Drake). The terms and conditions of the merger are
further described in Note 8.
Basis of Presentation
The accompanying 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 December 31, 1995, the Company's accumulated deficit totaled
$1,238,791, and current liabilities exceeded current assets by $2,303,360. 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 obtain 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 signed an agreement to merge with Drake (see Note 8).
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.
F-10
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
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.
Deferred Charge
The deferred charge consists of unamortized loan costs, which were amortized
over five years through September 1995 (see Note 2). Amortization expense was
$45,000 in 1995 and $60,000 in 1994.
Investment in Partnership
Included in oil and gas properties is an investment in a general partnership
that was created in 1991 to produce oil at a well located on one of the
Company's oil and gas properties. The Company is the managing partner in this
general partnership, and this investment is accounted for under the pro rata
consolidation method.
Property and Equipment
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration
and development of oil and gas reserves are capitalized as incurred. The costs
of oil and gas properties are accumulated in a cost center and are subject to a
cost center ceiling which such costs do not exceed. The Company has not
capitalized any internal costs in oil and gas properties.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are depleted over the estimated useful lives
of the properties by application of the unit-of-production method using only
proved oil and gas reserves, excluding future estimated costs and related proved
undeveloped oil reserves at the Vaca Oil Sands property, which relate to a major
development project involving an enhanced recovery process as more fully
discussed in Note 9. The evaluations of the oil and gas reserves were prepared
by Sherwin D. Yoelin, a petroleum engineer. Depletion expense recorded for the
years ended December 31, 1995 and 1994 was $196,484 and $218,723, respectively.
F-11
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Substantially all additions to oil and gas properties in 1995 and 1994 relate to
recompletions of existing producing or previously producing wells.
The Company's oil and gas producing properties are estimated by the Company's
independent petroleum engineer to have remaining producing lives in excess of 17
years. The Company's policy for accruing site restoration and environmental exit
costs related to its oil and gas production is that such costs are accounted for
in the Company's calculation of depletion expense. The nature of these costs
includes well abandonments, removal of equipment and facilities, clean-up of the
sites in accordance with applicable leases and laws, and removal of any
contamination. Such estimated net costs associated with the Company's proved
developed properties based on current costs are $480,000, net of estimated
salvage value of equipment of $325,000, of which $35,000 has been accrued as of
December 31, 1995. Future site restoration and environmental exit costs may vary
depending on inflation, changing regulations and other factors.
Depreciation of office equipment and furniture is computed using the
straight-line method, with depreciation rates based upon their estimated useful
lives, which range between five and seven years. Depreciation expense was $5,198
and $3,730 for the years ended December 31, 1995 and 1994, respectively.
Revenue
Revenue from oil and gas sales is recognized upon delivery of the oil and gas to
the Company's customer. Such revenue is recorded net of royalties and certain
other costs that the Company incurs to bring the oil and gas into salable
condition.
The Company had one significant customer in 1995 and 1994 which comprised
approximately 53% and 33% of gross oil and gas sales, respectively.
Included in other revenues for 1995 is $250,000 received 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.
Earnings Per Common Share
Net income (loss) per common share is based upon average outstanding common
shares, adjusted for the stock split described in Note 8, during each year
(4,383,183 shares in 1995 and 3,676,025 shares in 1994). 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. The fair value of the preferred shares is based upon the sale of shares
of the preferred stock at par value for an equivalent amount of cash in
December, 1995, to unrelated parties in arm's length transactions.
F-12
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
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:
December 31
1995 1994
-----------------------------
Note payable to bank $1,460,000 $1,460,000
Notes payable to investors 508,063 776,813
-----------------------------
1,968,063 2,236,813
Less current portion 1,968,063 1,636,000
-----------------------------
Total long-term debt $ -- $ 600,813
=============================
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 December 31, 1995
and 1994, the prime rate was 8.5%. 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, which was also
F-13
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
2. Notes Payable (continued)
not paid and is currently delinquent. The Company was not in compliance with
certain loan covenants at and subsequent to December 31, 1995, 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
December 31, 1995. The Company is engaged in discussions with the bank to
further extend the maturity of the note.
