Form 10-SBG/A
Amendment No. 3
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 33-0328958
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25660 Crenshaw Boulevard, Suite 201
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Torrance, California 90505
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(Address of principal executive offices) (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 Name of each exchange on which
to be so registered each class is to be registered
Inapplicable Inapplicable
Securities to be registered under Section 12(g) of the Act:
Common shares
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(Title of Class)
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PART 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis for the years ended December 31,
1995, and 1994, and the quarters ended March 31, 1995, and March 31, 1996, are
read in combination with the Financial Statements presented elsewhere herein.
Results of Operations
1995 Compared with 1994. During the year ended December 31, 1995, GEO
had net income of $153,401 and cash provided by operations of $201,844, compared
to a net loss of $558,466 and cash used in operations of $202,185 for 1994. Oil
and gas revenues increased 48% to $1,563,206 for 1995, compared to $1,053,036
for 1994. This was attributable mostly to increased production as a result of a
well improvement and recompletion program. A 7% increase in average oil prices,
to $16.23 per barrel, also contributed to the increase in revenues, but was
partly offset by a 47% decrease in gas prices, to $1.48 per mcf. During the year
ended December 31, 1994, oil prices averaged $15.08 per barrel and gas prices
averaged $2.17 per Mcf, respectively.
Average production costs per barrel of oil and equivalents decreased
29% to $7.06 for 1995, compared to $10.00 for 1994.
Lease operating expenses for 1995 amounted to $943,283, as compared to
$907,713 for 1994, a 4% increase over the previous year, reflecting the
additional number of wells on production. In addition to the normal operating
expenses of existing wells, expenses were incurred in repairing and recompleting
wells to bring them on production, performing repairs on wells and facilities
damaged by contractor negligence and by two major storms and a fire, and
constructing automated custody transfer facilities necessary for the delivery of
oil into a refiner's pipeline.
General and administrative expenses for 1995 were $402,978, as compared
to $256,519 for 1994, an increase of 57%. Legal costs and fees of approximately
$77,000 were incurred in 1995 for prosecuting a lawsuit that resulted in a
settlement payment of $250,000 to the Company. Substantial legal, auditing,
engineering and investment banking costs were incurred in connection with the
preparation, offering, and negotiating of equity offerings and of joint
ventures. Additional administrative costs were incurred due to the increased
number of wells and properties operated during 1995.
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%.
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Capital Resources and Liquidity
Financial Position. At December 31, 1995, the Company's total assets
increased by approximately $325,000 over December 31, 1994, primarily as a
result of additions to oil and gas properties due to the recompletion and
equipping of idle wells on its East Los Angeles and Bandini properties to bring
them on production, installation of gas processing and automated oil shipping
equipment, and purchase of two wells on the Orcutt property. At December 31,
1995, the Company had a working capital deficiency of $2,303,360, which
deficiency is greater by $162,449 over such deficiency at December 31, 1994.
The Company's $1,460,000 bank loan is with the City National Bank, 606
S. Olive Street, Los Angeles, California 90014. City National acquired First Los
Angeles Bank, the original lender to Geo. The Company, the Bank, and those Geo
shareholders who had provided the collateral for the loan, began negotiations in
May, 1996, to extend the loan for at least one year. A third party, introduced
by Geo's investment bankers, has stated an interest in assuming the loan and
extending its term to at least August 1, 1997. The Company is current in payment
of interest and fees, and no default has been declared by the Bank, while
negotiations continue.
As stated in Financial Condition above, the "going concern" reference
set forth in the independent auditor's report on the Company's financial
statements is largely a result of the fact that the Company's bank loan is due
currently and that the Company currently does not have cash reserves or income
sufficient to pay it off. The Company is seeking to extend the loan for a period
sufficient to enable it to complete one or more equity financings, joint
ventures, or, if such measures are not adequate, property sales. Based on the
evaluations of an independent petroleum engineer and of its investment banker,
and due to firm oil and gas prices, the Company expects that it can find
financing sufficient to develop and rework its properties, thereby obtaining the
cash flow necessary to pay off its bank loan. The engineering evaluations
support the Company's belief that the sale of a portion of its properties would
enable it to pay off the loan. The Company is discussing proposed financings
from individual and institutional investors, and from large oil companies.
Recurring sources of Other Revenue consist of sales of interests in
future Net Profits; rent; miscellaneous income; and waste water disposal fees.
Other sources include proceeds from the settlement of legal actions and a gain
on the sale of an asset. Other Revenue for the years ended December 31, 1995 and
1994 is itemized as follows:
December 31,
1995 1994
Other revenue
Net Profits Interests $ 62,970 $ 29,111
Rent 4,800 --
Miscellaneous Income 105,115 48,595
Waste Water Disposal 129,659 59,942
Legal Settlement 250,000 --
Total 552,544 137,648
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The reasons for the increase in Other Revenues from year-end 1994 to 1995 are as
follows:
a) Net Profits Interests: 1995 sales of these interests were higher
than 1994 sales.
b) Rent: Geo acquired a rental property in November 1994. Geo did not
start collecting rent on said property until January 1995.
c) Miscellaneous Income: Represents primarily management fees and
royalties earned by the Company which were higher in 1995 than in 1994
due to higher production and prices for oil and gas.
d) Waste Water Disposal: 1995 volumes of waste water received were
higher than in 1994.
e) Legal Settlement: In 1995, Geo received $250,000 from the
settlement of a lawsuit against a contractor for damages incurred
properties. Geo did not receive any such income in 1994.
Other Revenue for the quarters ended March 31, 1996 and 1995 is
itemized as follows:
March 31
1996 1995
Other revenue
Net Profits Interests $ 18,200 $ 31,950
Rent 1,200 2,107
Miscellaneous Income 7,864 13,806
Waste Water Disposal 15,866 27,853
Legal Settlement 45,000 78,997
Gain on Sale of Asset 36,000 --
Total 124,131 154,712
The reasons for the decrease in Other Revenue from the quarter ended March 31,
1995 to March 31, 1996 are as follows:
a) Net Profits Interests: 1996 sales of these interests were less than
1995 sales.
b) Rent: 1995 rent charges were higher than 1996.
c) Miscellaneous Income: Primarily management fees and royalties
earned by the Company, which were higher in 1995 than in 1996 due to
higher production and prices for oil and gas.
d) Waste Water Disposal: 1996 sales of this service were lower than in
the 1995 period.
e) Legal Settlement: In 1995, Geo received $250,000 from the
settlement of a lawsuit against a contractor for damages incurred
while performing services on one of the Company's oil and gas
properties. In 1996, Geo received $45,000 from the settlement of a
lawsuit against an adjacent property owner for damages to Company
property incurred while trespassing on a Company easement.
f) Gain on Sale of Asset: Geo did not realize any gains on the sale of
assets in 1995.
In the event of noncompliance with the Bank's loan payment
requirements, the Company will be required to allocate the proceeds of any
financing first to the payment of the loan. If such
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funds are not available, the Company would sell off sufficient assets to pay the
loan. If the Bank foreclosed on the pledgors' collateral, which had a market
value as of June 30, 1996, of more than 150% of the amount of the loan, the
pledgors could seek to collect the amount paid by them by foreclosing on a 20%
interest in Geo's Vaca Tar Sands property.
Historically, the net cash flow from the properties of the Company has
been sufficient to fund its costs of operations but insufficient to fund such
costs and its debt servicing requirements.
The Company's primary sources of liquidity and capital resources in the
near term will consist of working capital derived from its oil and gas
production and water disposal operations, augmented by any such funds as may be
derived from the sale of equity in the Company and of participating interest in
its operations. The Company's net revenues from oil and gas sales in excess of
production and operating expenses during 1995 and 1994 were $619,923 and
$145,323 respectively.
With respect to the long-term development of its Vaca Oil Sands
properties in the Oxnard Field, a plan for the development of the property using
the same enhanced recovery process presently in use on the producing Vaca Oil
Sands wells has been deemed feasible by the Company's independent petroleum
engineer. The future costs for the complete development of the property are
estimated by the independent petroleum engineer to be $66,650,000 with net cash
flow before income taxes estimated to be $169,977,000 on an undiscounted basis
or $69,879,000 discounted to present value at 10%. The Company does not now have
the capital resources adequate to pay these development costs. At such time as
the Company obtains equity financing, it intends to commence the development to
the extent that it obtains such funds. Part of the future costs may be paid out
of revenues derived from the initial development work. Full development will
require large amounts of equity financing. The Company alternatively may offer
participation in a joint venture to larger companies in return for the necessary
capital. A significant uncertainty remains involving the financial ability of
the Company to develop the reserves.
