<PAGE>
FORM 10-SB/A/2
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.
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(Name of Small Business Issuer in its charter)
California
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(State or other jurisdiction of
incorporation or organization)
25660 Crenshaw Boulevard, Suite 201
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Torrance, California
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(Address of principal executive offices)
33-0328958
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(I.R.S. Employer Identification No.)
90505
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(Zip Code)
Issuer's telephone number (310) 539-8191
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Securities to be registered under Section 12(b) of the Act:
Title of each class to be so registered
Inapplicable
Name of each exchange on which each class is to be registered
Inapplicable
Securities to be registered under Section 12(g) of the Act:
Common shares
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(Title of Class)
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PART 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis for the years ended
December 31, 1995, and 1994, and the quarters ended March 31,
1995, and March 31, 1996, are read in combination with the
Financial Statements presented elsewhere herein.
Results of Operations
1995 Compared with 1994. During the year ended December 31,
1995, GEO had net income of $153,401 and cash provided by
operations of $201,844, compared to a net loss of $558,466 and
cash used in operations of $202,185 for 1994. Oil and gas
revenues increased 48% to $1,563,206 for 1995, compared to
$1,053,036 for 1994. This was attributable mostly to increased
production as a result of a well improvement and recompletion
program. A 7% increase in average oil prices, to $16.23 per
barrel, also contributed to the increase in revenues, but was
partly offset by a 47% decrease in gas prices, to $1.48 per mcf.
During the year ended December 31, 1994, oil prices averaged
$15.08 per barrel and gas prices averaged $2.17 per Mcf,
respectively.
Average production costs per barrel of oil and equivalents
decreased 29% to $7.06 for 1995, compared to $10.00 for 1994.
Lease operating expenses for 1995 amounted to $943,283, as
compared to $907,713 for 1994, a 4% increase over the previous
year, reflecting the additional number of wells on production.
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 contractor negligence and by two major
storms and a fire, and constructing automated custody transfer
facilities necessary for the delivery of oil into a refiner's
pipeline.
General and administrative expenses for 1995 were $402,978,
as compared to $256,519 for 1994, an increase of 57%. Legal
costs and fees of approximately $77,000 were incurred in 1995 for
prosecuting a lawsuit that resulted in a settlement payment of
$250,000 to the Company. Substantial legal, auditing,
engineering and investment banking costs were incurred in
connection with the preparation, offering, and negotiating of
equity offerings and of joint ventures. Additional
administrative costs were incurred due to the increased number of
wells and properties operated during 1995.
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Interest expense for 1995 was $377,706, as compared to
$307,333 for 1994, an increase of 23%. This increase was due to
additional short-term loans and to higher interest rates. The
Company's provision for depletion and depreciation decreased to
$196,484 for 1995, as compared to $222,453 for 1994, a decrease
of 12%.
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 and a gain on the sale of an
asset. Other Revenue for the years ended December 31, 1995 and
1994 is itemized as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
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<S> <C> <C>
Other revenue
Net Profits Interests $ 62,970 $ 29,111
Rent 4,800 -
Miscellaneous Income 105,115 48,595
Waste Water Disposal 129,659 59,942
Legal Settlement 250,000 -
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Total 552,544 137,648
========= ========
</TABLE>
The reasons for the increase in Other Revenues from year-end 1994
to 1995 are as follows:
a) Net Profits Interests: 1995 sales of these interests were
higher than 1994 sales.
b) Rent: Geo acquired a rental property in November 1994. Geo
did not start collecting rent on said property until January
1995.
c) Miscellaneous Income: Represents primarily management fees
and royalties earned by the Company which were higher in 1995
than in 1994 due to higher production and prices for oil and gas.
d) Waste Water Disposal: 1995 volumes of waste water received
were higher than in 1994.
e) Legal Settlement: In 1995, Geo received $250,000 from the
settlement of a lawsuit against a contractor for damages incurred
<PAGE>
while performing services on one of the Company's oil and gas
properties. Geo did not receive any such income in 1994.
Other Revenue for the quarters ended March 31, 1996 and 1995 is
itemized as follows:
<TABLE>
<CAPTION>
March 31
1996 1995
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<S> <C> <C>
Other revenue
Net Profits Interests $ 18,200 $ 31,950
Rent 1,200 2,107
Miscellaneous Income 7,864 30,303
Waste Water Disposal 15,866 27,853
Legal Settlement 45,000 62,500
Gain on Sale of Asset 36,000 -
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Total 124,131 154,712
========= ========
</TABLE>
The reasons for the decrease in Other Revenue from the quarter
ended March 31, 1995 to March 31, 1996 are as follows:
a) Net Profits Interests: 1996 sales of these interests were
less than 1995 sales.
b) Rent: 1995 rent charges were higher than 1996.
c) Miscellaneous Income: Primarily management fees and
royalties earned by the Company, which were higher in 1995 than
in 1996 due to higher production and prices for oil and gas.
d) Waste Water Disposal: 1996 sales of this service were lower
than in the 1995 period.
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. Of this amount, $62,500 was allocated to the first
quarter of 1995 because the settlement had been substantially
negotiated and completed during this period. In the first
quarter of 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.
<PAGE>
f) Gain on Sale of Asset: Geo did not realize any gains on the
sale of assets in 1995.
Capital Resources and Liquidity
Financial Position. At December 31, 1995, the Company's
total assets increased by approximately $325,000 over December
31, 1994, 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, installation of gas processing and automated oil
shipping equipment, and purchase of two wells on the Orcutt
property. At December 31, 1995, the Company had a working
capital deficiency of $2,303,360, which deficiency is greater by
$162,449 over such deficiency at December 31, 1994.
The Company's $1,460,000 bank loan is with the City National
Bank, 606 S. Olive Street, Los Angeles, California 90014. City
National acquired First Los Angeles Bank, the original lender to
Geo. The Company, the Bank, and those Geo shareholders who had
provided the collateral for the loan, began negotiations in May,
1996, 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.
<PAGE>
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 150% 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.
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 1995
and 1994 were $619,923 and $145,323 respectively.
Cash provided by operations for the year ended December 31,
1995, was $201,844 compared to cash used in operations of
$202,185 for the year ended December 31, 1994. This increase in
cash provided by operations of $404,029 is primarily a result of
increased oil and gas production and revenues and the recovery in
a lawsuit of a net $183,000 for damages to a Company well.
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. 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 continue to operate on a positive
cash flow basis.
Sources of Capital Resources. During the year ended
December 31, 1995, 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 July 15,
1996). This facility is secured by collateral pledged by
<PAGE>
minority shareholders of the Company and is not 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 December 31, 1995, the increase in the Company's working
capital deficiency from December 31, 1994, 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 $451,551 in 1995 and
$613,611 in 1994. This was financed in 1995 by cash provided by
operations and the proceeds from the issuance of additional notes
payable and, in 1994, solely from the latter source.
Cash provided by financing activities amounted to $210,398
in 1995 and $802,815 in 1994. This cash was primarily the net
proceeds from the issuance of notes payable in both years.
During 1995, holders of $454,750 of notes payable exchanged such
notes for $454,750 of redeemable convertible preferred stock.
Results of Operations
FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995.
----------------------------------------------------
During the quarter ended March 31, 1996, GEO had a net loss
of $52,785 and cash used in operations of $43,783, compared to
net income of $39,955 and cash provided by operations of $155,978
for the comparable 1995 quarter. Oil and gas revenues declined
to $226,150 for the 1996 period, compared to $437,698 for the
first quarter 1995. 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 as a result of
temporary mechanical malfunctions. Average oil prices increased
to $17.53 per barrel in the 1996 period, compared to $15.66 per
barrel in the comparable 1995 period, while gas prices remained
about unchanged at $1.45 per mcf.
