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FORM 10-SB
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 1. DESCRIPTION OF BUSINESS
General
Geo Petroleum, Inc. (herein "Geo" or the "Company") was
organized as a California corporation in 1986 by Gerald T.
Raydon, to engage in the exploration for and production of oil
and gas, primarily in California. See "Directors, Executive
Officers, Promoters and Control Persons." To date, Geo's
activities have been limited to the acquisition of producing oil
properties which Geo deems are underexploited and have additional
potential, and to the subsequent enhancement of the production
from those properties. Geo also owns acreage which it believes is
suitable for exploratory drilling, but financial limitations have
prevented Geo from exploring such properties to date. The Company
has one industry segment, which is the acquisition, development,
production and sale of crude oil and natural gas. The Company's
offices are located at 25660 Crenshaw Boulevard, Torrance,
California 90505; its telephone number is (310) 539-8191, and its
fax number is (310) 539-0101.
Geo has ten full time employees, three of whom are general
or administrative; the remaining seven being field employees. Two
of the employees are related to Gerald T. Raydon, the chief
executive officer and principal shareholder of the Company. The
Company intends to increase the number of its employees by the
addition of both administrative and field personnel as soon as
finances permit.
The Company's primary business method is to acquire
properties which have been in production for a number of years,
but which, in the judgment of the Company, still have undeveloped
potential for substantial increases in production and reserves.
Geo seeks to acquire properties after conducting geological and
engineering studies of them, and then attempts to enhance
production by opening and producing previously bypassed oil and
gas zones, by stimulating existing productive zones and by
improving production techniques and equipment. To date,
essentially all of GEO's activities have been concentrated in
three geologic areas, the Los Angeles Basin, the Santa Maria
Basin in Santa Barbara County and the Oxnard Field in Ventura
County, all of which are in Southern California. At such time as
GEO acquires the properties described herein, the Company will
have established a substantial position in the San Joaquin Basin
as well. See the discussion under "Description of Property" for
information concerning Geo's principal oil and gas properties.
GEO intends to continue remediation and development of its
existing properties, to acquire additional properties suitable in
GEO's judgment for enhancement of production, and to commence
exploration of its prospects. GEO has no subsidiaries and
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presently holds interests in 7030 gross acres (6550 net) of oil
and gas leases or mineral rights, of which 2,100 gross acres
(1,940 net) are developed for oil and gas production and 4,930
gross acres (4,610 net) are undeveloped. Geo has negotiated to
acquire, subject to financing, two additional properties for
approximately $905,000. The proven, producing reserves are
estimated to approximate a net 1,050,000 barrels of oil and
equivalents. GEO believes that the reserves can be increased
substantially and economically by the expenditure of less than
one million dollars. The total net revenues provided by these
properties should increase substantially as a result of the work
contemplated by Geo. The Company presently lacks the funds
necessary to acquire these properties, but is seeking to raise
such funds.
Geo owns no drilling rigs or equipment and engages the
services of independent contractors to perform its drilling and
remedial activities. All of Geo's production of oil and gas is
sold to unaffiliated purchasers. See "Business - Principal
Purchasers." The Company also operates two water disposal wells.
See "Properties - Environmental Services." In addition, the
Company is investigating the possibility of initiating a gas
storage project. See "Properties - Natural Gas Storage Project."
Financial Condition
The financial statements of the Company contain a going
concern qualification, largely as a result of the fact that the
Company's bank loan, amounting to $1,460,000, was due April 15,
1996. The loan has been subsequently extended to June 15, 1996,
while the bank is discussing an extension to June 15, 1997 with
the Company and the pledgors of the loan collateral. The loan is
collateralized by publicly traded equity securities in another
corporation pledged to the bank by shareholders of the Company.
Interest has been paid on a current basis by the Company. The
shareholders who provided the collateral have brought suit
against the bank claiming, among other things, that the bank
deceived the shareholders. Geo is not a party to the litigation.
See "Litigation."
Acquisition of DIC
Effective April 9, 1996, Geo acquired by merger an inactive
California corporation, Drake Investment Corp. ("DIC"), primarily
for the purpose of increasing its shareholder base as an initial
step in establishing Geo as a public company. The acquisition was
accounted for as a purchase, and while increasing the number of
shareholders of Geo and contributing a minor amount of cash, had
no appreciable effect on Geo, its operations or financial
condition. See "Financial Statements."
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Regulation
The Company's operations are regulated by certain federal
and state agencies. In particular, oil and natural gas production
and related operations are or have been subject to price
controls, taxes and other laws relating to the oil and natural
gas industry. The Company cannot predict how existing laws and
regulation may be interpreted by enforcement agencies or court
rulings, whether additional laws and regulations will be adopted,
or the effect such changes may have on its business or financial
condition.
The Company's operations are subject to extensive federal,
state and local laws and regulations relating to the generation,
storage, handling, and transportation of materials and their
potential discharge into the environment. Permits are required
for various of the Company's operations, and these permits are
subject to revocation, modification and renewal by issuing
authorities.