Cash provided by operations for the year ended December 31, 1995, was
$201,844 compared to cash used in operations of $202,185 for the year ended
December 31, 1994. This increase in cash provided by operations of $404,029 is
primarily a result of increased oil and gas production and revenues and the
recovery in a lawsuit of a net $183,000 for damages to a Company well.
GEO is seeking long-term equity financing. The first step in obtaining
it was a merger with Drake Investment Corporation, which closed on April 9,
1996. This was for the purpose of increased access to capital sources. The
Company plans now to sell additional shares of its common or preferred stock in
equity offerings, which, if successfully completed, will permit it to eliminate
its working capital deficiency, debt and interest obligations, to perform
improvement and remedial work on its existing properties, to acquire additional
properties, and to drill a large number of wells on its properties. All of these
activities are expected to substantially increase the revenues of the Company
and permit it to continue to operate on a positive cash flow basis.
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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 and then indefinitely). 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.
Results of Operations
First quarter 1996 compared with first quarter 1995.
During the quarter ended March 31, 1996, GEO had a net loss of $52,785
and cash used in operations of $43,783, compared to net income of $39,955 and
cash provided by operations of $155,978 for the comparable 1995 quarter. Oil and
gas revenues declined to $226,150 for the 1996 period, compared to $437,698 for
the first quarter 1995. This was attributable mostly to normal declines and to a
reduction of the number of wells on production in the Rosecrans and East Los
Angeles Fields as a result of temporary mechanical malfunctions. Average oil
prices increased to $17.53 per barrel in the 1996 period, compared to $15.66 per
barrel in the comparable 1995 period, while gas prices remained about unchanged
at $1.45 per mcf.
Lease operating expenses for the first quarter of 1996 declined to
$247,174, as compared to $264,119 in the comparable 1995 period, a 7% decrease
reflecting the fewer number of wells on production. However, average production
costs per barrel of oil and equivalents increased to $13.97 in the 1996 period
from $7.01 in the 1995 period, due to increased repair costs and due to
allocating fixed operating costs to a smaller quantity of produced barrels. In
addition to the normal operating expenses of existing wells, expenses were
incurred in repairing and recompleting wells to bring them on production,
performing repairs on wells and facilities damaged by a fire
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caused by contractor negligence, and putting into service automated custody
transfer facilities necessary for the delivery of oil into a refiner's pipeline.
General and administrative expenses for the 1996 quarter were $52,075,
as compared to $112,834 for the 1995 period, a decrease of 54%. The decrease was
largely due to a reduction in legal costs and fees after substantially resolving
two lawsuits successfully, and due to lower accounting and consulting fees.
Interest expense for the 1996 quarter was $56,314, as compared to
$105,758 for the comparable 1995 period, a decrease of 47%. This decrease was
due primarily to the exchange of short-term loans for the Company's preferred
stock. The Company's provision for depletion and depreciation decreased to
$49,121 for the first quarter of 1996, as compared to $55,016 for the 1995
period, a decrease of 11%.
Capital Resources and Liquidity
Financial Position.
At March 31, 1996, the Company had a working capital deficiency of
$2,338,410, which deficiency is greater by $35,050 than such deficiency at
December 31, 1995. The Company has requested a one year extension of its bank
loan of $1,460,000 which was due July 15, 1996. Negotiations are continuing and
the Company has temporarily and informally extended the loan during such
negotiations.
Historically, the net cash flow from the properties of the Company has
been sufficient to fund its costs of operations but insufficient to fund such
costs and its debt servicing requirements.
The Company's primary sources of liquidity and capital resources in
the near term will consist of working capital derived from its oil and gas
production and water disposal operations, augmented by any such funds as may be
derived from the sale of equity in the Company and of participating interests in
its operations. The Company's net revenues from oil and gas sales in excess of
production and operating expenses during the first quarter of 1996 and 1995 were
($21,024) and $173,579, respectively. This decline is primarily attributable to
the drop in revenues in the first quarter 1996 which was previously discussed.
Cash used in operations for the quarter ended March 31, 1996, was
$43,783 compared to cash provided by operations of $155,978 for the period ended
March 31, 1995. This decrease in cash provided by operations of $199,761 is
primarily a result of decreased oil and gas production and revenues, increased
costs per unit of production, and costs of repair of fire damage.
GEO is seeking long-term equity financing, as set forth above in this
Item, to permit it to continue to operate on a positive cash flow basis.
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Sources of Capital Resources. The status of the Company's bank loan is
discussed above in this Item. A portion of the proceeds from the planned equity
offering will be dedicated to the repayment of such indebtedness.
The Company's cash used in investing activities, primarily additions
to its oil and gas properties, net of any sales or disposals, was $30,173 in the
first quarter of 1996 and $127,032 for the period ending December 31, 1995.
Inflation
In recent years inflation has not had a significant impact on the
Company, its operations or financial condition.
Trends. Although there is no assurance that the Company will be able
to successfully complete its planned equity offering, the Company believes that
if it is successful, the Company will be able to increase its revenues by
investing a portion of the anticipated proceeds in remedial and recompletion
operations, development and exploratory drilling and planned acquisitions. As a
result of any increase in activities, the Company anticipates that its general
and administrative expenses will measurably increase, since the Company is
contemplating hiring additional personnel, expanding its administrative offices
and increasing compensation to its existing staff, including its president.
Legislation has been enacted which permits the export of Alaskan North Slope
crude oil, primarily to the Far East. Previously, large quantities of such crude
were shipped to California for refining and sale, which depressed prices paid
for crude oil produced in California. The major producer of Alaskan oil has
announced plans to deliver a large portion of its oil production from Alaska to
the Far East in 1996. As such reduction of Alaskan supplies to the West Coast
occurs, it is expected to have a positive effect upon the price paid for
California crude oil. During the first five months of 1996, crude oil prices
have increased by an average of $2.20 per barrel.
GEO anticipates that there will be a gradual strengthening in the
prices for both its oil and gas production, but that periods of unstable pricing
may occur. The Company will be subject to variations in cash flow depending upon
changes in prices paid for oil and gas. Based upon historical swings in prices,
the Company does not envision a situation where reductions in prices will create
an operating loss from its properties at the field level. Severe drops in prices
would, however, strain the Company's ability to conduct remedial work using it
revenues.
ITEM 3. DESCRIPTION OF PROPERTY
All of the Company's properties are located in California, primarily
in the southern portion of the State. Geo's material producing properties are
described in this item.
East Los Angeles / Bandini Fields
At December 31, 1995, these two separate, but adjacent accumulations
which are located in an industrial area of the City of Los Angeles, produced a
daily average during 1995 of 210
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barrels (172 net) of high gravity (33 degree API) oil and 306 mcf. of 1200 BTU
gas from a total of 10 wells. Estimated total net proven developed reserves
amounted to 2,039,114 barrels of oil and 5,530,765 MCF. of natural gas, of which
594,148 barrels and 865,143 MCF, respectively, were classified as proved
producing. For the six month period ended June 30, 1996, these two properties
produced a daily average of 110 barrels of oil and 101 Mcf of gas from a total
of eight wells. At June 30, 1996, 14 wells were idle pending recompletion or
repair operations, and eleven were idles awaiting reworking and re-equipping
operations. The Company believes that such operations, as completed, will add
additional producing capability.
The properties are located approximately one-half mile apart and are
operated together by the same employees. In the aggregate, approximately 570
surface acres are covered by GEO's leases. GEO's rights in both fields are held
by production. The Company owns all the mineral rights in the East Los Angeles
Field, subject to overriding royalties of 16% of gross revenues. The Bandini
interests are comprised of town-lot leases and of Company-owned mineral rights;
the Bandini interests are subject to royalties varying from 16% to 29.5% of
gross revenues. Production comes from multiple sand zones in the Pliocene
Repetto formation at depths of 2800 to 8000 feet at Bandini and in the Miocene
Puente formation at depths of between 7200 to 11200 feet at East Los Angeles.