Lease operating expenses for the first quarter of 1996
declined to $247,174, as compared to $264,119 in the comparable
1995 period, a 7% decrease reflecting the fewer number of wells
on production. However, average production costs per barrel of
oil and equivalents increased to $13.97 in the 1996 period from
$7.01 in the 1995 period, due to increased repair costs and due
<PAGE>
to allocating fixed operating costs to a smaller quantity of
produced barrels. In addition to the normal operating expenses
of existing wells, expenses were incurred in repairing and
recompleting wells to bring them on production, performing
repairs on wells and facilities damaged by a fire caused by
contractor negligence, and putting into service automated custody
transfer facilities necessary for the delivery of oil into a
refiner's pipeline.
General and administrative expenses for the 1996 quarter
were $52,075, as compared to $112,834 for the 1995 period, a
decrease of 54%. 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 $56,314, as
compared to $105,758 for the comparable 1995 period, a decrease
of 47%. 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 first quarter of 1996, as compared to $55,016
for the 1995 period, a decrease of 11%.
Capital Resources and Liquidity
FINANCIAL POSITION.
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At March 31, 1996, the Company had a working capital
deficiency of $2,338,410, which deficiency is greater by $35,050
than 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 July 15, 1996. Negotiations are continuing and the
Company 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
first quarter of 1996 and 1995 were ($21,024) and $173,579,
respectively. This decline is primarily attributable to the drop
in revenues in the first quarter 1996 which was previously
discussed.
<PAGE>
Cash used in operations for the quarter ended March 31,
1996, was $43,783 compared to cash provided by operations of
$155,978 for the period ended March 31, 1995. This decrease in
cash provided by operations of $199,761 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.
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 $30,173 in the first quarter of 1996 and $127,032
for the period ending December 31, 1995.
Inflation
In recent years inflation has not had a significant impact
on the Company, its operations or financial condition.
Trends. Although there is no assurance that the Company
will be able to successfully complete its planned equity
offering, the Company believes that if it is successful, the
Company will be able to increase its revenues by investing a
portion of the anticipated proceeds in remedial and recompletion
operations, development and exploratory drilling and planned
acquisitions. As a result of any increase in activities, the
Company anticipates that its general and administrative expenses
will measurably increase, since the Company is contemplating
hiring additional personnel, expanding its administrative offices
and increasing compensation to its existing staff, including its
president. 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 announced plans to deliver a large portion of its oil
production from Alaska to the Far East in 1996. As such
reduction of Alaskan supplies to the West Coast occurs, it is
expected to have a positive effect upon the price paid for
California crude oil. During the first five months of 1996,
crude oil prices have increased by an average of $2.20 per
barrel.
<PAGE>
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 it revenues.
ITEM 3. DESCRIPTION OF PROPERTY
All of the Company's properties are located in California,
primarily in the southern portion of the State. Geo's material
producing properties are described in this item.
East Los Angeles / Bandini Fields
At December 31, 1995, these two separate, but adjacent
accumulations which are located in an industrial area of the City
of Los Angeles, produced a daily average during 1995 of 210
barrels (172 net) of high gravity (33 degree API) oil and 306
MCf. of 1200 BTU gas from a total of 10 wells. Estimated total
net proven developed reserves amounted to 2,039,114 barrels of
oil and 5,530,765 MCF. of natural gas, of which 594,148 barrels
and 865,143 MCF, respectively, were classified as proved
producing. For the six month period ended June 30, 1996, these
two properties produced a daily average of 110 barrels of oil and
101 Mcf of gas from a total of eight wells. At June 30, 1996, 14
wells were idle pending recompletion or repair operations, and
eleven were idles awaiting reworking and re-equipping operations.
The Company believes that such operations, as completed, will add
additional producing capability.
The properties are located approximately one-half mile apart
and are operated together by the same employees. In the
aggregate, approximately 570 surface acres are covered by GEO's
leases. GEO's rights in both fields are held by production. The
Company owns all the mineral rights in the East Los Angeles
Field, subject to overriding royalties of 16% of gross revenues.
The Bandini interests are comprised of town-lot leases and of
Company-owned mineral rights; the Bandini interests are subject
to royalties varying from 16% to 29.5% of gross revenues.
Production comes from multiple sand zones in the Pliocene Repetto
formation at depths of 2800 to 8000 feet at Bandini and in the
Miocene Puente formation at depths of between 7200 to 11200 feet
at East Los Angeles.
<PAGE>
GEO acquired these fields in 1990, when they were producing
less than 40 net barrels of oil per day, and had remaining
economic reserves of less than 90,000 barrels. Since that time
GEO has invested approximately $1,200,000 in reworking and
remedial efforts, and has achieved the increases in production
and reserves stated above. GEO determined that the previous
operators had not recognized several potentially productive oil
and gas zones. By recompleting existing wells, GEO has discovered
two shallower gas zones and extended one oil zone at Bandini. In
the East Los Angeles Field, two shallower oil and gas zones have
been discovered. In each case, the recompleted wells flowed with
excellent pressures. Geo regards the results of the foregoing
work as demonstrative of the economic feasibility of the
continued recompletion of wells and of the drilling of extension,
deeper test, and horizontal wells in the fields.
The Company presently operates five out of eighteen existing
wells at the Bandini Field. At East Los Angeles, the Company
operates three producing wells out of a total of fifteen wells.
Subject to obtaining financing, GEO intends to spend
approximately $2,165,000 for recompleting the remaining wells and
restoring them to production.
GEO's geologic studies have led the Company to conclude that
there are also seven exploratory prospects in these fields,
which, if productive when drilled, would extend the existing
field limits, discover shallower and deeper zones, and develop
production by horizontal drilling. Geo has no present schedule
for drilling these prospects.
Oxnard Field
GEO and Gerald T. Raydon, President and principal
shareholder of GEO, jointly acquired 26 oil wells and oil and gas
leases covering approximately 625 acres of land in the area of
Oxnard, Ventura County, California, from Oryx Energy in 1990, for
a consideration of S150,000. See "Certain Relationships and
Related Transactions." On April 1, 1994, GEO acquired all but
five percent of the 25% interest held by Mr. Raydon in the Oxnard
Field for a consideration consisting solely of Common Stock.
The production in this field is from the prolific and
massive Vaca Oil Sand which is found at depths of between 1950
and 2400 feet. In 325 acres of the leases, the thickness of the
oil-saturated sand averages 225 feet. The reservoir is highly
porous (32%) and permeable (1800 md.). The oil is heavy,
approximately 6-8 degrees API, and is highly viscous.
Consequently, cyclic steam injection is necessary to heat the oil
and reduce its viscosity, permitting it to flow readily through
the well bores. In existing operations, GEO generates steam at
the surface and injects it into the producing formation. The heat
permeates the formation, and GEO then pumps the oil in a
conventional manner. Because of the use of steam, operations are
<PAGE>
comparatively expensive while the price received for the oil is
relatively low.
Geo treats the production from existing wells in the Oxnard
Field as oil from "non-conventional" sources, which thus
qualifies for tax credits provided under Section 29 of the
Internal Revenue Code. For the year 1995, this credit amounted to
approximately $5.95 per produced barrel, and is subject to annual
increases with inflation. At such time as the Company has an
obligation to pay federal income taxes, the accrued credits may
be used to offset directly any taxes due. GEO has, in the past,
secured funds for operations on this lease by entering into
transactions designed to provide these credits to investors in
exchange for payments. GEO intends to continue such funding on an
ad hoc basis. Funding from such sources would not, however, be
sufficient to develop the property to any material extent. GEO is
examining project financing and other methods of providing
funding for development of this accumulation, but has not
determined the feasibility of any such method.
Proved developed non-producing reserves in Geo's leases
amount as of January 1, 1996, to 775,121 net barrels and proved
undeveloped reserves are a net 27,613,000 barrels. In order to
produce these total reserves, the Company would be required to
obtain about $66,000,000 for the drilling of 250 conventional
wells, or about $45,000,000 if horizontal wells should prove
feasible. With full development, future net revenues of
$169,977,000 would be achieved, having a present net worth,
discounted at 10% per annum, of $69,879,000, according to the
report of an independent petroleum engineer.