Governmental authorities have the power to enforce
compliance with their regulations, and violations are subject to
fines, injunctions or both. It is possible that increasingly
strict requirements will be imposed by environmental laws and
enforcement policies thereunder. The Company does not anticipate
that it will be required in the near future to expend amounts
that are material to the Company's financial position or results
of operations by reason of environmental laws and regulations,
but because such laws and regulations are frequently changed, the
Company is unable to predict the ultimate cost of such
compliance.
The Company believes that the oil and gas industry may
experience increasing liabilities and risks under the
Comprehensive Environmental Response, Compensation and Liability
Act, as well as other federal, state and local environmental
laws, as a result of increased enforcement of environmental laws
by various regulatory agencies. As an "owner" or "operator" of
property where hazardous materials may exist or be present, the
Company, like all others engaged in the oil and gas industry,
could be liable for the release of any hazardous substances.
Although the Company has not been subject to the imposition of
"clean-up" orders by the government, the potential for sudden and
unpredictable liability for environmental problems is a
consideration of increasing importance to the Company and the oil
and gas industry as a whole. During the three preceding years,
the Company has been subjected to administrative penalties on two
occasions, each resulting from minor vapor leaks resulting from
the failure of sealing devices on oil storage tanks at the
Company's East Los Angeles/Bandini property. See "Business -
Principal Properties." The penalties consisted of monetary fines
which were of negotiated amounts and aggregated $1,200.
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The Company is required to comply with various federal and
state regulations regarding plugging and abandonment of oil and
gas wells. The Company provides reserves for the estimated cost
of plugging and abandoning its wells on a unit of production
basis. In addition, as required by state law, the Company
maintains a $100,000 cash bond covering its obligation to abandon
wells; the bond does not limit the Company's abandonment
liability.
ITEM 2. MANAGEMENT DISCUSSION
The following discussion and analysis for the years ended
December 31, 1995, and 1994, should be 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
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administrative costs were incurred due to the increased number of
wells and properties operated during 1995.
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%.
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
has requested a one year extension of its bank loan of $1,460,000
due June 15, 1996, and its bank expects to respond to the request
by June 30, 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 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
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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 June 15,
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.
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.
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
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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.
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.
Inflation
In recent years inflation has not had a significant impact
on the Company, its operations or financial condition.
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 most
significant 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 (averaged over the year
1995) of 210 barrels (172 net) of high gravity (33 degree AP1)
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
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 the mineral rights in the East Los Angeles Field and
in a portion of the Bandini 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%
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to 30.5% 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.
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 seven 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
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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
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.
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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 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
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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 in the process of
negotiating an agreement to market the gas through the existing
pipeline system, which, if successfully negotiated, should result
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, drilling operations to date have not
been consistently economic.
Production of the existing wells to depletion is projected
by the Company 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
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,
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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.
The wells are currently injecting 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.
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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.
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
<PAGE>
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.
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
<PAGE>
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>
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.
<PAGE>
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) $ 7.48 $10.00 $ 7.06
<FN>
(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 attritutable to landowners royalty and overriding royalty
and, thus, represents the cost of gross production.
</TABLE>
Volumes of production of oil and gas for the one year period
ended December 31, 1995, were as follows:
Gas 172,907 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.
<TABLE>
<CAPTION>
December 31
-----------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Gross 22 30 32
Net 20 26 29
</TABLE>
<PAGE>
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:
<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>
<PAGE>
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 know 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 occured
subsequent to December 31, 1995.
<TABLE>
<CAPTION>
Directors, Executive
Officers, and Five Shares
Percent Shareholders Beneficially Owned Percent of Class
- -------------------- ------------------ ----------------
<S> <C> <C>
Gerald T. Raydon(1)<F1> 3,647,225 73.30
Suite 201,
25660 Crenshaw Blvd.
Torrance, CA 90505
Alyda Raydon(1)<F1> 3,647,225 73.30
Suite 201,
25660 Crenshaw Blvd.
Torrance, CA 90505
William J. Corcoran
(2)<F2> 10,202 0.21
Michael F. Moran(3)<F3> 10,202 0.21
Eric J. Raydon(4)<F4> 1,275 0.03
--------- -----
All executive officers
and directors as a group
(4 persons) 3,668,904 73.74
Harriman affiliated
interests(5) 522,853 11.00
c/o Brown & Wood
One World Trade Center
New York, New York 10048
Drake Holding Corp.(6) 558,657 11.23
1250 Fourth Street
<PAGE>
Santa Monica, CA 90401
- -----------------------------------------------------------------
<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.
<F4>
(4) 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.
<F5>
(5) 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.
<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.
</FN>
</TABLE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS.
<PAGE>
Directors and Executive Officers
The directors, executive officers and key employees of Geo and
their ages as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
Name Age
- ---- ---
Position with the Company
- -------------------------
<S> <C>
Gerald T. Raydon 65
President and Chief Executive Officer,
Chairman of the Board of Directors
Alyda L. Raydon 54
Secretary, Treasurer,
Chief Financial Officer
William J. Corcoran 65
Director
Michael F. Moran 41
Director
Charles F. Peters 37
Manager, East Los Angeles/Bandini
field operations
Eric J. Raydon 26
Assistant to the President and
Assistant Secretary
</TABLE>
Gerald T. Raydon founded GEO in 1986. He has over 40 years
of experience in the California oil business 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
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
<PAGE>
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 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 financial capacity by affiliates of Carl
Linder.