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 Tar Sands
property to certain parties in exchange for those parties providing the
collateral, 35,000 shares of Union Pacific Corp. common stock, for the Company's
note payable to a bank. The consideration issued was valued at $300,000, its
estimated fair market value, and was amortized as additional loan costs over
five years. The 35,000 shares of Union Pacific Corp. common stock is held in a
trust and had an approximate value of $2,310,000 at December 31, 1995. 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 April 15, 1996. No
additional consideration was given for this extension.
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
$257,024 and $174,294 in 1995 and 1994, respectively. At December 31, 1995 and
1994, the Company had a net receivable balance of $155,686 and $81,312,
respectively, from the other entity.
The Company's principal officer/shareholder previously held a net profit
interest of 25% in the East Los Angeles and Vaca Tar Sands oil and gas
properties. In 1994, the Company acquired the 25% net profit interest in the
East Los Angeles property and 20% of the net profit interest in the Vaca Tar
Sands property from the principal officer/shareholder. In
F-14
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
3. Related Party Transactions (continued)
exchange for these interests, the Company issued 1,148,054 shares of common
stock valued at $103,421, which was the approximate cost of the properties to
the principal officer/shareholder. At the date of the acquisition in 1994, the
principal officer/shareholder owed the Company $31,516, which amount was
forgiven as part of the purchase consideration.
In 1987, the Company acquired certain interests in oil and gas properties from
its principal officer/shareholder in exchange for 2,125,587 shares of the
Company's common stock valued at $781,400, which was the approximate cost of the
properties to the principal officer/shareholder.
At December 31, 1995 and 1994, the Company had notes payable to relatives of the
principal officer/shareholder totaling $53,563 and $86,819, respectively.
At December 31, 1994, relatives of the principal officer/shareholder owed the
Company $6,471 relating to the net revenue interests in certain oil and gas
properties. No such amounts were owed at December 31, 1995.
In December 1995, notes payable by the Company to a relative of the principal
officer/shareholder totaling $30,000 were converted into 30.0 shares of the
Company's redeemable convertible preferred stock aggregating $30,000 (see Note
4).
The principal officer/shareholder of the Company has not taken a salary since
inception of the Company.
4. Redeemable Convertible Preferred Stock
During 1994, the Company authorized 100,000 shares of preferred stock with a par
value of $1,000 per share. At December 31, 1994, no shares of preferred stock
had been issued.
In December 1995, the Company issued 48.0 shares of its redeemable convertible
preferred stock to three investors for cash totaling $48,000. Additionally, the
Company issued 2.4 shares to an individual as a finders fees payment for
services performed in 1995.
F-15
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
4. Redeemable Convertible Preferred Stock (continued)
Also during December 1995, 17 holders of notes payable totaling $454,750
converted such notes into 454.75 shares of the Company's redeemable convertible
preferred stock.
In connection with the issuance of the Company's redeemable convertible
preferred stock in 1995, fourth quarter dividends amounting to $20,120 were
declared and are payable as of December 31, 1995.
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.
The Company believes that, at December 31, 1995, the fair value of its issued
redeemable convertible preferred stock approximates its carrying value in the
Company's balance sheet. The fair value was based upon the sale of the preferred
stock at par value for an equivalent amount of cash in December, 1995, to
unrelated parties in arm's-length transactions.
5. Common Stock
In June 1995, the Company issued 185,498 (72,730 pre-split) 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.
F-16
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
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:
December 31
1995 1994
----------------------------
Deferred income tax asset - operating loss
carryforwards $ 1,450,000 $ 1,100,000
Deferred income tax liability - differences
between book and tax basis of property (1,050,000) (950,000)
Valuation allowance (400,000) (150,000)
----------------------------
Net deferred income taxes $ -- $ --
============================
As of December 31, 1995 and 1994, the Company 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 amounted to approximately $3,740,000 and $2,750,000 for 1995 and
1994, respectively, and expire during the years 2001 through 2009. For state
income tax purposes, net operating loss carryforwards amounted to approximately
$1,950,000 and $1,480,000 for 1995 and 1994, respectively, and expire during the
years 2004 through 2010. The Company is delinquent in filing its 1994 income tax
returns.