GEO acquired these fields in 1990, when they were producing less than
40 net barrels of oil per day, and had remaining economic reserves of less than
90,000 barrels. Since that time GEO has invested approximately $1,200,000 in
reworking and remedial efforts, and has achieved the increases in production and
reserves stated above. GEO determined that the previous operators had not
recognized several potentially productive oil and gas zones. By recompleting
existing wells, GEO has discovered two shallower gas zones and extended one oil
zone at Bandini. In the East Los Angeles Field, two shallower oil and gas zones
have been discovered. In each case, the recompleted wells flowed with excellent
pressures. Geo regards the results of the foregoing work as demonstrative of the
economic feasibility of the continued recompletion of wells and of the drilling
of extension, deeper test, and horizontal wells in the fields.
The Company presently operates five out of eighteen existing wells at
the Bandini Field. At East Los Angeles, the Company operates three producing
wells out of a total of fifteen wells. Subject to obtaining financing, GEO
intends to spend approximately $2,165,000 for recompleting the remaining wells
and restoring them to production.
GEO's geologic studies have led the Company to conclude that there are
also seven exploratory prospects in these fields, which, if productive when
drilled, would extend the existing field limits, discover shallower and deeper
zones, and develop production by horizontal drilling. Geo has no present
schedule for drilling these prospects.
Oxnard Field
GEO and Gerald T. Raydon, President and principal shareholder of GEO,
jointly acquired 26 oil wells and oil and gas leases covering approximately 625
acres of land in the area of Oxnard, Ventura County, California, from Oryx
Energy in 1990, for a consideration of S150,000. See
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"Certain Relationships and Related Transactions." On April 1, 1994, GEO acquired
all but five percent of the 25% interest held by Mr. Raydon in the Oxnard Field
for a consideration consisting solely of Common Stock.
The production in this field is from the prolific and massive Vaca Oil
Sand which is found at depths of between 1950 and 2400 feet. In 325 acres of the
leases, the thickness of the oil-saturated sand averages 225 feet. The reservoir
is highly porous (32%) and permeable (1800 md.). The oil is heavy, approximately
6-8 degrees API, and is highly viscous. Consequently, cyclic steam injection is
necessary to heat the oil and reduce its viscosity, permitting it to flow
readily through the well bores. In existing operations, GEO generates steam at
the surface and injects it into the producing formation. The heat permeates the
formation, and GEO then pumps the oil in a conventional manner. Because of the
use of steam, operations are 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 zones in the
future. Presently, the gas produced from this yields no revenues for the
Company. The wells are expected to produce an estimated 896,000 mcf of gas. Geo
in the process of negotiating an agreement to market the gas through the
existing pipeline system, which, if successfully negotiated, should result 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
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increased to about 798,000 net barrels of oil and equivalents. Geo does not have
the funds available to perform these operations and no assurance may be given
that the results will be as estimated by the engineer.
Orcutt Field
GEO owns two oil and gas leases covering 3140 acres on the south flank
of the giant Orcutt Field in Santa Barbara County, California. Royalty burdens
on this lease are 21% of gross revenues. There are two producible formations
which underlie the lease. The shallower formation is the massive, oil-saturated
Diatomite Zone, which is between 250 and 500 feet thick and lies at depths of
from 850 feet to 1500 feet. This formation has low permeability, which requires
that it be hydraulically fractured in order to be productive. Although GEO's
engineers have attributed possible reserves of approximately 8 million barrels
of oil to this formation, past operations have not established the commerciality
of the Zone which requires stimulation by hydraulic fracturing. The high cost of
fracturing, the variable resulting production, and the low price of oil have
made most wells uneconomic (six out of ten wells). The last two wells drilled
are producing in commercial quantities, and Geo believes that improved
fracturing technology and firm to higher oil prices may result in enhancing the
economics of the Zone, but the overall profitability of operations has not yet
been demonstrated.
Production of the existing wells to depletion is estimated by the
Company's staff to provide a net 126,000 BOE. GEO subleased shallow rights in
the Diatomite Zone to Santa Fe Energy Resources, Inc. In 1991, Santa Fe drilled,
hydraulically fractured and completed two wells at a depth of 1,400 feet in the
Diatomite, confirming the Zone's productive potential. However, the high costs
of completing the wells on an experimental basis made it unlikely that Santa Fe
would recover its costs, and it sold the two wells to GEO in June, 1995.
GEO owns ten wells which have been completed in the Diatomite Zone, of
which four are presently producing an aggregate of 25 barrels of oil and 20 mcf
of gas per day. At December 31, 1995 and March 31, 1996, respectively, GEO was
receiving $13.60 and $17.60 per barrel for Orcutt oil. Because gas is produced
in association with the oil, it is necessary to market or otherwise dispose of
the gas. The plant which had been purchasing the gas has been closed. Since it
is impermissible to vent the gas to the atmosphere, GEO has been delivering gas
for only a nominal payment. The Company is exploring other methods for dealing
with the gas, including co-generation, re-injection, and construction of a
pipeline to a nearby utility pipeline. More production will be needed before the
latter alternative will be economically feasible.
The second formation underlying GEO leasehold interests is the
Monterey formation, found at depths of 3500 to 5500 feet. GEO owns seven wells
which are bottomed in the Monterey formation, of which two wells are presently
producing. At December 31, 1995, such wells produced daily an aggregate of 12
barrels of oil and 150 mcf of gas. The oil is 30 gravity and was sold for $14.80
per barrel in December, 1995, and in April, 1996, sold for approximately $18.80
per barrel. Payment for gas has not been received for the reasons described
above.
11
<PAGE>
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 have injected 20,000 to 30,000 barrels of water per month at
charges averaging about $0.60 per barrel. The Company currently has contracts
with two major oil companies and eight independents to dispose of their water.
Because there are few high-capacity waste water wells permitted by the
California Division of Oil & Gas, and an expanding need by operators to dispose
of their waste water, GEO's operations of this type are capable of substantial
growth.
Natural Gas Storage Project
GEO is conducting preliminary negotiations with a large California
utility regarding the use of one of GEO's fields for the underground storage of
up to thirty billion cubic feet (30 BCF) of natural gas. Preliminary studies
have indicated the feasibility of the project. It is expected that construction
of the project would result in payment of storage and injection fees to GEO. In
addition, the injection of gas under pressure into the oil zones would increase
production by driving the oil to the well bores.
Estimated Oil and Gas Reserves
At December 31, 1995, the Company's net proved oil and gas reserves,
as estimated by its independent petroleum engineer, Sherwin D. Yoelin, Petroleum
Engineer, Inc., amounted to 30,428,000 barrels of oil and 5,530,000 mcf. of
natural gas, of which 2,824,000 barrels and 5,530,000 mcf. were classified as
proved developed. Future cash flows attributable to such
12
<PAGE>
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 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
13
<PAGE>
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 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.
14
<PAGE>
Developed Developed Undeveloped Undeveloped
Gross Net Gross Net
----- --- ----- ---
2100 1940 4930 4610
As is customary in the oil and gas industry, the Company is generally
able to retain its ownership interest in undeveloped acreage by production of
existing wells, by drilling activity which establishes commercial reserves
sufficient to maintain the lease, or by payment of delay rentals. All of the
acreage listed above as "undeveloped" is acreage which is held by production,
but upon which no wells have presently been drilled.
Production
The average sales prices received for and the related costs of the
Company's production for the periods ended December 31, 1993, 1994 and 1995 are
shown below.
December 31
-----------
1993 1994 1995
---- ---- ----
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
(1) Since all of the Company's gas is produced in association with oil, it is
not feasible to separately determine production costs. Consequently, production
costs have been stated in equivalent barrels. Average cost includes the cost of
producing oil attributable to landowners royalty and overriding royalty and,
thus, represents the cost of gross production.
Volumes of production of oil and gas for the one year period ended
December 31, 1995, were as follows:
Gas 112,000 mcf
Oil and liquids 110,560 bbls
Producing Well Summary
Set forth below is a tabulation of the number of producing wells in
which the Company possessed an interest at December 31, 1993, 1994 and 1995.