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. Mr. Raydon received his Bachelor of
Science 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
<PAGE>
during any such years. The Board has authorized compensation to
Mr. Raydon in the amount of $110,000 per year commencing January
1, 1996.
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 May, 1996.
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
the Company's East Los Angeles-Bandini properties for 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.
<PAGE>
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 1992, 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). The group
received 273,669 shares of common stock as partial consideration
for providing such collateral. 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
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."
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.
In 1988, the Company acquired certain minor properties and
other assets from the Harriman group in exchange for 267,803
shares of common stock.
In 1987, the Company acquired certain interests in oil and
gas properties from Mr. and Mrs. Raydon in exchange for 833,400
shares of the Company's common stock valued at $718,400, which
was the approximate cost of the properties to the principal
officer/shareholder.
On February 1, 1996 the Company issued in exchange for cash,
promissory notes to relatives of Gerald T. Raydon totaling
$57,813. On September 1, 1995, 30 shares of preferred stock 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.
<PAGE>
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
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
<PAGE>
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
redeemption 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 initital public offering of the common stock of the
Company.
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")
<PAGE>
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
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.
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
<PAGE>
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
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 presently restricted by the Company's bank loan
agreement, which restricts such payments, and by the General
Corporation Law of the State of California, which renders
impermissible the payment of dividends under the present
financial condition of the Company.
ITEM 2. LEGAL PROCEEDINGS
At March 31, 1996, the Company was a defendant to several
lawsuits in which the plaintiff claimed that the Company had
failed to pay for work or materials, and the Company disputed the
values of the services or materials. The aggregate amount claimed
by all plaintiffs is approximately $39,000. The Company believes
that all of such suits will be settled for less than the amount
claimed and that none is material to the Company or its
properties.
In December 1995, the Company filed a law suit in the
Superior Court for the County of Los Angeles, California, styled
Geo Petroleum, Inc. v. Hydro-Test, Inc. in the amount of $63,000
against a contractor for lost revenue and damages incurred while
performing services on one of the Company's oil and gas
properties.
In August 1995, various persons affiliated with the W.A.
Harriman interests commenced a suit, to which Geo is not a party,
in the Superior Court for the County of Los Angeles, California,
styled Edward Northrop et. al. v. First Los Angeles Bank et al
(No.SC 037968). Prior to such time, the plaintiffs had provided
collateral which was used to secure a loan from the Bank to Geo.
<PAGE>
In the suit, the plaintiffs claim, inter alia, that the Bank or
one of its officials converted certain dividends that had accrued
on the collateral. The plaintiffs assert that had they known of
the conversion, they would not have consented to a renewal and
recollateralization of the bank loan. Geo is not a party to the
litigation, but should the plaintiffs be successful in the
litigation, they might receive back the collateral which secures
repayment of Geo's loan from the Bank. Geo is nevertheless liable
to repay the bank loan, which has an outstanding balance of
approximately $1.46 million. See"Certain Relationships and
Related Transactions." The litigation appears to be quiescent.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company changed its independent accountants as of the
end of its 1994 year. Deloitte & Touche LLP had audited the
financial statements of Geo for the year ended December 31, 1994.
There were no disagreements with Deloitte & Touche LLP respecting
accounting or auditing matters. Effective January 1, 1996, Geo
as a matter of business judgment engaged the services of Ernst &
Young LLP for Geo's 1995 audit.
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.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
On April 9, 1996, pursuant to an order qualifying the
securities issued by the Department of Corporations of the State
of California after a hearing on the fairness thereof, the
Company issued an aggregate of 497,546 common shares in the
acquisition by way of merger, of Drake Investment Corporation, an
inactive California corporation. Such issuance was exempt by
reason of section 3(a)(10) of the Securities Act of 1933. The
number of beneficial issuees was fifty. The issuance was not
underwritten.
In April, 1994, the Company issued 476,242 common shares in
exchange for interests in two oil and gas properties in which the
Company owned the majority interest. The number of persons to
whom shares were issued was 6, all of whom had a preexisting
relationship of long standing with the Company and its principal
shareholders and one of which such persons was Gerald T. Raydon.
To the Company's knowledge each of such persons was an
"accredited investor" as that term is used in Regulation D under
the Securities Act. Such issuance was exempt by reason of
sections 4(2) and 3(a)(11) of the Securities Act of 1933 and Rule
<PAGE>
506 of Regulation D thereunder. No underwritter was involved in
these transactions and no compensation was paid to any third
person by reason of such issuances. No general advertising was
employed in connnection with the sales. The Company maintains
stop transfer instructions with respect to the shares so issued.