The tax credit of approximately $6.00 (for 1996) for each
barrel produced from this field available under Section 29 of the
Internal Revenue Code adds substantially to the after-tax
revenues per barrel. GEO presently produces approximately 40
barrels per day of oil from four wells in this field. Subject to
the availability of financing, GEO anticipates spending about
$415,000 for reworking and equipping fifteen existing wells. At
December 31, 1995 and at March 31, 1996, the oil price was
respectively, $13.16 and $17.15 per barrel. Operating costs have
averaged approximately $7.45 per barrel during the one year
period ended December 31, 1995. Operating costs for the first
quarter appear to be consistent with the yearly average. GEO
expects that per barrel operating costs will decline as
production per well increases. No provision has been made for
funding development drilling on the property.
The Company is seeking ways in which to improve the
economics of the field's production. Recently, the Company
entered into a letter of intent with a manufacturing firm which
will test its newly developed down-hole steam generator on the
Oxnard wells. This device is designed to operate at a greatly
reduced cost and much more efficiently than methods in use
<PAGE>
currently. By generating steam in the well rather than at the
surface, much less fuel is required, the heat loss is avoided
which occurs when steam travels through surface pipelines and
down the wells to a depth of over 2000 feet, and higher
temperatures can be delivered to the oil zone. Since electricity
is used for fuel instead of gas, major environmental permitting
and compliance costs will be avoided. If this process is
successful, it is expected to substantially enhance the economics
of the present wells and of the 250 development wells needed to
recover the proven undeveloped reserves.
Produced water is disposed of in wells on site owned and
operated by GEO. See "Environmental Services." GEO has two steam
generators, a large capacity (9300 barrels) tank farm, disposal
wells, fresh water source wells and all other equipment needed
for steam operations on this lease.
GEO's leases have no current drilling obligations nor do
they require the payment of rentals to keep the leases in good
standing. The leases reserve a royalty of 17% of gross revenues
to the lessor. Wells cost approximately $265,000 to drill and
complete for production
The Company in 1995 received a conditional use permit from
Ventura County, allowing it to drill 120 wells on part of its
property. Steaming operations require compliance with various
environmental regimes, including those designed to protect air
quality. GEO's operations have been permitted by the local air
pollution control district and have been found to be in
compliance with relevant requirements. There is no assurance that
such operations will remain in compliance.
Rosecrans Field
GEO purchased 30 wells in the Rosecrans Oil Field located in
Los Angeles County, California, in December, 1994, with the plan
of improving the seven active wells and repairing or reworking an
additional 19 wells in order to return them to production. Wells
in this field were drilled during a period of between ten and
fifty years ago. The royalty amounts to 16.67% of gross revenues.
If the wells were to be produced under present conditions to
depletion, future cumulative production would amount to 434,000
barrels of oil (360,000 net). There are seven principal producing
zones of Miocene and Pliocene age in the Field, ranging from
depths of 6500 to 8400 feet. The wells have been drilled through
these zones, but have not produced from all of them. This
provides the opportunity to commence production from bypassed
zones in the future. Presently, the gas produced from this
yields no revenues for the Company. The wells are expected to
produce an estimated 896,000 MCf of gas. Geo in the process of
negotiating an agreement to market the gas through the existing
pipeline system, which, if successfully negotiated, should result
<PAGE>
in the Company receiving payment for the gas it produces from
this field.
The Company's independent petroleum engineer estimates that
by completing a program to improve equipment and facilities,
change production methods, stimulate the producing zones, and
bring proven bypassed zones on production at a cost of about
$128,000, production could be increased to about 798,000 net
barrels of oil and equivalents. Geo does not have the funds
available to perform these operations and no assurance may be
given that the results will be as estimated by the engineer.
Orcutt Field
GEO owns two oil and gas leases covering 3140 acres on the
south flank of the giant Orcutt Field in Santa Barbara County,
California. Royalty burdens on this lease are 21% of gross
revenues. There are two producible formations which underlie the
lease. The shallower formation is the massive, oil-saturated
Diatomite Zone, which is between 250 and 500 feet thick and lies
at depths of from 850 feet to 1500 feet. This formation has low
permeability, which requires that it be hydraulically fractured
in order to be productive. Although GEO's engineers have
attributed possible reserves of approximately 8 million barrels
of oil to this formation, past operations have not established
the commerciality of the Zone which requires stimulation by
hydraulic fracturing. The high cost of fracturing, the variable
resulting production, and the low price of oil have made most
wells uneconomic (six out of ten wells). The last two wells
drilled are producing in commercial quantities, and Geo believes
that improved fracturing technology and firm to higher oil prices
may result in enhancing the economics of the Zone, but the
overall profitability of operations has not yet been
demonstrated.
Production of the existing wells to depletion is estimated
by the Company's staff to provide a net 126,000 BOE. GEO
subleased shallow rights in the Diatomite Zone to Santa Fe Energy
Resources, Inc. In 1991, Santa Fe drilled, hydraulically
fractured and completed two wells at a depth of 1,400 feet in the
Diatomite, confirming the Zone's productive potential. However,
the high costs of completing the wells on an experimental basis
made it unlikely that Santa Fe would recover its costs, and it
sold the two wells to GEO in June, 1995.
GEO owns ten wells which have been completed in the
Diatomite Zone, of which four are presently producing an
aggregate of 25 barrels of oil and 20 MCf of gas per day. At
December 31, 1995 and March 31, 1996, respectively, GEO was
receiving $13.60 and $17.60 per barrel for Orcutt oil. Because
gas is produced in association with the oil, it is necessary to
<PAGE>
market or otherwise dispose of the gas. The plant which had been
purchasing the gas has been closed. Since it is impermissible to
vent the gas to the atmosphere, GEO has been delivering gas for
only a nominal payment. The Company is exploring other methods
for dealing with the gas, including co-generation, re-injection,
and construction of a pipeline to a nearby utility pipeline. More
production will be needed before the latter alternative will be
economically feasible.
The second formation underlying GEO leasehold interests is
the Monterey formation, found at depths of 3500 to 5500 feet. GEO
owns seven wells which are bottomed in the Monterey formation, of
which two wells are presently producing. At December 31, 1995,
such wells produced daily an aggregate of 12 barrels of oil and
150 MCf of gas. The oil is 30 gravity and was sold for $14.80 per
barrel in December, 1995, and in April, 1996, sold for
approximately $18.80 per barrel. Payment for gas has not been
received for the reasons described above.
Environmental Services
The Company owns two commercial water disposal facilities at
which water produced in oil field operations conducted by GEO and
by other operators is reinjected into the subsurface for
disposal. Such facilities are located at GEO's Oxnard and Orcutt
properties. Historically, these operations did not contribute
significantly either to gross revenues or earnings, but GEO has
recently increased its efforts to attract non-affiliates to
dispose of oil field waste water in GEO's facilities for a per-
barrel fee. These efforts have resulted in a significant increase
in revenues at the facilities.
Water produced by other oil operators is hauled to GEO's
disposal sites, cleaned, stored, and injected into wells operated
in a joint venture with Capitan Resources, Inc., an affiliate,
which provides the capital for disposal facilities and retains
25% of the revenues. See "Certain Transactions."
At Orcutt, GEO operates one disposal well which discharges
waste water into a formation located approximately 3,300 feet
from the surface. Waste water is received from trucks into
holding tanks and then pumped under pressure into the well. At
Oxnard, GEO operates one well which has the unusual
characteristic of usually siphoning or receiving the water on a
natural vacuum or at a low pressure, thereby allowing the water
to be disposed of more inexpensively than in the usual case of
wells requiring injection under high pump pressure. GEO has
augmented its existing facilities by installing equipment which
allows GEO to salvage oil from the waste water and sell it.
<PAGE>
The wells have injected 20,000 to 30,000 barrels of water
per month at charges averaging about $0.60 per barrel. The
Company currently has contracts with two major oil companies and
eight independents to dispose of their water. Because there are
few high-capacity waste water wells permitted by the California
Division of Oil & Gas, and an expanding need by operators to
dispose of their waste water, GEO's operations of this type are
capable of substantial growth.