15
<PAGE>
Producing Oil and Gas Wells
1993 1994 1995
Gas Oil Gas Oil Gas Oil
--- --- --- --- --- ---
Gross 1 21 3 27 3 29
Net 1 19 2 24 2 27
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:
16
<PAGE>
Year Ended December 31
1993 1994 1995
---- ---- ----
Net Gross Net Gross Net Gross
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
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.
ALL AMOUNTS OF COMMON STOCK SHARES STATED IN THIS FORM 10-SB/A/3 HAVE
BEEN ADJUSTED TO REFLECT A 2.5505 TO 1 STOCK SPLIT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's common shares as of April 30, 1996, by:
(1) each stockholder who is known by the Company to own beneficially more than
five percent of the common shares; (2) each Named Executive Officer of the
Company; (3) each director of the Company; and (4) all directors and executive
officers of the Company as a group. The information set forth below gives effect
to a 2.5505 for one stock split which occurred subsequent to December 31, 1995.
17
<PAGE>
Directors, Executive Officers,
and Five Percent Shareholders Shares Beneficially Owned Percent of Class
- ----------------------------- ------------------------- ----------------
Gerald T. Raydon (1)
Suite 201, 25660 Crenshaw Blvd
Torrance, Ca. 90505 3,647,225 73.30
Alyda Raydon (1)
Suite 201, 25660 Crenshaw Blvd
Torrance, Ca. 90505 3,647,225 73.30
William J. Corcoran (2, 7) 10,202 0.21
Michael F. Moran (3, 7) 10,202 0.21
Eric J. Raydon 1,275 0.03
------------------------------------
All executive officers and directors
as a group (4 persons) 3,668,904 73.74
Harriman affiliated interests (4)
c/o Brown & Wood
One World Trade Center
New York, New York 10048 522,853 11.00
Drake Holding Corp. (5,6)
1250 Fourth St
Santa Monica, Ca. 90401 558,657 11.23
- --------------------------------------------------------------------------------
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.
2. William J. Corcoran was affiliated with certain of the Harriman family
interests. The shares held by Mr. Corcoran were issued as directors'
compensation.
3. Michael F. Moran was affiliated with certain of the Harriman family
interests. The shares held by Mr. Moran were issued as directors' compensation.
4. Represents shares held by various descendants or affiliates of W. A.
Harriman. Such shares are owned as follows: Associated Partners LTD - 245,613,
Crispin Connery - 51,010, Mary Dixon 51,010, Thomas F. Dixon - 51,010, Pamela
Harriman - 8,162, Hillside Syndicate - 14,028, Arden H. Mason - 51,010, Edward
Northrop - 51,010. The appellation "Harriman Affiliated Interests" does not
connote a legal relationship among the holders nor is it a title suggested by
the persons designated as components. Associated Partners LTD is a limited
partnership managed by the general partner, Merchant Minerals Corp. Joan Coleman
is the President of the general partner, based in Alexandria, Virginia, and
exercises voting powers over the shares held by the partnership. Hillside
Syndicate is a joint venture, of which the person exercising voting power over
the shares is the Manager, William J. Rich, New York City, New York. Hillside
Syndicate owns about 0.27% of Geo's shares.
18
<PAGE>
5. Eric J. Raydon is the son of Mr. and Mrs. Raydon. The latter parties disclaim
beneficial ownership of the shares held in the name of Eric J. Raydon. Shares
indicated as being owned by Mr. and Mrs. Raydon do not include shares
attributable to Eric J. Raydon.
6. Includes 122,546 shares held in the name of Drake Energy Corp., an affiliate,
and 185,498 shares held in the name of Drake Capital Securities, Inc., an
affiliate. Such shares represent 2.46% and 3.73%, respectively of the
outstanding shares of the Company. Drake Holding Corp. is the parent of Drake
Capital Securities, Inc., which is the parent of Drake Energy Corp. The
directors of each of the corporations are Joseph Di Lillo, John Mazza, and Mark
Tipton. Messrs. Di Lillo and Mazza own more than 10% of the equity of each
corporation, and Mr. Tipton more than 8%. Such persons are also the executive
officers of Drake Holding Corp.
7. Messrs. Corcoran and Moran were employed until 1995 by a firm successively
known as Harriman Administrative Management and Middleburg Management Corp.
which managed investments for various members of the family of W. A. Harriman.
Since 1995, neither has been affiliated with such company nor with the Harriman
family. To the Company's knowledge, the Harriman Affiliated Interests have no
interest in the shares shown as beneficially owned by such persons, as to which
such persons have sole voting and dispositive authority.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Directors and Executive Officers
The directors, executive officers and key employees of Geo and their
ages as of March 31, 1996 are as follows:
Name
- ----
Position with the Company Age
- -------------------------------------------------------------
Gerald T. Raydon
President and Chief Executive Officer,
Chairman of the Board of Directors 65
Alyda L. Raydon
Secretary, Treasurer, Chief Financial Officer 54
William J. Corcoran
Director 65
Michael F. Moran
Director 41
Charles F. Peters
Manager, East Los Angeles/Bandini field operations 37
Eric J. Raydon
Assistant to the President and Assistant Secretary 27
19
<PAGE>
Gerald T. Raydon founded GEO in 1986. He has over 40 years of
experience in the California oil industry as a geologist, attorney, and oil
company president, commencing his career with Chevron U.S.A., Inc. He was for 16
years the President of American Pacific International, Inc., a public oil
company located in Los Angeles, California, which achieved a market
capitalization of $55,000,000 before its 1984 merger into Worldwide Energy
Corporation. Subsequently he served as a director of Worldwide and as President
of its West Coast subsidiary until 1986. In March 1989, he was appointed as
Receiver of Fountain Oil & Gas Company by the Chief Judge of the United States
District Court, Central District of California, and served four years until the
receivership was concluded. Mr. Raydon holds B.A. and M.A. degrees in Geological
Sciences from the University of California, Berkeley, and the J.D. degree from
the University of Southern California, School of Law. He is a member of the
American Association of Petroleum Geologists and of the California State Bar.
Mr. Raydon is the husband of Alyda L. Raydon and the father of Eric J. Raydon.
Mr. Raydon devotes approximately 95% of his working time to the performance of
his duties with Geo. The balance is devoted to managing personal and business
interests. See "Certain Relationships and Related Transactions."
Alyda L. Raydon is Secretary/Treasurer and has been employed in such
position since October, 1986. She has completed college courses in financial and
investment management, accounting, computer science, and office procedures.
Alyda L. Raydon is the wife of Gerald T. Raydon and the mother of Eric J.
Raydon.
William J. Corcoran was employed by an investment management firm
representing the W. Averell Harriman family from 1963 until his retirement in
1995. He served as Secretary-Treasurer of the Mary A. H. Rumsey Foundation, the
Gladys and Roland Harriman Foundation, and the W. Averell Harriman and Pamela C.
Harriman Foundation. Mr. Corcoran graduated from Fordham University with B.A.
and M.A. degrees in accounting.
Michael F. Moran was employed in various accounting, tax analysis, and
management capacities by a firm which made investments for members of the
Harriman family from 1980 to 1995. He was the Treasurer of Middleburg Management
Corporation and also served as Director and Chief Financial Officer of several
Harriman family firms. He graduated from St. Peters College with a degree in
accounting. Mr. Moran is currently employed in a similar capacity by affiliates
of the Linder Family in New York City.
Charles F. Peters has seventeen years of experience in oil and gas
field operations. Mr. Peters has operated oil and gas wells and production
facilities in California, including fourteen years experience in operations at
the East Los Angeles-Bandini properties. Mr. Peters became manager of the
properties in 1991.
Eric J. Raydon joined the Company in June, 1995. He has over four years
of experience in finance, real estate development, accounting and management,
which he gained while working for a privately held unaffiliated real estate
development company. While so employed, Mr. Raydon was responsible for
financial, accounting, and contract management of projects involving the
construction of over 1,200 residential units in the Las Vegas, Nevada and
Phoenix, Arizona areas. Mr. Raydon's responsibilities included management of the
Las Vegas accounting department, loan
20
<PAGE>
and contract administration, and cash management. Mr. Raydon was also
responsible for the selection and implementation of a computerized cost
accounting system for the company. His last job title was Construction Finance
Coordinator. Mr. Raydon received his B.S. degree in Business Administration/Real
Property Development and Management from the University of Southern California
in May, 1991. Eric J. Raydon is the son of Gerald and Alyda Raydon.