During the period September 1, 1994 to October 1, 1995, the
Company exchanged for cash in the amount of each note, its
promissory notes due one year or less from the date of issuance,
with 21 individuals (including revocable trusts controlled by
three such individuals) in the aggregate amount of $1,156,132,
bearing interest at a rate of ten percent per annum, plus a
payment out of production from certain of the wells of the
Company equal to an additional twenty percent per annum. During
1995, the maturity date of each of the notes due in 1995 was
extended to a date in 1996. All of the persons to whom such
notes were issued had a preexisting relationship of long standing
with the Company and its principal shareholders and such issues
included two relatives of the principal shareholders. To the
Company's knowledge each of such persons was an "accredited
investor" as that term is used in Regulation D under the
Securities Act. Such issuance was exempt by reason of sections
4(2) and 3(a)(11) of the Securities Act of 1933 and Rule 506 of
Regulation D thereunder. No underwritter was involved in these
transactions and no compensation was paid to any third person by
reason of such issuances. No general advertising was employed in
connnection with the issuances.
In 1992, the Company issued its promissory note in the
principal amount of $1.3 million (now $1.46 million) to First Los
Angeles Bank, a California Banking institution, in exchange for a
loan of such amount bearing interest at a rate of prime plus two
percentage points. The loan was due one year from the date of
issuance and was secured by publicly traded stock, certificates
for which were provided by five individuals affiliated with the
W. A. Harriman interests. See "Security Ownership of Certain
Beneficial Owners and Management." The loan has been renewed
annually, until April 15, 1996 and is presently due. The issuance
of the note and each renewal was exempt under section 4(2) of the
Securities Act. In connection with the initial bank loan, the
Company issued 273,722 shares of it common stock (giving effect
to the stock split occuring in January 1996) to the persons
providing such collateral. The issuance of the stock was exempt
under section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D thereunder. No underwritter was involved in these
transactions and not compensation was paid to any third person by
reason of the issuance of the stock. No general advertising was
employed in connection with the issuances.
At various times during 1995, Geo issued shares of its
Preferred Stock, $1,000 par value, aggregating a total of 530.15
shares. Such shares were issued to a total of seventeen issues
(two of whom are related by blood to the chief executive
<PAGE>
officer). Sixteen of the issuances (to fourteen persons) were in
exchange for the surrender of promissory notes theretofore issued
by the Company (see description above), four were issued in
exchange for cash and one was issued in exchange for services
performed by a holder of the Company's notes in exchange for
services rendered in assisting the Company in exchanging
preferred stock for such notes. To the Company's knowledge each
of such persons was an "accredited investor" as that term is used
in Regulation D under the Securities Act. Such issuance was
exempt by reason of sections 4(2) and 3(a)(11) of the Securities
Act of 1933 and Rule 506 of Regulation D thereunder. No
underwritter was involved in these transactions and no
compensation was paid to any third person, save as indicated
above and then in an amount of 2.4 shares of preferred stock, by
reason of such issuances. No general advertising was employed in
connnection with the issuances.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Certain Indemnification Rights
As permitted by California law, the bylaws of the
Company provide broad rights of indemnification to the officers
and directors of the Company.The Articles of Incorporation of
the Company provide, in part, that:
(a) The liability of directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible
under California law.
(b) The corporation is authorized to provide indemnification of
agents, as defined in Section 317 of the California Corporations
Code, through by-law provisions, agreements with agents, vote of
shareholders or disinterested directors, or otherwise, which
indemnification may be in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code with
respect to actions for breaches of duty to the corporation and
its shareholders.
(c) Any amendment, repeal, or modification of any provision of
this Article V shall not adversely affect any right or protection
of an agent of this corporation existing at the time of such
amendment, repeal or modification..
In the view of the Securities and Exchange Commission, the
breadth of such indemnification provisions may be such as to be
violative of public policy as adumbrated by the federal security
laws.
<PAGE>
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.
/S/ Ernst & Young LLP
Los Angeles, California
April 30, 1996
<PAGE>
June 20, 1996
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>
<TABLE>
<CAPTION>
Geo Petroleum, Inc.
Balance Sheets
DECEMBER 31
1995 1994
------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents
(NOTE 1)<F1> $ 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)<F3> 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)<F1><F3>:
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)<F1> - 45,000
-------------------------
Total assets $4,241,733 $3,916,730
==========================
<FN>
<F1>
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.
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.
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.
Depreciation of office equipment and furniture is computed using
the straight-line method, with depreciation rates based upon
their estimated useful lives, which range between five and seven
years. Depreciation expense was $5,198 and $3,730 for the years
ended December 31, 1995 and 1994, respectively.
REVENUE
Revenue 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
<PAGE>
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.
<F3>
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 450,129 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.
<PAGE>
In 1987, the Company acquired certain interests in oil and gas
properties from its principal officer/shareholder in exchange for
833,400 shares of the Company's common stock valued at $781,400,
which was the approximate cost of the properties to the principal
officer/shareholder.
At December 31, 1995 and 1994, the Company had notes payable to
relatives of the principal officer/shareholder totaling $53,563
and $86,819, respectively.
At December 31, 1994, relatives of the principal
officer/shareholder owed the Company $6,471 relating to the net
revenue interests in certain oil and gas properties. No such
amounts were owed at December 31, 1995.
In December 1995, notes payable by the Company to a relative of
the principal officer/shareholder totaling $30,000 were converted
into 30.0 shares of the Company's redeemable convertible
preferred stock aggregating $30,000 (see Note 4).