7. Commitments
The Company leases office space under a noncancelable operating lease agreement
expiring June 30, 1996. The Company also leases equipment under month-to-month
leases. Future minimum lease payments under the noncancelable operating lease
are $3,240 for the period from January 1, 1996 through June 30, 1996.
Total rental expense incurred under all lease agreements was $31,346 for the
years ended December 31, 1995 and 1994.
F-17
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
8. Events Subsequent to December 31, 1995
Effective April 9, 1996, the Company merged with Drake. The agreement provides
that 10% of the Company's outstanding common stock after the merger will be
issued to the Drake shareholders in exchange for the net assets of Drake.
Subsequent to December 31, 1995, the Articles of Incorporation were amended to
provide for an authorized capital of fifty million shares of common stock and,
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.
All amounts of common stock shares stated herein have been adjusted to reflect
the 2.5505 to 1 stock split.
9. Oil and Gas Operations (Unaudited)
At December 31, 1995, the Company had interests in oil and gas properties that
are principally located in Southern California. The Company does not own or
lease any oil and gas properties outside the United States.
Costs Incurred in Oil and Gas Producing Activities
Costs incurred in oil and gas producing activities were as follows:
Year ended December 31
1995 1994
-------------------------
(In Thousands)
(Unaudited)
Property acquisition costs:
Proved properties $ 90,289 $141,785
Exploration costs -- --
Development costs 346,585 613,611
-------------------------
Total costs $436,874 $755,396
=========================
Estimated Quantities of Proved Oil and Gas Reserves
Reserve information presented below is based upon reports prepared by the
Company's independent petroleum reservoir engineer. Reserve estimates are
inherently imprecise and estimates of new discoveries are more imprecise than
those of producing oil and gas properties. Accordingly, these estimates are
expected to change as future information becomes available.
F-18
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods.
<TABLE>
Net quantities of crude oil and natural gas for the Company as of the beginning
and the end of the years ended December 31, 1995 and 1994, as well as the
changes in proved reserves during such years, are set forth in the tables below:
Oil and Gas Reserve Data
<CAPTION>
Year ended December 31
1995 1994
------------------------------------------------------------
Oil Gas Oil Gas
Bbls MCF Bbls MCF
------------------------------------------------------------
(In Thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves (excluding Vaca Oil
Sands), net:
Beginning of year 3,495 5,329 3,468 11,078
Revisions of previous
estimates (193) 314 (291) (5,718)
Purchase of reserves in
place -- -- 400 --
Production (102) (112) (82) (31)
------------------------------------------------------------
End of year 3,200 5,531 3,495 5,329
============================================================
Proved undeveloped Vaca Oil
Sands reserves, net:
End of year 27,614 --
===============================
</TABLE>
F-19
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
The decrease in the quantity of gas reserves during the year ended December 31,
1994 pertains to process undeveloped reserves and is attributable primarily to
the experience of producing gas wells which indicated that due to the manner of
completion of the existing wells and the discontinuance nature of the producing
zones, rates of recovery and ultimate recovery from the existing wells would be
less than estimated and that the recovery of all such reserves would require the
drilling of new wells which, at this time, is not contemplated.
Prior to 1995, the Company had made no expenditures toward developing its
undeveloped Vaca Oil Sands reserves which were purchased in 1990. In 1995, the
Company took steps toward the development of these reserves by obtaining a
governmental permit allowing it to drill 120 wells on part of its acreage. 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. A significant
uncertainty remains involving the financial ability of the Company to develop
the reserves. 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 cost allocated to the
undeveloped Vaca Oil Sands reserves is insignificant at December 31, 1995 and
1994 and the estimated volume of such reserves described above have been
excluded from the calculation of the Company's depletion expense through
December 31, 1995. The costs related to the Vaca Oil Sands reserves, including
future development costs, will be included in the Company's calculations of
depletion expense when production of these reserves commences.