ITEM 6. EXECUTIVE COMPENSATION.
Director Compensation
Directors currently receive an annual issuance of 2,550 shares of
common stock as compensation. Directors do not receive reimbursement for their
out of pocket costs in attending board meetings.
<TABLE>
Executive Compensation
No officer of the Company received compensation, including salary and
bonus, in excess of $100,000 during any of the three preceding years. Gerald T.
Raydon received no salary or bonus during any such years, with the exception of
the 2,550 shares (1,000 shares pre-split), valued at $1,000, that he received as
a member of the Board of Directors, for each of said years. The Board has
authorized compensation to Mr. Raydon in the amount of $110,000 per year
commencing January 1, 1996. The following table sets forth certain information
regarding compensation earned during each of the Company's last three fiscal
years by the Company's Chief Executive Officer and all other executive officers
of the Company.
Summary Compensation Table
<CAPTION>
Long-term
Compensation
Awards
Payouts
Securities Long-term
Other Annual Restricted Underlying Incentive All Other
Annual Compensation Compen- Stock Options/ Plan Compen-
Name & Principal Salary Bonus sation Awards SARs Payouts sation
& Position Year ($)(1) ($) ($) ($) (#) ($) ($)(1)
---------- ---- ------ --- --- --- --- --- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald T. Raydon 1993 1,000 0 0 0 0 0 0
1994 1,000 0 0 0 0 0 0
1995 1,000 0 0 0 0 0 0
Alyda L. Raydon 1993 37,000 0 0 0 0 0 0
1994 40,000 0 0 0 0 0 0
1995 41,500 0 0 0 0 0 0
(1) Includes value ($1,000) of 2550 shares of stock granted annually to each
director, whether or not an employee. The value of each share of stock was
established at $1.00 ($0.39 adjusted
21
<PAGE>
for stock split) by action of the Board of directors of the Company in 1990. No
trading market existed for the stock at the time of the grants.
</TABLE>
The following table sets forth stock options granted during 1995 to the
named executive officers of the Company.
Option/SAR Grants in the Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
- --------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise
Granted in Fiscal or Base Expiration 5% 10%
Name (#) Year Price Date ($) ($)
- ---- --- ---- ----- ---- --- ---
Gerald T. Raydon 0 0
Alyda L. Raydon 0 0
The following table sets forth information with respect to stock
options (none of which have been granted) which were exercised in the year ended
December 31, 1995, by the named executive officers and the value of such
officers' unexercised options at December 31, 1995.
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised In-the-Money Options
Exercise Realized Options at Fiscal Year End at Fiscal Year-end
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- --- --- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald T. Raydon 0 0 0 0 0 0
</TABLE>
Benefit Plans and Employment Agreements
The Company has no benefit plans and no employment agreements, other
than at will agreements, with any of its employees. In 1996, the Board
authorized the Company to enter into employment contracts for periods of five
years with each of Mr. Gerald T. Raydon, Mrs. Alyda Raydon and Mr. Eric J.
Raydon. Such agreements when executed will provide for annual compensation of
$110,000, $45,000 and $40,000, respectively, all subject to escalation on an
annual basis as approved by the Board. The agreements will not contain
provisions restricting a change of control in the Company. It is expected that
formal contracts will be executed sometime during September, 1996. No payments
have been made to the executives pursuant to such authorized contracts because
of the Company's working capital deficiency, while Eric J. Raydon and Alyda L.
Raydon have drawn salaries in amounts less than the contract amounts. The
22
<PAGE>
Company has accrued the contract salaries since July 1, 1996, and anticipates
payment of the accrued amounts during the last quarter of 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 1,114,805 shares of common stock valued at $103,421, which was
the approximate cost of the properties to Mr. Raydon.
Capitan Resources, Inc. owns an undivided 25% interest in the waste
disposal facilities owned and operated by GEO at GEO's Orcutt and Oxnard
properties. See "Properties - Environmental Services." Gerald T. Raydon and his
family own all of the stock of Capitan Resources, Inc. Relations between the
Company and Capitan Resources are governed by an agreement which provides for a
proportionate sharing of costs and revenues.
Capitan Resources, Inc. is the purchaser of natural gas from the
Company's Bandini-East Los Angeles properties. Capitan purchases the natural gas
under a contract dated June 30, 1991, which provides for a payment to Capitan of
25% of gross sales in exchange for advancing capital and other costs of gas
processing and transportation. Capitan then resells the natural gas to other
purchasers. To date, resale transactions have not resulted in Capitan's recovery
of its investment; however, it is expected that ultimately Capitan will achieve
a significant profit on its investment.
From time to time there are outstanding balances and credits between
the Company and Capitan pursuant to the agreements above mentioned. At December
31, 1995 GEO had a receivable of $155,686 due from Capitan. Similar credits and
balances were outstanding from time to time with respect to the Bandini-East Los
Angeles properties and Vaca properties; during the two years ended December 31,
1995, the largest balance receivable from Mr. Raydon was $31,516 and at such
date the receivable balance was 0.
The Harriman affiliated group currently owns approximately 11% of the
outstanding common stock of GEO. In 1990, members of the group provided
collateral to a bank for a loan to GEO in the principal amount of $1,200,000
(now $1,460,000). As consideration, the group received 273,669 shares of common
stock (as adjusted to reflect the stock split), an option to purchase 70,833
shares (unadjusted), and a security interest in 20% of the Company's Oxnard
Field properties. The option was not exercised, and expired on September 11,
1995. Such loan remains unpaid as of the date hereof. In 1995, members of such
group brought suit against the bank that made the loan to the Company, claiming,
among other things, that the agent of the Harriman group that executed the
collateral pledge agreement was not authorized so to do. The loan matured on
April 15, 1996, was extended to June 15, 1996, and has been informally
23
<PAGE>
extended to the present while the bank, the pledgors, and the Company are
negotiating for a one-year extension. Interest is being paid on a current basis
by the Company. See "Litigation."
In 1987 Gerald T. Raydon and Alyda L. Raydon conveyed to the Company
their interests in various properties now held by the Company for an aggregate
consideration of 2,125,587 shares of common stock (833,400 shares prior to
split), valued at $718,400, which was the approximate cost of the properties to
the principal officer/shareholders.
In 1988, the Company acquired certain minor properties and other assets
from the Harriman group in exchange for 267,803 shares of common stock.
On February 1, 1995, the Company issued promissory notes to a relative
of Gerald T. Raydon for $57,813 in consideration of an equal amount of cash. On
September 1, 1995, 30 shares of preferred stock at $1,000 per share were issued
in exchange for a $30,000 portion of such promissory notes.
At September 30, 1995, relatives of Gerald T. Raydon owed the Company
$6,471 relating to net revenue interests in the Company's Vaca property. Such
relatives acquired their interest in 1992 for a consideration of $3,500 which
was the same price for which the interest was offered to third persons. The debt
bears no interest.
Drake Capital Securities, Inc., the shareholders of which were
shareholders of DIC is the Company's investment banker. Drake Capital
Securities, Inc. entered into an agreement with the Company dated December 20,
1995, by which Drake Capital Securities, Inc. agreed on a best efforts basis to
manage a private placement of up to 2,500,000 shares of the common shares of the
Company for an offering price of $2.50 per share. Drake Capital Securities, Inc.
will be compensated by the Company with commissions of 7.5 - 10%. In addition,
Drake Capital Securities, Inc. has acted as a financial advisor to the Company
in the past.
The Company believes that the terms of the transactions described above
are no less favorable than the Company would have received in arm's-length
transactions.
ITEM 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
24
<PAGE>
Unregistered Securities." Holders of the Common equity are entitled to dividends
when and as declared by the Board of Directors from funds legally available
therefor and upon liquidation are entitled to share ratably in any distribution
to stockholders. All holders of Common equity are entitled to one vote per share
on any matter coming before the stockholders for a vote. Shareholders are
entitled to cumulate their votes in the election of directors. Thus, each
shareholder is given a number of votes equal to the number of shares held
multiplied by the number of directors to be elected, and the shareholder is
entitled to apportion such votes among the nominees as the shareholder selects.