The principal officer/shareholder of the Company has not taken a
salary since inception of the Company.
</FN>
</TABLE>
<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)<F3> 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)<F2> 1,968,063 1,636,000
--------------------------
Total current liabilities 2,817,672 2,540,287
Notes payable (NOTE 2)<F2> - 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)<F4> 505,150 -
<PAGE>
Stockholders' equity (NOTES 2, 3
AND 5)<F2><F3><F5>
Common stock, no par value;
authorized 5,000,000 shares;
issued and outstanding 1,755,700
and 1,681,417 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.
<FN>
<F2>
2. NOTES PAYABLE
Notes payable consisted of the following:
DECEMBER 31
1995 1994
----------------------
Note payable to bank $1,460,000 $1,460,000
Notes payable to investors 508,063 776,813
--------------------------
1,968,063 2,236,813
Less current portion 1,968,063 1,636,000
--------------------------
Total long-term debt $ - $ 600,813
==========================
The Company has issued notes payable to various investors bearing
an interest rate of 10% and a guaranteed oil and gas production
payment equal to 20% of the outstanding principal amount per
annum. The holders of the notes have extended the maturities of
the notes to various dates in 1996, and all of the notes are
secured by interests in the Company's oil and gas properties.
The note payable to bank bears interest at prime plus 2.0%. At
December 31, 1995 and 1994, the prime rate was 8.5%. Interest
payments are due monthly, and the outstanding principal amount
and all unpaid interest was due on October 15, 1995. In October
1995, the bank extended the maturity date of the note payable to
April 15, 1996, which was also 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
<PAGE>
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 107,300 shares of common stock, an
option to purchase 70,833 additional shares of common stock at $6
per share and a recorded deed of trust on 20% of the Company's
interest in its Vaca Tar Sands property to certain parties in
exchange for those parties providing the collateral, 35,000
shares of Union Pacific Corp. common stock, for the Company's
note payable to a bank. The consideration issued was valued at
$300,000, its estimated fair market value, and was amortized as
additional loan costs over five years. The 35,000 shares of Union
Pacific Corp. common stock is held in a trust and had an
approximate value of $2,310,000 at December 31, 1995. In the
event of default on the bank note payable, the parties providing
the collateral may take steps to recover from the Company the
value of any collateral taken by the bank. The collateral
agreements and the stock purchase option expired on September 11,
1995. In connection with the extension of the maturity date of
the bank note payable, the collateral agreement was extended to
April 15, 1996. No additional consideration was given for this
extension.
<F3>
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 450,129 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
833,400 shares of the Company's common stock valued at $781,400,
<PAGE>
which was the approximate cost of the properties to the principal
officer/shareholder.
At December 31, 1995 and 1994, the Company had notes payable to
relatives of the principal officer/shareholder totaling $53,563
and $86,819, respectively.
At December 31, 1994, relatives of the principal
officer/shareholder owed the Company $6,471 relating to the net
revenue interests in certain oil and gas properties. No such
amounts were owed at December 31, 1995.
In December 1995, notes payable by the Company to a relative of
the principal officer/shareholder totaling $30,000 were converted
into 30.0 shares of the Company's redeemable convertible
preferred stock aggregating $30,000 (see Note 4).
The principal officer/shareholder of the Company has not taken a
salary since inception of the Company.
<F4>
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.
<PAGE>
<F5>
5. COMMON STOCK
In June 1995, the Company issued 72,730 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Geo Petroleum, Inc.
Statements of Operations
Year ended December 31
1995 1994
--------------------------
<S> <C> <C>
Revenues (NOTES 1 AND 3)<F1><F3>:
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)<F1> 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)<F6> - -
--------------------------
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 $ (0.15)
==========================
<PAGE>
SEE ACCOMPANYING NOTES.
<FN>
<F1>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Geo Petroleum, Inc. (the Company) is a private oil and gas
production company that was founded in 1986 in the state of
California. The Company engages in the development, production
and management of oil and gas properties located in California.
On April 9, 1996, the Company's Board of Directors approved the
proposed merger with Drake Investment Corp. (Drake). The terms
and conditions of the merger are further described in Note 8.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, as of
December 31, 1995, the Company's accumulated deficit totaled
$1,238,791, and current liabilities exceeded current assets by
$2,303,360. These factors, among others, may indicate that the
Company will be unable to continue as a going concern for a
reasonable period of time.
The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its current
obligations on a timely basis, to obtain additional financing,
and ultimately to obtain successful operations. Management is
continuing its efforts to obtain additional funds so that the
Company can meet its obligations and sustain operations. These
potential alternatives include, among other things, a private and
public placement of debt or equity, extending or refinancing the
bank loan using oil and gas properties as collateral, sale of oil
and gas properties and obtaining an advance on future production
from an end user. As a first step in a potential public or
private offering, the Company has signed an agreement to merge
with Drake (see Note 8). There can be no assurance that any of
these potential alternatives will materialize. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
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
<PAGE>
authorization purposes to perform additional oil and gas well
recompletions. These funds are subject to certain withdrawal
restrictions until completion of the work.