No reserve report was filed with any federal authorities or agencies during 1995
and 1994.
F-20
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves
The following tables set forth the computation of the standardized measure of
discounted future net cash flows relating to proved reserves at December 31,
1995 and 1994, respectively. The standardized measure is the estimated future
cash inflows from proved reserves less estimated future production and
development costs and estimated future income taxes. Future cash inflows
represent expected revenues from the production of proved reserves based on
prices and any fixed determinable future escalation provided by contractual
arrangements in existence at fiscal year end. Escalation based on inflation,
federal regulatory changes and supply and demand is not considered. Estimated
future production and development costs related to future production of reserves
are based on historical costs. Such costs include, but are not limited to
drilling development wells and installation of production facilities. Inflation
and other anticipatory costs are not considered until the actual cost change
takes effect. Estimated future income tax expenses are computed using the
appropriate year-end statutory tax rates. Consideration is given to the effects
of permanent differences, tax credits and allowances. A discount rate of 10% is
applied to the annual future net cash flows after income taxes.
The methodology and assumptions used in calculating the standardized measure are
those required by FASB Statement No. 69. It is not intended to be representative
of the fair market value of proved reserves. The valuations of revenues and
costs do not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
F-21
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
The standardized measure of discounted future net cash flows relating to proved
developed oil and gas reserves, which excludes the Company's proved undeveloped
Vaca Oil Sands reserves, follows:
December 31
1995 1994
---------------------
(In Thousands)
(Unaudited)
Future cash inflows $ 60,853 $ 63,719
Future production and development costs (29,699) (29,316)
Future income tax expenses (8,727) (10,384)
---------------------
Future net cash flows 22,427 24,019
10% annual discount for estimated timing of
cash flows (8,735) (9,062)
---------------------
Standardized measure of discounted future
net cash flows $ 13,692 $ 14,957
=====================
For the calculations in the preceding table, estimated future cash inflows from
estimated future production of proved developed reserves were computed using
average year-end oil and gas prices. The average oil price, primarily based on
posted prices, was $15.84 per barrel and $15.11 per barrel at December 31, 1995
and 1994, respectively, and the average gas price, a combination of spot gas
prices and contract prices, was $1.84 per thousand cubic feet and $2.05 per
thousand cubic feet at December 31, 1995 and 1994, respectively.
F-22
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
Changes in Standardized Measure of Discounted Future Net Cash Flows
The changes in standardized measure for discounted future net cash flows
relating to proved developed reserves, which excludes the Company's proved
undeveloped Vaca Oil Sands reserves, follows:
Year ended December 31
----------------------
1995 1994
----------------------
(In Thousands)
(Unaudited)
Sales of oil and gas produced, net of production
costs $ (620) $ (145)
Net changes in prices and production costs (763) 3,275
Changes in estimated future development costs (332) (131)
Development costs incurred during the period 347 614
Revisions of previous quantity estimates (1,252) (8,778)
Purchase of reserves in place -- 291
Accretion of discount 1,496 1,624
Net change in income taxes 1,022 2,873
Other, principally changes in timing of estimated
production (1,163) (905)
----------------------
Net decrease (1,265) (1,282)
Beginning of year 14,957 16,239
----------------------
End of year $ 13,692 $ 14,957
======================
F-23
<PAGE>
Unaudited Condensed Financial Statements
Geo Petroleum, Inc.