Natural Gas Storage Project
GEO is conducting preliminary negotiations with a large
California utility regarding the use of one of GEO's fields for
the underground storage of up to thirty billion cubic feet (30
BCF) of natural gas. Preliminary studies have indicated the
feasibility of the project. It is expected that construction of
the project would result in payment of storage and injection fees
to GEO. In addition, the injection of gas under pressure into the
oil zones would increase production by driving the oil to the
well bores.
Estimated Oil and Gas Reserves
At December 31, 1995, the Company's net proved oil and gas
reserves, as estimated by its independent petroleum engineer,
Sherwin D. Yoelin, Petroleum Engineer, Inc., amounted to
30,428,000 barrels of oil and 5,530,000 mcf. of natural gas, of
which 2,824,000 barrels and 5,530,000 mcf. were classified as
proved developed. Future cash flows attributable to such proved
developed reserves (before income taxes) are estimated to be
$30,594,000 at December 31, 1995, and the discounted value
thereof, at 10%, is estimated to be $18,745,000. Much of the
Company's reserve of oil is comprised of heavy crude.
Consequently, a major portion of the Company's proved reserve of
oil is highly price sensitive, the Company's heavy crude costs
more to produce than the lighter crudes, and receives a lower
price in the market. Accordingly, a price at or above 1995-1996
levels is needed in order to cover operating costs and yield
profit.
There are numerous uncertainties inherent in estimating oil
and gas reserves and their values, including many factors beyond
the control of the producer. The reserve data set forth above
represent only estimates. Reserve engineering is a subjective
process of estimating underground accumulations of oil and gas
that cannot be measured in an exact amounts. The accuracy of any
reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As
a result, estimates of different engineers may vary. In addition,
estimates of reserves are subject to revision by the results of
drilling, testing and production subsequent to the date of such
estimate. Accordingly, reserve estimates are often different
from the quantities of oil and gas that are ultimately recovered.
<PAGE>
The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they were based.
In general, the volume of production from oil and gas
properties declines as reserves are depleted. Except to the
extent the Company acquires properties containing proved reserves
or conducts successful exploration and development activities, or
both, the proved reserves of the Company will decline as reserves
are produced. The Company's future oil and gas production is,
therefore, highly dependent upon its level of success in
acquiring or developing additional reserves.
For additional information concerning the discounted future
net cash flows to be derived from these reserves see Note to the
Financial Statements included elsewhere herein.
The Company's estimates of reserves have not been filed with
or included in reports to any federal agency other than the
Securities and Exchange Commission.
Title to Properties
While GEO has been in possession of its major properties,
Bandini-East Los Angeles, Orcutt and Oxnard, for at least six
years and has not received notice of an adverse claim, GEO has
not obtained title insurance or a title opinion covering such
properties, but has relied upon title abstracts of the public
records and the apparently unchallenged possession of its
predecessors in interest. Consequently, while GEO believes that
title to its properties is satisfactory, it would be unable to
demonstrate such fact without obtaining title insurance or
opinions. which GEO believes is not warranted under the
circumstances.
Title to the Company's properties is, in addition, subject
to royalty and overriding royalty interests and to contractual
arrangements customary in the oil and gas industry, to liens for
work and materials, current taxes not yet due and to other minor
encumbrances. GEO has not encumbered any of its properties to
secure bank indebtedness. See "Certain Transactions" for a
description of a lien to a shareholder which will be released
upon payment of GEO's existing bank indebtedness.
Markets
General. The market for oil and natural gas produced by the
Company depends on factors beyond its control, including the
extent of domestic production and imports of oil and natural gas,
the proximity and capacity of natural gas pipelines and other
transportation facilities, demand for oil and natural gas, the
marketing of competitive fuels and the effects of state and
federal regulation of oil and natural gas production and sales.
<PAGE>
The oil and gas industry as a whole also competes with other
industries in supplying the energy and fuel requirements of
industrial, commercial and individual consumers.
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
California crudes. The major producer of Alaskan oil has
announced plans to deliver a large portion of its oil to the Far
East in 1996. As such reduction of Alaskan supplies to the West
Coast occurs. it is expected to have a positive effect upon the
price paid for California crude oil.
The Company, during 1996, experienced a substantial increase
in the price paid for its oil and anticipates that there may be a
further 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, taken as a whole, at the field level. Severe drops in
prices would, however, strain the Company's ability to conduct
remedial work using its revenues.
Competition
The oil and gas industry is highly competitive. Competitors
include major oil companies, other independent oil and gas
companies, and individual producers and operators, many of which
have financial resources, staffs and facilities substantially
greater than those of the Company. The Company faces intense
competition for the acquisition of producing oil and gas
properties that are being divested by major and independent oil
and gas companies.
Acreage
The following table reports the Company's developed and
undeveloped leasehold and mineral acreage at December 31, 1995.
All of the Company's acreage is in California.
<TABLE>
<CAPTION>
DEVELOPED DEVELOPED UNDEVELOPED UNDEVELOPED
--------- --------- ----------- -----------
GROSS NET GROSS NET
----- --- ----- ---
<C> <C> <C> <C>
2100 1940 4930 4610
</TABLE>
<PAGE>
As is customary in the oil and gas industry, the Company is
generally able to retain its ownership interest in undeveloped
acreage by production of existing wells, by drilling activity
which establishes commercial reserves sufficient to maintain the
lease, or by payment of delay rentals. All of the acreage listed
above as "undeveloped" is acreage which is held by production,
but upon which no wells have presently been drilled.
Production
The average sales prices received for and the related costs
of the Company's production for the periods ended December 31,
1993, 1994 and 1995 are shown below.
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Average Sales Price Received
Oil $12.67 $15.08 $16.23
Gas 1.66 2.17 1.48
Average Production Cost per
equivalent barrel(1)<F1> $ 7.48 $10.00 $ 7.06
<FN>
<F1>
(1) Since all of the Company's gas is produced in association
with oil, it is not feasible to separately determine production
costs. Consequently, production costs have been stated in
equivalent barrels. Average cost includes the cost of producing
oil attributable to landowners royalty and overriding royalty
and, thus, represents the cost of gross production.
</FN>
</TABLE>
Volumes of production of oil and gas for the one year period
ended December 31, 1995, were as follows:
Gas 112,000 mcf
Oil and liquids 110,560 bbls
Producing Well Summary
Set forth below is a tabulation of the number of producing
wells in which the Company possessed an interest at December 31,
1993, 1994 and 1995.
<PAGE>
Producing Oil and Gas Wells
<TABLE>
<CAPTION>
1993 1994 1995
GAS OIL GAS OIL GAS OIL
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Gross 1 21 3 27 3 29
Net 1 19 2 24 2 27
</TABLE>
Purchasers of Production
Crude oil produced in the Los Angeles Basin is sold via
pipeline to Kern Oil & Refining Company, and approximated 78% of
the Company's crude oil sales for 1995. Production of crude from
the Oxnard property is sold via truck to Texaco Trading and
Refining Co. which, during 1994, purchased 14% and 10% during
1995 of the Company's oil production. Natural gas produced from
the Los Angeles Basin properties is sold to Pacific Tube Company,
an end user in Commerce, California, and accounted for
approximately 75% of the Company's share of gas sold during 1995.
Natural gas from the Company's Strain Ranches lease during 1995
was sold to Pacific Gas & Electric Co. and accounted for
approximately 20% of the Company's share of gas sales during
1995.
Alternative purchasers are available for all of the
Company's production, except for natural gas produced from Orcutt
where there is a single purchaser. The Company does not receive
fair market value from its sales of Orcutt gas, but because of a
single purchaser, the Company's present options are limited. The
Company is seeking ways to develop an additional outlet for its
gas, but has been unsuccessful to date in so doing. Loss of
Pacific Tube Company as a purchaser would, in all probability,
result in a reduction in the price received for gas from the
Bandini-East Los Angeles properties, probably in the range of
20%, but would not result in a loss of market for such gas.