DEFERRED CHARGE
The deferred charge consists of unamortized loan costs, which
were amortized over five years through September 1995 (see
Note 2). Amortization expense was $45,000 in 1995 and $60,000 in
1994.
INVESTMENT IN PARTNERSHIP
Included in oil and gas properties is an investment in a general
partnership that was created in 1991 to produce oil at a well
located on one of the Company's oil and gas properties. The
Company is the managing partner in this general partnership, and
this investment is accounted for under the pro rata consolidation
method.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil
and gas properties. Accordingly, all costs associated with the
acquisition, exploration and development of oil and gas reserves
are capitalized as incurred. The costs of oil and gas properties
are accumulated in a cost center and are subject to a cost center
ceiling which such costs do not exceed.
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.
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.
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 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.
<F3>
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.
<PAGE>
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 450,129 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
833,400 shares of the Company's common stock valued at $781,400,
which was the approximate cost of the properties to the principal
officer/shareholder.
At December 31, 1995 and 1994, the Company had notes payable to
relatives of the principal officer/shareholder totaling $53,563
and $86,819, respectively.
At December 31, 1994, relatives of the principal
officer/shareholder owed the Company $6,471 relating to the net
revenue interests in certain oil and gas properties. No such
amounts were owed at December 31, 1995.
In December 1995, notes payable by the Company to a relative of
the principal officer/shareholder totaling $30,000 were converted
into 30.0 shares of the Company's redeemable convertible
preferred stock aggregating $30,000 (see Note 4).
The principal officer/shareholder of the Company has not taken a
salary since inception of the Company.
<F6>
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
<PAGE>
of the following:
DECEMBER 31
1995 1994
-------------------------
Deferred income tax asset -
operating loss carryforwards $1,450,000 $1,100,000
Deferred income tax liability -
differences between book and
tax basis of property (1,050,000) (950,000)
Valuation allowance (400,000) (150,000)
--------------------------
Net deferred income taxes $ - $ -
==========================
As of December 31, 1995 and 1994, the Company had net operating
loss carryforwards available in future periods to reduce income
taxes that may be payable at those dates. For federal income tax
purposes, net operating loss carryforwards amounted to
approximately $3,740,000 and $2,750,000 for 1995 and 1994,
respectively, and expire during the years 2001 through 2009. For
state income tax purposes, net operating loss carryforwards
amounted to approximately $1,950,000 and $1,480,000 for 1995 and
1994, respectively, and expire during the years 2004 through
2010. The Company is delinquent in filing its 1994 income tax
returns.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Geo Petroleum, Inc.
Statements of Stockholders' Equity
Number of
Common
Shares Common Accumulated
Outstanding Stock Deficit Total
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31,1993 1,201,175 $2,034,275 $(813,606) $1,220,669
Net loss - - (558,466) (558,466)
Issuance of
stock 480,242 113,427 - 113,427
-----------------------------------------------
Balance at
December 31, 1994 1,681,417 2,147,702 (1,372,072) 775,630
Net income - - 153,401 153,401
Issuance of
stock 74,283 10,000 - 10,000
Preferred stock
dividends - - (20,120) (20,120)
-----------------------------------------------
Balance at
December 31, 1995 1,755,700 $2,157,702 $(1,238,791) $918,911
===============================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Geo Petroleum, Inc.
Statements of Cash Flows
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
--------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Geo Petroleum, Inc.
Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1995 1994
------------------------
<S> <C> <C>
Net decrease in cash and cash
equivalents (39,309) (12,981)
Cash and cash equivalents at
beginning of year 139,874 152,855
-------------------------
Cash and cash equivalents at
end of year $ 100,565 $139,874
=========================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for
interest $ 414,821 $ 188,816
=========================
Cash paid during the year for
income taxes $ 800 $ -
=========================
</TABLE>
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 72,730 shares of common stock to a consulting
company as payment for services that were performed in 1994 and
1995.
During 1994, the Company issued 476,242 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.
<PAGE>
Geo Petroleum, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Geo Petroleum, Inc. (the Company) is a private oil and gas
production company that was founded in 1986 in the state of
California. The Company engages in the development, production
and management of oil and gas properties located in California.
On April 9, 1996, the Company's Board of Directors approved the
proposed merger with Drake Investment Corp. (Drake). The terms
and conditions of the merger are further described in Note 8.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, as of
December 31, 1995, the Company's accumulated deficit totaled
$1,238,791, and current liabilities exceeded current assets by
$2,303,360. These factors, among others, may indicate that the
Company will be unable to continue as a going concern for a
reasonable period of time.
The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its current
obligations on a timely basis, to obtain additional financing,
and ultimately to obtain successful operations. Management is
continuing its efforts to obtain additional funds so that the
Company can meet its obligations and sustain operations. These
potential alternatives include, among other things, a private and
public placement of debt or equity, extending or refinancing the
bank loan using oil and gas properties as collateral, sale of oil
and gas properties and obtaining an advance on future production
from an end user. As a first step in a potential public or
private offering, the Company has signed an agreement to merge
with Drake (see Note 8). There can be no assurance that any of
these potential alternatives will materialize. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
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
<PAGE>
authorization purposes to perform additional oil and gas well
recompletions. These funds are subject to certain withdrawal
restrictions until completion of the work.