Quarter ended March 31, 1996
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
March 31
1996
-----------------
Assets
Current assets:
Cash and cash equivalents $ 141,802
Accounts receivable:
Accrued oil and gas revenues 61,639
Joint interest and other 195,226
Prepaid expenses and other
52,413
-----------------
Total current assets 451,080
Property and equipment:
Oil and gas properties 4,765,050
Office furniture and equipment
65,948
-----------------
4,830,998
Accumulated depletion and depreciation (1,086,525)
-----------------
3,744,473
Total assets $ 4,195,553
=================
1
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
<CAPTION>
March 31
1996
<S> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable:
Accrued royalties $ 443,614
Trade and other 214,624
Dividends payable
7,126
Accrued expenses 75,657
Current portion of notes payable 2,048,469
--------------------
Total current liabilities 2,789,490
Redeemable convertible preferred stock, $1,000 par value;
authorized 100,000 shares; issued and outstanding 538.65
shares at March 31, 1996 578,945
Stockholders' equity
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 4,477,913 at March 31, 1996 2,157,702
Accumulated deficit (1,330,584)
--------------------
Total stockholders' equity 827,118
--------------------
Total liabilities and stockholders' equity $ 4,195,553
====================
</TABLE>
2
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Operations
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Revenues:
Oil and gas sales $ 226,150 $ 437,698
Other revenue 124,131 154,712
Interest income 1,618 869
------------------- ----------------
351,899 593,279
Expenses:
Lease operating expenses 247,174 264,119
Depletion and depreciation 49,121 55,613
Amortization of deferred loan costs - 15,000
General and administrative 52,075 112,834
Interest expense 56,314 105,758
-------------------- ----------------
Income (loss) before income taxes (52,785) 39,955
Provision for income taxes - -
-------------------- ----------------
Net income (loss) (52,785) 39,955
Less preferred stock dividends (39,008) -
-------------------- ----------------
Net income (loss) applicable to common stock $ (91,793) $ 39,955
==================== ================
Net income (loss) per share of common stock $ (0.02) $ 0.01
==================== ================
Weighted average number of common shares outstanding 4,477,913 4,288,454
==================== ================
</TABLE>
3
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Cash Flows
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Operating activities
Net income (loss) $ (52,785) $ 39,955
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion and depreciation 49,121 55,613
Amortization of deferred loan costs - 30,000
Gain on sale of property and equipment (36,000) -
Changes in operating assets and liabilities:
Accounts receivable 104,469 57,125
Prepaid expenses and other - (13,053)
Accounts payable (56,304) (21,817)
Accrued expenses (52,284) 8,155
------------------ ----------------
Net cash provided by (used in) operating activities (43,783) 155,978
Investing activities
Additions to property and equipment (70,173) (127,032)
Proceeds on sale of property and equipment 40,000 -
------------------ ----------------
Net cash used in investing activities (30,173) (127,032)
Financing activities
Proceeds from notes payable 96,693 -
Payments on notes payable (5,000) (70,695)
Bank overdraft - (26,002)
Preferred stock issued 23,500 -
------------------ ----------------
Net cash provided by financing activities 115,193 (96,697)
------------------ ----------------
Net increase (decrease) in cash and cash equivalents 41,237 (67,751)
Cash and cash equivalents at beginning of period 100,565 139,874
------------------ ----------------
Cash and cash equivalents at end of period 141,802 72,123
================== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 18,299 103,705
================== ================
Cash paid during the period for income taxes $ - $ -
================== ================
</TABLE>
4
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows
March 31, 1996
Supplemental disclosure of noncash investing and financing activities:
During the quarter ended March 31, 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, and the Company sold an
additional 23.5 shares of the Company's redeemable convertible preferred stock
for $23,500. Dividends on the Company's redeemable convertible preferred stock,
amounting to $32,354, were declared during the quarter ended March 31, 1996.
However, $25,422 of said dividends were automatically reinvested into additional
shares of preferred stock. Additionally, $14,872 of dividends payable at
December 31, 1995 were automatically reinvested into additional shares of
preferred stock during the quarter ended March 31, 1996.
5
<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 20, 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 March 31, 1996, the Company's accumulated deficit totaled
$1,330,584, and current liabilities exceeded current assets by $2,338,410. 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 obtain 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 signed an agreement to merge with Drake. There
can be no assurance that
6
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
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 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
March 31, 1996, relate to recompletions of existing producing or previously
producing wells.
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.
7
<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 March 31,
1996 and 1995, which comprised approximately 75% and 52% of gross oil and gas
sales, respectively.
Included in other revenues during the quarter ended March 31, 1996, is $45,000
received from the settlement of a lawsuit against an adjacent property owner for
damages to Company property incurred while trespassing on a Company easement.
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 in
Note 5. 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.