Recent Drilling Activities
During the three year period ended December 31, 1995, the
Company drilled or participated in the drilling of development
and exploratory wells as set forth in the table below:
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1993 1994 1995
---- ---- ----
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Development Wells:
Oil 8 8 0 0 0 0
Gas 0 0 0 0 0 0
Dry 8 8 0 0 0 0
Exploratory Wells:
Oil 0 0 0 0 0 0
Gas 0 0 0 0 0 0
Dry 0 0 0 0 0 0
Total Wells: 8 0 0 0 0 0
</TABLE>
During the quarter ended March 31, 1996, the Company did not
participate in or drill any wells.
Offices
The Company leases office space in Torrance, California,
aggregating some 500 square feet. The Company has no long-term
lease commitments and anticipates acquiring additional office
facilities when finances permit the same.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information regarding
the beneficial ownership of the Company's common shares as of
April 30, 1996, by: (1) each stockholder who is known by the
Company to own beneficially more than five percent of the common
shares; (2) each Named Executive Officer of the Company; (3)
each director of the Company; and (4) all directors and executive
officers of the Company as a group. The information set forth
below gives effect to a 2.5505 for one stock split which occurred
subsequent to December 31, 1995.
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS,
- ------------------------------
AND FIVE PERCENT SHAREHOLDERS SHARES BENEFICIALLY OWNED PERCENT OF CLASS
- ----------------------------- ------------------------- ----------------
<S> <C> <C>
Gerald T. Raydon1
Suite 201, 25660 Crenshaw Blvd.
Torrance, Ca. 90505 3,647,225<F1> 73.30
Alyda Raydon1
Suite 201, 25660 Crenshaw Blvd.
Torrance, Ca. 90505 3,647,225<F1> 73.30
William J. Corcoran2 2,710,202<F2> 0.21
Michael F. Moran3 3,710,202<F3> 0.21
All executive officers and directors
as a group (4 persons) 3,668,904 73.74
Harriman affiliated interests4
c/o Brown & Wood
One World Trade Center
New York, New York 10048 522,853<F4> 11.00
Eric J. Raydon5<F5> 1,275<F5> 0.03
Drake Holding Corp.6,7
1250 Fourth St.
Santa Monica, Ca. 90401 558,657<F6><F7> 11.23
==============================================================================
<FN>
<F1>
1. Gerald T. and Alyda Raydon are husband and wife. Shares
listed as beneficially owned by one spouse includes shares owned
beneficially by the other. In the aggregate, Mr. and Mrs. Raydon
own 3,647,225 shares or 73.30% of the common shares of the
Company. Excludes, in all cases, the shares held by Eric J.
Raydon and by Bryan T. Raydon (7,787), as to which each of Mr.
and Mrs. Raydon disclaim beneficial interest.
<F2>
2. William J. Corcoran was affiliated with certain of the
Harriman family interests. The shares held by Mr. Corcoran were
issued as directors' compensation.
<F3>
3. Michael F. Moran was affiliated with certain of the Harriman
family interests. The shares held by Mr. Moran were issued as
directors' compensation.
<PAGE>
<F4>
4. Represents shares held by various descendants or affiliates
of W. A. Harriman. Such shares are owned as follows: Associated
Partners LTD- 245,613, Crispin Connery - 51,010, Mary Dixon
51,010, Thomas F. Dixon - 51,010, Pamela Harriman - 8,162,
Hillside Syndicate - 14,028, Arden H. Mason - 51,010, Edward
Northrop - 51,010. The appellation "Harriman Affiliated
Interests" does not connote a legal relationship among the
holders nor is it a title suggested by the persons designated as
components. Associated Partners LTD is a limited partnership
managed by the general partner, Merchant Minerals Corp. Joan
Coleman is the President of the general partner, based in
Alexandria, Virginia, and exercises voting powers over the shares
held by the partnership. Hillside Syndicate is a joint venture,
of which the person exercising voting power over the shares is
the Manager, William J. Rich, New York City, New York. Hillside
Syndicate owns about 0.27% of Geo's shares.
<F5>
5. Eric J. Raydon is the son of Mr. and Mrs. Raydon. The latter
parties disclaim beneficial ownership of the shares held in the
name of Eric J. Raydon. Shares indicated as being owned by Mr.
and Mrs. Raydon do not include shares attributable to Eric J.
Raydon.
<F6>
6. Includes 122,546 shares held in the name of Drake Energy
Corp., an affiliate, and 185,498 shares held in the name of Drake
Capital Securities, Inc., an affiliate. Such shares represent
2.46% and 3.73%, respectively of the outstanding shares of the
Company. Drake Holding Corp. is the parent of Drake Capital
Securities, Inc., which is the parent of Drake Energy Corp. The
directors of each of the corporations are Joseph Di Lillo, John
Mazza, and Mark Tipton. Messrs. Di Lillo and Mazza own more than
10% of the equity of each corporation, and Mr. Tipton more than
8%. Such persons are also the executive officers of Drake
Holding Corp.
<F7>
7. Messrs. Corcoran and Moran were employed until 1995 by a firm
successively known as Harriman Administrative Management and
Middleburg Management Corp. which managed investments for various
members of the family of W. A. Harriman. Since 1995, neither has
been affiliated with such company nor with the Harriman family.
<PAGE>
To the Company's knowledge, the Harriman Affiliated Interests
have no interest in the shares shown as beneficially owned by
such persons, as to which such persons have sole voting and
dispositive authority.
</FN>
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS.
Directors and Executive Officers
The directors, executive officers and key employees of Geo
and their ages as of March 31, 1996 are as follows:
NAME
- ----
POSITION WITH THE COMPANY AGE
- ------------------------- ---
Gerald T. Raydon
President and Chief Executive Officer,
Chairman of the Board of Directors 65
Alyda L. Raydon
Secretary, Treasurer,
Chief Financial Officer 54
William J. Corcoran
Director 65
Michael F. Moran
Director 41
Charles F. Peters
Manager, East Los Angeles /Bandini
Field operations 37
Eric J. Raydon
Assistant to the President and
Assistant Secretary 26
Gerald T. Raydon founded GEO in 1986. He has over 40 years
of experience in the California oil industry as a geologist,
attorney, and oil company president, commencing his career with
Chevron U.S.A., Inc. He was for 16 years the President of
American Pacific International, Inc., a public oil company
located in Los Angeles, California, which achieved a market
capitalization of $55,000,000 before its 1984 merger into
Worldwide Energy Corporation. Subsequently he served as a
director of Worldwide and as President of its West Coast
subsidiary until 1986. In March 1989, he was appointed as
Receiver of Fountain Oil & Gas Company by the Chief Judge of the
United States District Court, Central District of California, and
served four years until the receivership was concluded. Mr.
Raydon holds B.A. and M.A. degrees in Geological Sciences from
the University of California, Berkeley, and the J.D. degree from
the University of Southern California, School of Law. He is a
<PAGE>
member of the American Association of Petroleum Geologists and of
the California State Bar. Mr. Raydon is the husband of Alyda L.
Raydon and the father of Eric J. Raydon. Mr. Raydon devotes
approximately 95% of his working time to the performance of his
duties with Geo. The balance is devoted to managing personal and
business interests. See "Certain Relationships and Related
Transactions."
Alyda L. Raydon is Secretary/Treasurer and has been employed
in such position since October, 1986. She has completed college
courses in financial and investment management, accounting,
computer science, and office procedures. Alyda L. Raydon is the
wife of Gerald T. Raydon and the mother of Eric J. Raydon.
William J. Corcoran was employed by an investment management
firm representing the W. Averell Harriman family from 1963 until
his retirement in 1995. He served as Secretary-Treasurer of the
Mary A. H. Rumsey Foundation, the Gladys and Roland Harriman
Foundation, and the W. Averell Harriman and Pamela C. Harriman
Foundation. Mr. Corcoran graduated from Fordham University with
B.A. and M.A. degrees in accounting.
Michael F. Moran was employed in various accounting, tax
analysis, and management capacities by a firm which made
investments for members of the Harriman family from 1980 to 1995.
He was the Treasurer of Middleburg Management Corporation and
also served as Director and Chief Financial Officer of several
Harriman family firms. He graduated from St. Peters College with
a degree in accounting. Mr. Moran is currently employed in a
similar capacity by affiliates of the Linder Family in New York
City.