All issued and outstanding shares of the Common equity are fully paid
and non-assessable. Shareholders do not have preemptive rights.
Description of the Preferred Stock
The Board of Directors is empowered, by the Articles as amended on
August 23, 1994 to issue 100,000 shares of Preferred Stock and to divide the
same into series, fix the number of shares constituting each series, and to fix
or alter the voting rights, dividend rights, dividend rates, conversion rights,
rights and term or redemption, rights upon dissolution or liquidation and other
special rights on any unissued series of Preferred Stock.
During 1995, the Board authorized the creation of a $1,000 preferred
stock and pursuant to that authorization the Company issued a total of 505.15
shares in exchange for $505,150. The series of preferred stock issued, carries
an annual dividend of 30%, is callable by the Company at par at any time on
notice to the holder. If the Company has not called the preferred stock for
redemption by January 1, 1997, the holder may require the Company to redeem the
preferred stock. The preferred stock is convertible into common stock, at the
option of the holder, at a price equal to 80% of the price at which the common
stock may be sold in an initial public offering of the common stock of the
Company.
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
25
<PAGE>
were no options or warrants convertible into common equity outstanding. However,
as of such date the Company had outstanding a class of Preferred Stock which is
under certain conditions convertible into common shares; at such date 505.15
shares of such preferred stock had been issued. Such preferred stock is
convertible into common stock at a price equal to eighty percent of the price at
which a share of common stock is sold to the public in the Company's initial
public offering. See "Description of the Preferred Shares."
Shares Available for Resale
At April 30, 1996, had the Company been subject to the reporting
requirements of the Securities and Exchange Act, approximately 4,467,914 shares
of the common equity of the Company would have been eligible for resale under
Rule 144 under the Securities Act of 1933, of which approximately 4,393,661
shares were held by affiliates of the Company and constituted "restricted"
shares. In addition, shares issued in connection with the acquisition of DIC
(See "Business - Acquisition of DIC") were issued pursuant to an exemption from
the registration and prospectus delivery requirements of the Securities Act
pursuant to section 3(a)10) thereof and are believed to be freely transferable.
In such transaction, 497,546 shares were issued. To the knowledge of the
Company, none of the issuees constitutes an "affiliate" of the Company, nor does
any such issuee hold more than five percent of the common equity of the Company.
The remaining 4,477,914 shares of common stock held by existing
stockholders (the "Restricted Shares") were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities Act.
These shares may 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
26
<PAGE>
period of 90 days. It is expected that such 90 day period will expire on or
about October 1, 1996. All the shares described which may be eligible for resale
pursuant to Rule 144 may be sold in the public market only if registered or
pursuant to an exemption from registration, such as Rules 144, 144 (k), or 701
under the Securities Act.
Possible Sale of Shares by the Company and Registration Rights
The Company has no agreements by which it is obligated to register any
shares of common equity. However, the Company plans to privately offer shares of
its common stock in the near future and is considering the issuance of common
equity in a transaction registered under the Securities Act, but has not
formulated definitive plans for the latter. The Company is seeking to implement
the first alternative by a placement of up to 2,500,000 shares of its common
stock privately through the efforts of Drake Capital Securities, Inc. See
"Certain Relationships and Related Transactions." If the Company privately
places any of its common shares, it is anticipated that the purchasers thereof
will be accorded rights to require the Company to register the shares. In
addition, if the Company conducts an initial public offering of its shares, it
is probable that the existing holders of the Preferred Stock will be accorded
the right to have their shares registered as part of the offering. The Company
is also considering the issuance of common equity in a transaction registered
under the Securities Act, but has not formulated definitive plans therefor.
Holders of Common Equity
At April 30, 1996, there were approximately 73 holders of record known to
the Company of the common equity of the Company.
Dividends
The Company has never paid dividends on its common equity and has no plans
to do so in the foreseeable future. Payment of dividends is implicitly
restricted by the Company's bank loan agreement, and by the General Corporation
Law of the State of California, since the latter prohibits the payment of
dividends if the distribution thereof would result in it being unlikely that the
corporation would be able to meet its liabilities as they mature. At present the
Company has a working capital deficiency and would thus be unable to pay
dividends currently.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On January 26, 1996, the Company notified Deloitte & Touche LLP, its
independent accountants, that it had replaced such firm as its independent
accountants by the firm of Ernst & Young LLP, effective for the fiscal year
1995. Deloitte & Touche LLP had audited Geo's financial statements for the year
ended December 31, 1994, and issued its audit report thereon on June 28, 1995,
except for Notes 2 and 8 for which the date is November 29, 1995 (which report
expressed an unqualified opinion and included an explanatory paragraph relating
to the Company's ability to continue as a going concern). There were no
disagreements with Deloitte & Touche LLP respecting accounting or auditing
matters. The change of accountants was made by Geo as a matter of business
judgment. The Board of Directors by resolution authorized the said change of
independent accountants.
Geo has provided a copy of this disclosure to its present and its former
accountants and has requested both to review such disclosure. A letter
confirming the foregoing from Deloitte & Touche LLP has been filed as an exhibit
to this registration statement. Geo did not discuss the application of
accounting principles to any specific transaction or the type of audit opinion
that might be rendered, prior to engaging its new accounting firm.
<PAGE>
PART F/S
Geo Petroleum, Inc.
Index to Financial Statements
Report of Ernst & Young LLP, Independent Auditors............................F-2
Report of Deloitte & Touche LLP, Independent Auditors........................F-3
Balance Sheets at December 31, 1995 and 1994.................................F-4
Statements of Operations
for the years ended December 31, 1995 and 1994............................F-6
Statements of Stockholders' Equity
for the years ended December 31, 1995 and 1994............................F-7
Statements of Cash Flows
for the years ended December 31, 1995 and 1994............................F-8
Notes to Financial Statements...............................................F-10
F-1
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Geo Petroleum, Inc.
We have audited the accompanying balance sheet of Geo Petroleum, Inc. as of
December 31, 1995, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Geo Petroleum, Inc. at
December 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had incurred recurring losses from operations
through December 31, 1994, and had an accumulated deficit and negative working
capital at December 31, 1995. In addition, the Company has defaulted on a loan
agreement with a bank and has not complied with certain related covenants. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Ernst & Young LLP
Los Angeles, California
April 30, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
GEO Petroleum, Inc.
Torrance, California
We have audited the accompanying balance sheet of GEO Petroleum, Inc. ("the
Company") as of December 31, 1994, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and had an accumulated deficit and negative working capital at December 31,
1994. These conditions raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Deloitte & Touche LLP
Los Angeles, California
June 28, 1995, except for Notes 2 and 8
for which the date is November 29, 1995
F-3
<PAGE>
Geo Petroleum, Inc.
Balance Sheets
December 31
1995 1994
-------------------------
Assets
Current assets:
Cash and cash equivalents (Note 1) $ 100,565 $ 139,874
Accounts receivable:
Accrued oil and gas revenues (net of allowances
for doubtful accounts of $17,775 in 1995 and
$6,430 in 1994) 161,308 121,194
Joint interest and other (Note 3) 200,026 132,514
Prepaid expenses and other 52,413 5,794
-------------------------
Total current assets 514,312 399,376
Property and equipment (Notes 1 and 3):
Oil and gas properties 4,698,877 4,262,003
Office furniture and equipment 65,948 51,271
-------------------------
4,764,825 4,313,274
Accumulated depletion and depreciation (1,037,404) (840,920)
-------------------------
3,727,421 3,472,354
Deferred charge, net (Note 1) -- 45,000
-------------------------
Total assets $4,241,733 $ 3,916,730
=========================
F-4
<PAGE>
December 31
1995 1994
--------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable:
Accrued royalties $ 438,507 $ 289,076
Trade and other (Note 3) 283,161 510,512
Bank overdraft -- 26,002
Dividends payable 20,120 --
Accrued expenses 107,821 78,697
Current portion of notes payable (Note 2) 1,968,063 1,636,000
--------------------------
Total current liabilities 2,817,672 2,540,287
Notes payable (Note 2) -- 600,813
Redeemable convertible preferred stock,
$1,000 par value; authorized 100,000
shares; issued and outstanding 505.15
shares at December 31, 1995 (Note 4) 505,150 --
Stockholders' equity (Notes 2, 3 and 5)
Common stock, no par value; authorized
50,000,000 shares; issued and
outstanding 4,477,913 and 4,288,454
shares at December 31, 1995 and 1994,
respectively
2,157,702 2,147,702
Accumulated deficit (1,238,791) (1,372,072)
--------------------------
Total stockholders' equity 918,911 775,630
--------------------------
Total liabilities and stockholders' equity $ 4,241,733 $ 3,916,730
==========================
See accompanying notes.