8
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
2. Notes Payable
Notes payable consisted of the following:
March 31
1996
-------------------
Note payable to bank $ 1,460,000
Notes payable to investors 588,469
-------------------
2,048,469
Less current portion 2,048,469
-------------------
Total long-term debt $ -
===================
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 March 31, 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. The bank has indicated that it will not 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
March 31, 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 March 31, 1996. The Company is engaged in discussions
with the bank to further extend the maturity of the note for up to one year from
June 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 $2,401,875 at March 31, 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
9
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
2. Notes Payable (continued)
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.
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 $29,683
during the quarter ended March 31, 1996. At March 31, 1996, the Company had a
net receivable balance of $139,219 from the other entity.
At March 31, 1996, the Company had notes payable to relatives of the principal
officer/shareholder totaling $118,469.
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 March 31, 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, and sold an additional 23.5
shares of the Company's redeemable convertible preferred stock for $23,500.
During the quarter ended March 31, 1996, dividends on the Company's redeemable
convertible preferred stock amounting to $32,354 were declared. However, $25,422
of said dividends were automatically reinvested into additional shares of the
preferred stock. Therefore, $6,931 in dividends were payable at March 31, 1996.
Additionally, $14,872 of dividends payable at December 31, 1995 were
automatically reinvested into additional shares of preferred stock during the
quarter ended March 31, 1996.
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
10
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
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 (Note 8), 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:
March 31
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 March 31, 1996, the Company 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 March 31, 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 March
31, 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.
7. Commitments
The Company leases office space under a noncancelable operating lease agreement
expiring June 30, 1996. The Company also leases equipment under month-to-month
leases.
11
<PAGE>
Geo Petroleum, Inc.
Notes to Condensed Financial Statements
8. Events Subsequent to March 31, 1996
Effective April 9, 1996, the Company merged with Drake. The agreement provides
that 10% of the Company's outstanding common stock after the merger will be
issued to the Drake shareholders in exchange for the net assets of Drake.
Subsequent to the April 9, 1996 merger with Drake, there are now 4,477,913
outstanding shares of common stock after the April 9, 1996 split at the rate of
2.5505 to 1.
12
<PAGE>
PART III
<TABLE>
ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION
<CAPTION>
Exhibit Sequential
Number Description of Exhibit Location No.
- --------------------------------------------------------------------------------------------------------------
<S> <C>
16.1 Consent of Ernst & Young LLP to use of their opinion in this document,
dated August 9, 1996, and Changes in Accountants
16.2 Consent of Deloitte & Touche LLP to use of their opinion in
this document, dated August 9, 1996.
16.3 Changes in Accountants -- Deloitte & Touche LLP
</TABLE>
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this fourth amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Geo Petroleum, Inc.
-------------------
(Registrant)
Date: August 9, 1996
By_____________________________________
Gerald T. Raydon, President (signature)
CONSENT OF INDEPENDENT AUDITORS
We agree to the inclusion in this offering circular on Form 10-SB Amendment No.
4 of our report dated April 30, 1996, with respect to the financial statements
of Geo Petroleum, Inc. and consent to the reference to our firm under the
caption "Changes In and Disagreements With Accountants."
Ernst & Young LLP
August 9, 1996
Los Angeles, California
Exhibit 16.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Form 10-SB/A/4 of GEO Petroleum, Inc. of our
report dated June 28, 1995, except for Notes 2 and 8 for which the date is
November 29, 1995 (which expressed an unqualified opinion and included an
explanatory paragraph relating to the Company's ability to continue as a going
concern).
Deloitte & Touche LLP
Los Angeles, California
August 9, 1996
Exhibit 16.2
August 9, 1996
Securities and Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, D.C. 20549
We have read and agree with the comments in Part II, Item 3 of Form 10-SB/A/4 of
GEO Petroleum, Inc. dated August 9, 1996, except for the fifth sentence of the
first paragraph and the third sentence of the second paragraph of such Item, as
to which we have no basis to agree or disagree.
Yours truly,
Deloitte & Touche LLP
August 9, 1996
Exhibit 16.3