Charles F. Peters has seventeen years of experience in oil
and gas field operations. Mr. Peters has operated oil and gas
wells and production facilities in California, including fourteen
years experience in operations at the East Los Angeles-Bandini
properties. Mr. Peters became manager of the properties in 1991.
Eric J. Raydon joined the Company in June, 1995. He has
over four years of experience in finance, real estate
development, accounting and management, which he gained while
working for a privately held unaffiliated real estate development
company. While so employed, Mr. Raydon was responsible for
financial, accounting, and contract management of projects
involving the construction of over 1,200 residential units in the
Las Vegas, Nevada and Phoenix, Arizona areas. Mr. Raydon's
<PAGE>
responsibilities included management of the Las Vegas accounting
department, loan and contract administration, and cash
management. Mr. Raydon was also responsible for the selection
and implementation of a computerized cost accounting system for
the company. His last job title was Construction Finance
Coordinator. Mr. Raydon received his B.S. degree in Business
Administration/Real Property Development and Management from the
University of Southern California in May, 1991. Eric J. Raydon
is the son of Gerald and Alyda Raydon.
ITEM 6. EXECUTIVE COMPENSATION.
Director Compensation
Directors currently receive an annual issuance of 1000
shares of common stock as compensation. Directors do not receive
reimbursement for their out of pocket costs in attending board
meetings.
Executive Compensation
No officer of the Company received compensation, including
salary and bonus, in excess of $100,000 during any of the three
preceding years. Gerald T. Raydon received no salary or bonus
during any such years. The Board has authorized compensation to
Mr. Raydon in the amount of $110,000 per year commencing January
1, 1996. The following table sets forth certain information
regarding compensation earned during each of the Company's last
three fiscal years by the Company's Chief Executive Officer and
all other executive officers of the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Other Annual Restricted
Name & Principal Salary Bonus Compensation Stock Awards
& Position Year ($) ($) ($) ($)
- ---------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gerald T. Raydon 1993 0 0 0 0
1994 0 0 0 0
1995 0 0 0 0
Alyda L. Raydon 1993 36,000 0 0 0
1994 39,000 0 0 0
1995 40,500 0 0 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
Payouts
Securities Long-term
Underlying Incentive
Options/ Plan All Other
Name & Principal SARs Payouts Compensation
& Position Year (#) ($) ($)(1)<F1>
- ---------------- ---- ---------- --------- ------------
<S> <C> <C> <C> <C>
Gerald T. Raydon 1993 0 0 1.000
1994 0 0 1.000
1995 0 0 1.000
Alyda L. Raydon 1993 36,000 0 1.000
1994 39,000 0 1.000
1995 40,500 0 1.000
<FN>
<F1>
(1) Consists of stock granted annually to each director, whether
or not an employee. The value of each share of stock was
established at $1 by action of the Board of directors of the
Company in 1990. No trading market existed for the stock at the
time of the grants.
</FN>
</TABLE>
The following table sets forth stock options granted during
1995 to the named executive officers of the Company.
<PAGE>
Option/SAR Grants in the Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
- -----------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise
Granted in Fiscal or Base Expiration 5% 10%
Name (#) Year Price Date ($) ($)
- ---- ---------- ---------- -------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Gerald T. Raydon 0 0
Alyda L. Raydon 0 0
</TABLE>
The following table sets forth information with respect to
stock options (none of which have been granted) which were
exercised in the year ended December 31, 1995, by the named
executive officers and the value of such officers' unexercised
options at December 31, 1995.
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Shares Number of Securities
Acquired on Value Underlying Unexercised
Exercise Realized Options at Fiscal Year end
Name (#) ($) Exercisable Unexercisable
- ---- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Gerald T. Raydon 0 0 0 0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Value of Unexercised
In-the-Money Options
at Fiscal Year-end
Name Exercisable Unexercisable
- ---- ----------- -------------
<S> <C> <C>
Gerald T. Raydon 0 0
</TABLE>
Benefit Plans and Employment Agreements
The Company has no benefit plans and no employment
agreements, other than at will agreements, with any of its
employees. In 1996, the Board authorized the Company to enter
into employment contracts for periods of five years with each of
Mr. Gerald T. Raydon, Mrs. Alyda Raydon and Mr. Eric J. Raydon.
Such agreements when executed will provide for annual
compensation of $110,000, $45,000 and $40,000, respectively, all
subject to escalation on an annual basis as approved by the
Board. The agreements will not contain provisions restricting a
change of control in the Company. It is expected that formal
contracts will be executed sometime during September, 1996. No
payments have been made to the executives pursuant to such
authorized contracts because of the Company's working capital
deficiency, while Eric J. Raydon and Alyda L. Raydon have drawn
salaries in amounts less than the contract amounts. The Company
has accrued the contract salaries since July 1, 1996, and
anticipates payment of the accrued amounts during the last
quarter of 1996.
The Company believes that the terms of the transactions
described above are no less favorable than the Company would have
received in arm's-length transactions.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
At the time the Company acquired its interests in the East
Los Angeles-Bandini and Oxnard properties, Mr. Gerald T. Raydon,
president and major shareholder of the Company, acquired 25% of
the joint interests in such properties. Such joint interests were
acquired through Joint Venture Agreements pursuant to which the
Company paid costs of operations and Mr. Raydon supplied the
investment capital. Effective as of April 1, 1994, GEO acquired
20% of the 25% interest of Gerald T. Raydon in the Company's
Oxnard properties and all of the 25% interest of Mr. Raydon in
<PAGE>
the Company's East Los Angeles-Bandini properties for 1,114,805
shares of common stock valued at $103,421, which was the
approximate cost of the properties to Mr. Raydon.
Capitan Resources, Inc. owns an undivided 25% interest in
the waste disposal facilities owned and operated by GEO at GEO's
Orcutt and Oxnard properties. See "Properties - Environmental
Services." Gerald T. Raydon and his family own all of the stock
of Capitan Resources, Inc.. Relations between the Company and
Capitan Resources are governed by an agreement which provides for
a proportionate sharing of costs and revenues.
Capitan Resources, Inc. is the purchaser of natural gas from
the Company's Bandini-East Los Angeles properties. Capitan
purchases the natural gas under a contract dated June 30, 1991,
which provides for a payment to Capitan of 25% of gross sales in
exchange for advancing capital and other costs of gas processing
and transportation. Capitan then resells the natural gas to other
purchasers. To date, resale transactions have not resulted in
Capitan's recovery of its investment; however, it is expected
that ultimately Capitan will achieve a significant profit on its
investment.
From time to time there are outstanding balances and credits
between the Company and Capitan pursuant to the agreements above
mentioned. At December 31, 1995 GEO had a receivable of $155,686
due from Capitan. Similar credits and balances were outstanding
from time to time with respect to the Bandini-East Los Angeles
properties and Vaca properties; during the two years ended
December 31, 1995, the largest balance receivable from Mr. Raydon
was $31,516 and at such date the receivable balance was 0.
The Harriman affiliated group currently owns approximately
11% of the outstanding common stock of GEO. In 1990, members of
the group provided collateral to a bank for a loan to GEO in the
principal amount of $1,200,000 (now $1,460,000). As
consideration, the group received 273,669 shares of common stock
(as adjusted to reflect the stock split), an option to purchase
70,833 shares (unadjusted), and a security interest in 20% of the
Company's Oxnard Field properties. The option was not exercised,
and expired on September 11, 1995. Such loan remains unpaid as
of the date hereof. In 1995, members of such group brought suit
against the bank that made the loan to the Company, claiming,
among other things, that the agent of the Harriman group that
executed the collateral pledge agreement was not authorized so to
do. The loan matured on April 15, 1996, was extended to June 15,
1996, and has been informally extended to the present while the
bank, the pledgors, and the Company are negotiating for a one-
year extension. Interest is being paid on a current basis by the
Company. See "Litigation."
<PAGE>
In 1987 Gerald T. Raydon and Alyda L. Raydon conveyed to the
Company their interests in various properties now held by the
Company for an aggregate consideration of 2,125,587 shares of
common stock (833,400 shares prior to split), valued at $718,400,
which was the approximate cost of the properties to the principal
officer/shareholders.