F-5
<PAGE>
Geo Petroleum, Inc.
Statements of Operations
Year ended December 31
1995 1994
---------------------------
Revenues (Notes 1 and 3):
Oil and gas sales $ 1,563,206 $ 1,053,036
Other revenue 552,544 137,648
Interest income 3,102 4,868
---------------------------
2,118,852 1,195,552
Expenses:
Lease operating expenses 943,283 907,713
Depletion and depreciation 196,484 222,453
Amortization of deferred loan costs (Note 1) 45,000 60,000
General and administrative 402,978 256,519
Interest expense 377,706 307,333
---------------------------
Income (loss) before income taxes 153,401 (558,466)
Provision for income taxes (Note 6) -- --
---------------------------
Net income (loss) 153,401 (558,466)
Less preferred stock dividends (20,120) --
---------------------------
Net income (loss) applicable to common stock $ 133,281 $ (558,466)
===========================
Net income (loss) per share of common stock $ 0.03 $ (0.13)
===========================
See accompanying notes.
F-6
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Statements of Stockholders' Equity
<CAPTION>
Number of
Common
Shares Common Accumulated
Outstanding Stock Deficit Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 3,063,597 $ 2,034,275 $ (813,606) $ 1,220,669
Net loss -- -- (558,466) (558,466)
Issuance of stock 1,224,857 113,427 -- 113,427
---------------------------------------------------------------------------
Balance at December 31, 1994 4,288,454 2,147,702 (1,372,072) 775,630
Net income -- -- 153,401 153,401
Issuance of stock 189,459 10,000 -- 10,000
Preferred stock dividends -- -- (20,120) (20,120)
---------------------------------------------------------------------------
Balance at December 31, 1995 4,477,913 $ 2,157,702 $ (1,238,791$ 918,911
===========================================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-7
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Statements of Cash Flows
<CAPTION>
Year ended December 31
1995 1994
--------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 153,401 $(558,466)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depletion and depreciation 196,484 222,453
Amortization of deferred loan costs 45,000 60,000
Fees paid in stock 10,000 4,000
Changes in operating assets and liabilities:
Accounts receivable (107,626) (114,683)
Prepaid expenses and other (46,619) 22,543
Accounts payable (77,920) 88,138
Accrued expenses 29,124 73,830
--------------------------------
Net cash provided by (used in) operating activities 201,844 (202,185)
Investing activities
Additions to property and equipment (451,551) (613,611)
--------------------------------
Net cash used in investing activities (451,551) (613,611)
Financing activities
Proceeds from notes payable 307,000 776,813
Payments on notes payable (121,000) --
Bank overdraft (26,002) 26,002
Preferred stock issued 50,400 --
--------------------------------
Net cash provided by financing activities 210,398 802,815
--------------------------------
Net decrease in cash and cash equivalents (39,309) (12,981)
Cash and cash equivalents at beginning of year 139,874 152,855
--------------------------------
Cash and cash equivalents at end of year $ 100,565 $ 139,874
================================
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 414,821 $ 188,816
================================
Cash paid during the year for income taxes $ 800 $ --
================================
</TABLE>
F-8
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows (continued)
Supplemental disclosure of noncash investing and financing activities:
During 1995, the Company issued 454.75 shares of the Company's redeemable
convertible preferred stock in exchange for the retirement of certain notes
payable aggregating $454,750. Additionally, the Company issued 2.4 shares
of the Company's redeemable convertible preferred stock to an individual as
a finder's fee payment for services rendered in 1995. In connection with
the issuance of the Company's redeemable convertible preferred stock,
fourth quarter dividends amounting to $20,120 were declared and payable as
of December 31, 1995. Also, the Company issued 185,498 shares of common
stock to a consulting company as payment for services that were performed
in 1994 and 1995.
During 1994, the Company issued 1,214,655 shares of common stock and forgave
accounts receivable in the amounts of $32,358 in exchange for certain oil
and gas property interests valued at $141,785.
See accompanying notes.
F-9
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1995
1. Organization and Summary of Significant Accounting Policies
Organization
Geo Petroleum, Inc. (the Company) is a private oil and gas production company
that was founded in 1986 in the state of California. The Company engages in the
development, production and management of oil and gas properties located in
California.
On April 9, 1996, the Company's Board of Directors approved the proposed merger
with Drake Investment Corp. (Drake). The terms and conditions of the merger are
further described in Note 8.
Basis of Presentation
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, as of December 31, 1995, the Company's accumulated deficit totaled
$1,238,791, and current liabilities exceeded current assets by $2,303,360. These
factors, among others, may indicate that the Company will be unable to continue
as a going concern for a reasonable period of time.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its current obligations on a timely basis,
to obtain additional financing, and ultimately to obtain successful operations.
Management is continuing its efforts to obtain additional funds so that the
Company can meet its obligations and sustain operations. These potential
alternatives include, among other things, a private and public placement of debt
or equity, extending or refinancing the bank loan using oil and gas properties
as collateral, sale of oil and gas properties and obtaining an advance on future
production from an end user. As a first step in a potential public or private
offering, the Company has signed an agreement to merge with Drake (see Note 8).
There can be no assurance that any of these potential alternatives will
materialize. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
F-10
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash equivalents include certificates of deposit with original maturity dates of
less than three months. The Company maintains a $100,000 certificate of deposit
for state of California authorization purposes to perform additional oil and gas
well recompletions. These funds are subject to certain withdrawal restrictions
until completion of the work.
Deferred Charge
The deferred charge consists of unamortized loan costs, which were amortized
over five years through September 1995 (see Note 2). Amortization expense was
$45,000 in 1995 and $60,000 in 1994.
Investment in Partnership
Included in oil and gas properties is an investment in a general partnership
that was created in 1991 to produce oil at a well located on one of the
Company's oil and gas properties. The Company is the managing partner in this
general partnership, and this investment is accounted for under the pro rata
consolidation method.
Property and Equipment
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration
and development of oil and gas reserves are capitalized as incurred. The costs
of oil and gas properties are accumulated in a cost center and are subject to a
cost center ceiling which such costs do not exceed. The Company has not
capitalized any internal costs in oil and gas properties.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are depleted over the estimated useful lives
of the properties by application of the unit-of-production method using only
proved oil and gas reserves, excluding future estimated costs and related proved
undeveloped oil reserves at the Vaca Oil Sands property, which relate to a major
development project involving an enhanced recovery process as more fully
discussed in Note 9. The evaluations of the oil and gas reserves were prepared
by Sherwin D. Yoelin, a petroleum engineer. Depletion expense recorded for the
years ended December 31, 1995 and 1994 was $196,484 and $218,723, respectively.
F-11
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Substantially all additions to oil and gas properties in 1995 and 1994 relate to
recompletions of existing producing or previously producing wells.
The Company's oil and gas producing properties are estimated by the Company's
independent petroleum engineer to have remaining producing lives in excess of 17
years. The Company's policy for accruing site restoration and environmental exit
costs related to its oil and gas production is that such costs are accounted for
in the Company's calculation of depletion expense.
Depreciation of office equipment and furniture is computed using the
straight-line method, with depreciation rates based upon their estimated useful
lives, which range between five and seven years. Depreciation expense was $5,198
and $3,730 for the years ended December 31, 1995 and 1994, respectively.
Revenue
Revenue from oil and gas sales is recognized upon delivery of the oil and gas to
the Company's customer. Such revenue is recorded net of royalties and certain
other costs that the Company incurs to bring the oil and gas into salable
condition.