DEFERRED CHARGE
The deferred charge consists of unamortized loan costs, which
were amortized over five years through September 1995 (see
Note 2). Amortization expense was $45,000 in 1995 and $60,000 in
1994.
INVESTMENT IN PARTNERSHIP
Included in oil and gas properties is an investment in a general
partnership that was created in 1991 to produce oil at a well
located on one of the Company's oil and gas properties. The
Company is the managing partner in this general partnership, and
this investment is accounted for under the pro rata consolidation
method.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil
and gas properties. Accordingly, all costs associated with the
acquisition, exploration and development of oil and gas reserves
are capitalized as incurred. The costs of oil and gas properties
are accumulated in a cost center and are subject to a cost center
ceiling which such costs do not exceed.
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.
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.
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 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 107,300 shares of common stock, an
option to purchase 70,833 additional shares of common stock at $6
per share and a recorded deed of trust on 20% of the Company's
interest in its Vaca Tar Sands property to certain parties in
exchange for those parties providing the collateral, 35,000
shares of Union Pacific Corp. common stock, for the Company's
note payable to a bank. The consideration issued was valued at
$300,000, its estimated fair market value, and was amortized as
additional loan costs over five years. The 35,000 shares of Union
Pacific Corp. common stock is held in a trust and had an
approximate value of $2,310,000 at December 31, 1995. In the
<PAGE>
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 450,129 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
833,400 shares of the Company's common stock valued at $781,400,
which was the approximate cost of the properties to the principal
officer/shareholder.
At December 31, 1995 and 1994, the Company had notes payable to
relatives of the principal officer/shareholder totaling $53,563
and $86,819, respectively.
At December 31, 1994, relatives of the principal
officer/shareholder owed the Company $6,471 relating to the net
revenue interests in certain oil and gas properties. No such
amounts were owed at December 31, 1995.
In December 1995, notes payable by the Company to a relative of
the principal officer/shareholder totaling $30,000 were converted
into 30.0 shares of the Company's redeemable convertible
preferred stock aggregating $30,000 (see Note 4).
<PAGE>
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.
5. COMMON STOCK
In June 1995, the Company issued 72,730 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:
<PAGE>
<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.
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.
<PAGE>
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
----------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
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
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:
<PAGE>
<TABLE>
<CAPTION>
OIL AND GAS RESERVE DATA
YEAR ENDED DECEMBER 31
1995 1994
---------------------------------
Oil Gas Oil Gas
Bbls MCF Bbls MCF
----------------------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Proved developed
reserves, 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
reserves, net:
End of year 27,614 -
=================
</TABLE>
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%.
No reserve report was filed with any federal authorities or
agencies during 1995 and 1994.
<PAGE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING
TO PROVED RESERVES
The following tables set forth the computation of the
standardized measure of discounted future net cash flows relating
to proved reserves at December 31, 1995 and 1994, respectively.
The standardized measure is the estimated future cash inflows
from proved reserves less estimated future production and
development costs and estimated future income taxes. Future cash
inflows represent expected revenues from the production of proved
reserves based on prices and any fixed determinable future
escalation provided by contractual arrangements in existence at
fiscal year end. Escalation based on inflation, federal
regulatory changes and supply and demand is not considered.
Estimated future production and development costs related to
future production of reserves are based on historical costs. Such
costs include, but are not limited to drilling development wells
and installation of production facilities. Inflation and other
anticipatory costs are not considered until the actual cost
change takes effect. Estimated future income tax expenses are
computed using the appropriate year-end statutory tax rates.
Consideration is given to the effects of permanent differences,
tax credits and allowances. A discount rate of 10% is applied to
the annual future net cash flows after income taxes.
The methodology and assumptions used in calculating the
standardized measure are those required by FASB Statement No. 69.
It is not intended to be representative of the fair market value
of proved reserves. The valuations of revenues and costs do not
necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other
factors are considered in evaluating known and prospective oil
and gas reserves.
<PAGE>
The standardized measure of discounted future net cash flows
relating to proved developed oil and gas reserves follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
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>
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
<PAGE>
The changes in standardized measure for discounted future net
cash flows relating to proved developed reserves follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-----------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
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
<PAGE>
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>
PART III
THIS INDEX IS OF THE EXHIBITS WHICH, IN ACCORDANCE WITH RULE 202
OF REGULATION S-T, ARE BEING FILED CONCURRENTLY IN PAPER FORM
PURSUANT TO A CONTINUING HARDSHIP EXEMPTION GRANTED ON JUNE 19,
1996.
<TABLE>
<CAPTION>
ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBIT LOCATION NO.
- ------- ---------------------- ------------
<S> <C> <C>
2.1 Agreement of Merger and Plan of
reorganization between Drake Investment
Corp. and Geo Petroleum, Inc., dated
November 1, 1995.
2.2 Certificate of Approval of Agreement of
Merger between Drake Investment Corp.
and Geo Petroleum, Inc., dated
April 9, 1996.
2.3 Permit to issue stock in merger,
dated March 26,1996.
3.1 Articles of Incorporation of Geo
Petroleum, Inc., filed November 6, 1986.