In 1988, the Company acquired certain minor properties and
other assets from the Harriman group in exchange for 267,803
shares of common stock.
On February 1, 1995, the Company issued promissory notes to
a relative of Gerald T. Raydon for $57,813 in consideration of an
equal amount of cash. On September 1, 1995, 30 shares of
preferred stock at $1,000 per share were issued in exchange for a
$30,000 portion of such promissory notes.
At September 30, 1995, relatives of Gerald T. Raydon owed
the Company $6,471 relating to net revenue interests in the
Company's Vaca property. Such relatives acquired their interest
in 1992 for a consideration of $3,500 which was the same price
for which the interest was offered to third persons. The debt
bears no interest.
Drake Capital Securities, Inc., the shareholders of which
were shareholders of DIC is the Company's investment banker.
Drake Capital Securities, Inc. entered into an agreement with the
Company dated December 20, 1995, by which Drake Capital
Securities, Inc. agreed on a best efforts basis to manage a
private placement of up to 2,500,000 shares of the common shares
of the Company for an offering price of $2.50 per share. Drake
Capital Securities, Inc. will be compensated by the Company with
commissions of 7.5 - 10%. In addition, Drake Capital Securities,
Inc. has acted as a financial advisor to the Company in the past.
ITEM 8. DESCRIPTION OF SECURITIES.
The following is qualified by reference to the Company's
Articles of Incorporation and Bylaws, copies of which have been
filed as exhibits to this registration statement.
Description of the Common Equity.
The Company's Articles authorize the issuance of 5 million
shares of Common equity, of which 1.755,700 had been issued at
December 31, 1995 Subsequent to such date, the Articles of
Incorporation were amended to provide for an authorized capital
of fifty million shares of common stock and, in connection with
the acquisition of DIC, the outstanding shares, including those
<PAGE>
issued in connection with the acquisition, were split into 2.5505
shares, resulting in 4,975,460 shares of common stock being
outstanding at April 30, 1996. See "Recent Sales of Unregistered
Securities." Holders of the Common equity are entitled to
dividends when and as declared by the Board of Directors from
funds legally available therefor and upon liquidation are
entitled to share ratably in any distribution to stockholders.
All holders of Common equity are entitled to one vote per share
on any matter coming before the stockholders for a vote.
Shareholders are entitled to cumulate their votes in the election
of directors. Thus, each shareholder is given a number of votes
equal to the number of shares held multiplied by the number of
directors to be elected, and the shareholder is entitled to
apportion such votes among the nominees as the shareholder
selects.
All issued and outstanding shares of the Common equity are
fully paid and non-assessable. Shareholders do not have
preemptive rights.
Description of the Preferred Stock
The Board of Directors is empowered, by the Articles as
amended on August 23, 1994 to issue 100,000 shares of Preferred
Stock and to divide the same into series, fix the number of
shares constituting each series, and to fix or alter the voting
rights, dividend rights, dividend rates, conversion rights,
rights and term or redemption, rights upon dissolution or
liquidation and other special rights on any unissued series of
Preferred Stock.
During 1995, the Board authorized the creation of a $1,000
preferred stock and pursuant to that authorization the Company
issued a total of 505.15 shares in exchange for $505,150. The
series of preferred stock issued, carries 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.
<PAGE>
PART II
ITEM 1. MARKET PRICE, DIVIDENDS AND OTHER SHAREHOLDER MATTERS.
Market Information.
Lack of Public Market
There has been no market for the shares of the Company. It
is expected that as a result of the acquisition of DIC a market
may develop, but the nature and extent thereof is speculative.
See "Business - Acquisition of DIC."
Shares issued
At April 30, 1996, the Company's Articles of Incorporation
authorized the issuance of fifty million common shares, of which
4,975,460 were issued and outstanding. As of such date, there
were no options or warrants convertible into common equity
outstanding. However, as of such date the Company had outstanding
a class of Preferred Stock which is under certain conditions
convertible into common shares; at such date 505.15 shares of
such preferred stock had been issued. Such preferred stock is
convertible into common stock at a price equal to eighty percent
of the price at which a share of common stock is sold to the
public in the Company's initial public offering. See "Description
of the Preferred Shares."
Shares Available for Resale
At April 30, 1996, had the Company been subject to the
reporting requirements of the Securities and Exchange Act,
approximately 4,467,914 shares of the common equity of the
Company would have been eligible for resale under Rule 144 under
the Securities Act of 1933, of which approximately 4,393,661
shares were held by affiliates of the Company and constituted
"restricted" shares. In addition, shares issued in connection
with the acquisition of DIC (See "Business - Acquisition of DIC")
were issued pursuant to an exemption from the registration and
prospectus delivery requirements of the Securities Act pursuant
to section 3(a)10) thereof and are believed to be freely
transferable. In such transaction, 497,546 shares were issued. To
the knowledge of the Company, none of the issuees constitutes an
"affiliate" of the Company, nor does any such issuee hold more
than five percent of the common equity of the Company.
The remaining 4,477,914 shares of common stock held by
existing stockholders (the "Restricted Shares") were issued and
sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act. These shares may
<PAGE>
be sold in the public market only if registered or pursuant to an
exemption from registration such as Rules 144, or 144(k) under
the Securities Act, which are summarized below.
Approximately 207,000 of these Restricted Shares are
eligible for sale in the public market upon compliance with Rule
144(k).
In general, under Rule 144 as currently in effect, an
affiliate of the Company, or person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at
least two years, will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of the Company's common stock
(approximately 49,754 shares) (ii) the average weekly trading
volume of the Company's Common Stock during the four calendar
weeks immediately preceding the date on which notice of the sale
is filed with the Securities and Exchange Commission. Sales
pursuant to Rule 144 are subject to certain requirements relating
to manner of sale, notice and availability of current public
information about the Company. A person (or person whose shares
are aggregated) who is not deemed to have been an Affiliate of
the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at
least three years is entitled to sell such shares pursuant to
Rule 144(k) without regard to the limitations described above.
None of the shares otherwise eligible for resale under Rule
144, will be so eligible until the Company has been subject to
the reporting requirements of the Securities and Exchange Act for
a period of 90 days. It is expected that such 90 day period will
expire on or about October 1, 1996. These shares may be sold in
the public market only if registered or pursuant to an exemption
from registration, such as Rules 144, 144 (k), or 701 under the
Securities Act.
Possible Sale of Shares by the Company and Registration Rights
The Company has no agreements by which it is obligated to
register any shares of common equity. However, the Company plans
to privately offer shares of its common stock in the near future
and is considering the issuance of common equity in a transaction
registered under the Securities Act, but has not formulated
definitive plans for the latter. The Company is seeking to
implement the first alternative by a placement of up to 2,500,000
shares of its common stock privately through the efforts of Drake
Capital Securities, Inc. See "Certain Relationships and Related
Transactions." If the Company privately places any of its common
<PAGE>
shares, it is anticipated that the purchasers thereof will be
accorded rights to require the Company to register the shares. In
addition, if the Company conducts an initial public offering of
its shares, it is probable that the existing holders of the
Preferred Stock will be accorded the right to have their shares
registered as part of the offering. The Company is also
considering the issuance of common equity in a transaction
registered under the Securities Act, but has not formulated
definitive plans therefor.
Holders of Common Equity
At April 30, 1996, there were approximately 73 holders of
record known to the Company of the common equity of the Company.
Dividends
The Company has never paid dividends on its common equity
and has no plans to do so in the foreseeable future. Payment of
dividends is implicitly restricted by the Company's bank loan
agreement, and by the General Corporation Law of the State of
California, since the latter prohibits the payment of dividends
if the distribution thereof would result in it being unlikely
that the corporation would be able to meet its liabilities as
they mature. At present the Company has a working capital
deficiency and would thus be unable to pay dividends currently.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company elected, effective January 1, 1996, to change
its independent accountants. Deloitte & Touche LLP had audited
the financial statements of Geo for the year ended December 31,
1994. Geo, as a matter of business judgment, engaged the
services of Ernst & Young LLP to audit its financial statements
for the year 1995. There were no disagreements with Deloitte &
Touche LLP respecting accounting or auditing matters.
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
<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
<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
<PAGE>
Geo Petroleum, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
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
=========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
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.
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
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.
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Statements of Stockholders' Equity
<TABLE>
<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
===============================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows
<TABLE>
<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
=========== ============
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
------------------------
<S> <C> <C>
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>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
Substantially all additions to oil and gas properties in 1995 and
1994 relate to recompletions of existing producing or previously
producing wells.
Because the Company 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 present
value of future site restoration and environmental exit
liabilities related to its oil and gas production to date are
insignificant.
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.
<PAGE>
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.
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.
<PAGE>
2. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
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
============ ============
</TABLE>
The Company has issued notes payable to various investors bearing
an interest rate of 10% and a guaranteed oil and gas production
payment equal to 20% of the outstanding principal amount per
annum. The holders of the notes have extended the maturities of
the notes 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 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
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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.
6. INCOME TAXES
Deferred income taxes result from temporary differences in the
recognition of revenues and expenses for financial accounting and
tax reporting purposes. Net deferred income taxes were composed
of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
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 $ - $ -
============ ============
</TABLE>
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.
<PAGE>
Total rental expense incurred under all lease agreements was
$31,346 for the years ended December 31, 1995 and 1994.
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.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
(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
============ ===========
</TABLE>
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
<PAGE>
producing oil and gas properties. Accordingly, these estimates
are expected to change as future information becomes available.
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.
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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-----------------------------
OIL GAS OIL GAS
BBLS MCF BBLS MCF
<S> <C> <C> <C> <C>
(IN THOUSANDS)
(UNAUDITED)
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>
<PAGE>
The decrease in the quantity of gas reserves during the year
ended December 31, 1994 pertains to proven 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.
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
<PAGE>
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.
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:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------------------
<S> <C> <C>
(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
=========================
</TABLE>
<PAGE>
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.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
(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
========== ==========
</TABLE>
<PAGE>
Unaudited Condensed Financial Statements
Geo Petroleum, Inc.
Quarter ended March 31, 1996
All common stock share amounts included in the filing are
=========================================================
retroactively revised to reflect the following: 4,477,913
==========================================================
outstanding shares of common stock after the April 9, 1996 split
================================================================
at the rate of 2.5505 to 1.
===========================
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis for the quarters ended
March 31, 1995 and March 31, 1996 should be read in combination
with the Unaudited Financial Statements presented elsewhere
herein.
Results of Operations
First quarter 1996 compared with first quarter 1995.
----------------------------------------------------
During the quarter ended March 31, 1996, GEO had a net loss
of $52,785 and cash used in operations of $43,783, compared to
net income of $39,955 and cash provided by operations of $155,978
for the comparable 1995 quarter. Oil and gas revenues declined
to $226,150 for the 1996 period, compared to $437,698 for the
first quarter 1995. 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 as a result of
temporary mechanical malfunctions. Average oil prices increased
to $17.53 per barrel in the 1996 period, compared to $15.66 per
barrel in the comparable 1995 period, while gas prices remained
about unchanged at $1.45 per mcf.
Lease operating expenses for the first quarter of 1996
declined to $247,174, as compared to $264,119 in the comparable
1995 period, a 7% decrease reflecting the fewer number of wells
on production. However, average production costs per barrel of
oil and equivalents increased to $13.97 in the 1996 period from
$7.01 in the 1995 period, due to increased repair costs and due
to allocating fixed operating costs to a smaller quantity of
produced barrels. In addition to the normal operating expenses
of existing wells, expenses were incurred in repairing and
recompleting wells to bring them on production, performing
<PAGE>
repairs on wells and facilities damaged by a fire caused by
contractor negligence, and putting into service automated custody
transfer facilities necessary for the delivery of oil into a
refiner's pipeline.
General and administrative expenses for the 1996 quarter
were $52,075, as compared to $112,834 for the 1995 period, a
decrease of 54%. 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 $56,314, as
compared to $105,758 for the comparable 1995 period, a decrease
of 47%. 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 first quarter of 1996, as compared to $55,016
for the 1995 period, a decrease of 11%.
Capital Resources and Liquidity
Financial Position.
-------------------
At March 31, 1996, the Company had a working capital
deficiency of $2,338,410, which deficiency is greater by $35,050
than such deficiency at December 31, 1995. The Company has
requested a one year extension of its bank loan of $1,460,000 now
due July 15, 1996. Negotiations are continuing and the Company
expects its bank to respond to the request by July 15, 1996.
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
first quarter of 1996 and 1995 were ($21,024) and $173,579,
respectively. This decline is primarily attributable to the drop
in revenues in the first quarter 1996 which was previously
discussed.
<PAGE>
Cash used in operations for the quarter ended March 31,
1996, was $43,783 compared to cash provided by operations of
$155,978 for the period ended March 31, 1995. This decrease in
cash provided by operations of $199,761 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.
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. 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 new wells. All of these activities are expected to
substantially increase the revenues of the Company and permit it
to continue to operate on a positive cash flow basis.
Sources of Capital Resources. During 1996, the Company
obtained agreements to extend the maturity date of its bank
credit facility in the amount of $1,460,000 from April 15, 1996,
to June 15, 1996, and a later extension to July 15, 1996. The
Company, its bank and the pledgors of the loan collateral have
been negotiating to obtain a one-year extension of the loan.
These negotiations are expected to continue into July, 1996.
This facility is secured by collateral pledged by minority
shareholders of the Company and is not 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.
The Company's cash used in investing activities, primarily
additions to its oil and gas properties, net of any sales or
disposals, was $30,173 in the first quarter of 1996 and $127,032
for the period ending December 31, 1995.
<PAGE>
PART F/S
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
<TABLE>
<CAPTION>
March 31
1996
-----------
<S> <C>
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
============
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Balance Sheet
<TABLE>
<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>
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Operations
<TABLE>
<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>
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Cash Flows
<TABLE>
<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)
----------- -----------
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Unaudited Condensed Statements of Cash Flows
(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
-------------------------
<S> <C> <C>
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>
<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.
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.
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
RECLASSIFICATIONS
Certain prior year amounts in the financial statements have been
reclassified to conform to current year presentation.
2. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
March 31
1996
-----------
<S> <C>
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 $ -
===========
</TABLE>
The Company has issued notes payable to various investors bearing
an interest rate of 10% and a guaranteed oil and gas production
payment equal to 20% of the outstanding principal amount per
annum. The holders of the notes have extended the maturities of
the notes 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.
<PAGE>
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 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
<PAGE>
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
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:
<TABLE>
<CAPTION>
March 31
1996
------------
<S> <C>
Deferred income tax asset -
operating loss carryforwards $ 1,470,000
Deferred income tax liability -
differences between book and
tax basis of property (1,050,000)
Valuation allowance (420,000)
------------
Net deferred income taxes $ -
============
</TABLE>
<PAGE>
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.
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.
<PAGE>
PART III
ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT LOCATION NO.
- ------- ---------------------- ------------
<S> <C> <C>
16.1 Consent of Ernst & Young LLP to use 276
of their opinion in this document,
dated July 31, 1996.
16.2 Consent of Deloitte & Touche LLP to 277
use of their opinion in this document,
dated July 31, 1996.
16.4 Changes in Accountants -- Deloitte &
Touche LLP
</TABLE>
In accordance with Section 12 of the Securities Exchange Act
of 1934, the registrant caused this second amendment to
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
GEO PETROLEUM, INC.
-------------------
(Registrant)
<S> <C>
Date: JULY 31, 1996
-------------
GERALD T. RAYDON
By
---------------------------------
GERALD T. RAYDON
(PRESIDENT)
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We agree to the inclusion in this offering circular on Form 10-SB
Amendment No. 1 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
July 31, 1996
Los Angeles, California
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Form 10-SB/A/2 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
July 31, 1996
<PAGE>
July 31, 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/2 of GEO Petroleum, Inc. dated July 31, 1996 except
for 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
Los Angeles, California