3.1(a) First Amendment to Articles of Incorporation
of Geo Petroleum, Inc., filed June 1, 1994.
3.1(b) Second Amendment to Articles of Incorporation
of Geo Petroleum, Inc. filed November 7, 1995.
3.1(c) Third Amendment to Articles of Incorporation
of Geo Petroleum, Inc. filed December 5, 1995.
3.2 By-laws of Geo Petroleum, Inc., dated
November 30, 1986.
4.1 Corporate Resolution establishing Rights,
Preferences and Privileges of Preferred Stock,
Series A, dated August 23, 1994.
4.1(a) Form of Preferred Stock Certificate.
4.2 Form of Common Stock Certificate.
<PAGE>
4.3 Form of Promissory Note, Deed of Trust, and
Assignment of Oil Payment of Geo Petroleum, Inc.
10.1 Form of Oil and Gas lease covering various
lands in Bandini oil field unit (exemplar),
dated January 2, 1975.
10.2 Assignment of Overriding Royalty Interest
(East Los Angeles/Bandini)dated February 1,
1979, from Irving Terry and Esther Terry to
Wayne Hoylman and Helen W. Hoylman (exemplar).
10.3(a) Form of Oil and Gas lease covering various
lands in Oxnard Field (Vaca Tar Sand Unit)
(exemplar), dated April 24, 1934.
10.3(b) Pooling Agreement, Vaca Tar Sand Unit,
Ventura County, California.
10.4 Form of Oil and Gas lease covering various
lands in the Rosecrans Oil Field, Los Angeles
County, CA. (exemplar), dated October 15, 1956.
10.5 Gas Sales Contract dated August 31, 1991,
between Geo Petroleum Inc. and Capitan Resources,
Inc. (East Los Angeles/Bandini fields).
10.6(a) Gas Sales Contract dated August 9, 1991 between
Pacific Tube Company and Geo Petroleum, Inc.
10.6(b) Assignment of Gas Sales Contract, Geo Petroleum,
Inc. To Capitan Resources, Inc.
10.7 Oil Sales Contract dated August 1, 1995 between
Geo Petroleum, Inc. and Kern Oil & Refining (East
Los Angeles/Bandini fields).
10.8(a) Oil Sales Contract dated November 22, 1994 between
Geo Petroleum,Inc. and Texaco Trading and
Transportation Inc. (Oxnard).
10.8(b) Oil Sales Contract dated July 5, 1995 between Geo
Petroleum, Inc. and Unocal Corp. (Rosecrans field).
10.9 Oil Sales Contract between Geo Petroleum, Inc. and
Kern Oil & Refining Co., dated July 10th, 1995
(Orcutt field).
10.10 Oil and Gas Lease between Gene Careaga, et al and
Central California Oil Co.,(Geo's predecessor in
interest) Orcutt Field) dated October 3, 1972.
<PAGE>
10.11 Water Disposal Agreement between J.W. Hansen and
Geo Petroleum,Inc. dated May 14, 1992.
10.12 Water Disposal Agreement between Geo Petroleum, Inc.
and Capitan Resources, Inc. dated June 1, 1990.
10.13 Services and Drilling Master Contract (water
disposal) between Unocal Corporation and Geo
Petroleum, Inc. dated February 3, 1993.
10.14 Term Loan Agreement, as amended and extended to
June 15, 1996, dated June 6, 1994, between First
Los Angeles Bank (now City National Bank) and Geo
Petroleum, Inc.
10.15 Letter Agreement between Geo Petroleum, Inc. and
William Rich III, as attorney in fact, (Harriman
interests) dated September 6, 1990.
10.16 Surface Use Agreement dated March 31, 1978, as
amended, between Los Angeles and Salt Lake Railroad
Company and Union Pacific Railroad Co. and Irving
Terry. (East Los Angeles and Bandini fields).
10.17 Standard Industrial Lease dated January 1, 1979
between Irving Terry et ux. and Western Avenue
Properties (East Los Angeles tank farm).
10.18 Deed from Terry Oil Company, Inc. dated February 5,
1979 to Western Avenue Properties, covering various
rights and easements for oil operations (East Los
Angeles/Bandini pipeline easements).
10.19 Assignment and Bill of Sale, Rosecrans Area Leases,
by and between Kelt California, Inc., and Geo
Petroleum, Inc., dated December 1, 1994.
10.20 Quitclaim Deed, Assignment of Leases and Bill of
Sale, East Los Angeles and Bandini Oil Fields, by
and between Western Avenue Properties, a California
general partnership, and Geo Petroleum, Inc., dated
January 19, 1990.
16.1 Consent of Ernst & Young LLP to use of their opinion
in this document.
16.2 Consent of Deloitte & Touche LLP to use of their
opinion in this document.
16.3 Consent of Sherwin D. Yoelin to use all information
from his evaluation reports in this document.
</TABLE>
<PAGE>
In accordance with Section 12 of the Securities Exchange Act
of 1934, the registrant caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Geo Petroleum, Inc.
- -------------------
(Registrant)
Date June 18, 1996
-------------
GERALD T. RAYDON
By-----------------------------------------
Gerald T. Raydon, President (signature)