The Company had one significant customer in 1995 and 1994 which comprised
approximately 53% and 33% of gross oil and gas sales, respectively.
Included in other revenues for 1995 is $250,000 received from the settlement of
a lawsuit against a contractor for damages incurred while performing services on
one of the Company's oil and gas properties.
Earnings Per Common Share
Net income (loss) per common share is based upon average outstanding common
shares, adjusted for the stock split described in Note 8, during each year
(4,383,183 shares in 1995 and 3,676,025 shares in 1994). Such calculations do
not assume any conversion of the redeemable convertible preferred stock into
common stock because determination of the conversion price is subject to future
events. The fair value of the preferred shares is based upon the sale of shares
of the preferred stock at par value for an equivalent amount of cash in
December, 1995, to unrelated parties in arm's length transactions.
F-12
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts in the financial statements have been reclassified to
conform to current year presentation.
2. Notes Payable
Notes payable consisted of the following:
December 31
1995 1994
-----------------------------
Note payable to bank $1,460,000 $1,460,000
Notes payable to investors 508,063 776,813
-----------------------------
1,968,063 2,236,813
Less current portion 1,968,063 1,636,000
-----------------------------
Total long-term debt $ -- $ 600,813
=============================
The Company has issued notes payable to various investors bearing an interest
rate of 10% and a guaranteed oil and gas production payment equal to 20% of the
outstanding principal amount per annum. The holders of the notes have extended
the maturities of the notes to various dates in 1996, and all of the notes are
secured by interests in the Company's oil and gas properties.
The note payable to bank bears interest at prime plus 2.0%. At December 31, 1995
and 1994, the prime rate was 8.5%. Interest payments are due monthly, and the
outstanding principal amount and all unpaid interest was due on October 15,
1995. In October 1995, the bank extended the maturity date of the note payable
to April 15, 1996, which was also
F-13
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
2. Notes Payable (continued)
not paid and is currently delinquent. The Company was not in compliance with
certain loan covenants at and subsequent to December 31, 1995, including
restrictions on incurring additional debt and failure to make certain payments
to outside vendors on a timely basis. While the bank has not taken any action
regarding such noncompliance, the covenants have not been waived through the
extended maturity date. As a result, the note is classified as current at
December 31, 1995. The Company is engaged in discussions with the bank to
further extend the maturity of the note.
In 1990, the Company issued 273,669 shares of common stock, an option to
purchase 180,660 additional shares of common stock at $6 per share and a
recorded deed of trust on 20% of the Company's interest in its Vaca Tar Sands
property to certain parties in exchange for those parties providing the
collateral, 35,000 shares of Union Pacific Corp. common stock, for the Company's
note payable to a bank. The consideration issued was valued at $300,000, its
estimated fair market value, and was amortized as additional loan costs over
five years. The 35,000 shares of Union Pacific Corp. common stock is held in a
trust and had an approximate value of $2,310,000 at December 31, 1995. In the
event of default on the bank note payable, the parties providing the collateral
may take steps to recover from the Company the value of any collateral taken by
the bank. The collateral agreements and the stock purchase option expired on
September 11, 1995. In connection with the extension of the maturity date of the
bank note payable, the collateral agreement was extended to April 15, 1996. No
additional consideration was given for this extension.
3. Related Party Transactions
The Company has entered into agreements with another entity to sell gas and
offer water disposal services at certain locations. The principal
officer/shareholder of the Company is also the principal officer/shareholder of
the other entity. Total revenue to the Company from these agreements was
$257,024 and $174,294 in 1995 and 1994, respectively. At December 31, 1995 and
1994, the Company had a net receivable balance of $155,686 and $81,312,
respectively, from the other entity.
The Company's principal officer/shareholder previously held a net profit
interest of 25% in the East Los Angeles and Vaca Tar Sands oil and gas
properties. In 1994, the Company acquired the 25% net profit interest in the
East Los Angeles property and 20% of the net profit interest in the Vaca Tar
Sands property from the principal officer/shareholder. In
F-14
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
3. Related Party Transactions (continued)
exchange for these interests, the Company issued 1,148,054 shares of common
stock valued at $103,421, which was the approximate cost of the properties to
the principal officer/shareholder. At the date of the acquisition in 1994, the
principal officer/shareholder owed the Company $31,516, which amount was
forgiven as part of the purchase consideration.
In 1987, the Company acquired certain interests in oil and gas properties from
its principal officer/shareholder in exchange for 2,125,587 shares of the
Company's common stock valued at $781,400, which was the approximate cost of the
properties to the principal officer/shareholder.
At December 31, 1995 and 1994, the Company had notes payable to relatives of the
principal officer/shareholder totaling $53,563 and $86,819, respectively.
At December 31, 1994, relatives of the principal officer/shareholder owed the
Company $6,471 relating to the net revenue interests in certain oil and gas
properties. No such amounts were owed at December 31, 1995.
In December 1995, notes payable by the Company to a relative of the principal
officer/shareholder totaling $30,000 were converted into 30.0 shares of the
Company's redeemable convertible preferred stock aggregating $30,000 (see Note
4).
The principal officer/shareholder of the Company has not taken a salary since
inception of the Company.
4. Redeemable Convertible Preferred Stock
During 1994, the Company authorized 100,000 shares of preferred stock with a par
value of $1,000 per share. At December 31, 1994, no shares of preferred stock
had been issued.
In December 1995, the Company issued 48.0 shares of its redeemable convertible
preferred stock to three investors for cash totaling $48,000. Additionally, the
Company issued 2.4 shares to an individual as a finders fees payment for
services performed in 1995.
F-15
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
4. Redeemable Convertible Preferred Stock (continued)
Also during December 1995, 17 holders of notes payable totaling $454,750
converted such notes into 454.75 shares of the Company's redeemable convertible
preferred stock.
In connection with the issuance of the Company's redeemable convertible
preferred stock in 1995, fourth quarter dividends amounting to $20,120 were
declared and are payable as of December 31, 1995.
The series of preferred stock issued, carrying an annual dividend of 30%, is
callable by the Company at par at any time on notice to the holder. If the
Company has not called the preferred stock for redemption by January 1, 1997,
the holder may require the Company to redeem the preferred stock. The preferred
stock is convertible into common stock, at the option of the holder, at a price
equal to 80% of the price at which the common stock may be sold in an initial
public offering of the common stock of the Company.
The Company believes that, at December 31, 1995, the fair value of its issued
redeemable convertible preferred stock approximates its carrying value in the
Company's balance sheet. The fair value was based upon the sale of the preferred
stock at par value for an equivalent amount of cash in December, 1995, to
unrelated parties in arm's-length transactions.
5. Common Stock
In June 1995, the Company issued 185,498 (72,730 pre-split) shares of common
stock to a consulting company as payment for services that were performed in
1994 and 1995. The parties agreed that the stock issued had a value of $10,000
and that approximately 80% of the services were performed at December 31, 1994.
Accordingly, at December 31, 1994, the Company had a payable balance of $8,000
relating to these services.
F-16
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
6. Income Taxes
Deferred income taxes result from temporary differences in the recognition of
revenues and expenses for financial accounting and tax reporting purposes. Net
deferred income taxes were composed of the following:
December 31
1995 1994
----------------------------
Deferred income tax asset - operating loss
carryforwards $ 1,450,000 $ 1,100,000
Deferred income tax liability - differences
between book and tax basis of property (1,050,000) (950,000)
Valuation allowance (400,000) (150,000)
----------------------------
Net deferred income taxes $ -- $ --
============================
As of December 31, 1995 and 1994, the Company had net operating loss
carryforwards available in future periods to reduce income taxes that may be
payable at those dates. For federal income tax purposes, net operating loss
carryforwards amounted to approximately $3,740,000 and $2,750,000 for 1995 and
1994, respectively, and expire during the years 2001 through 2009. For state
income tax purposes, net operating loss carryforwards amounted to approximately
$1,950,000 and $1,480,000 for 1995 and 1994, respectively, and expire during the
years 2004 through 2010. The Company is delinquent in filing its 1994 income tax
returns.
7. Commitments
The Company leases office space under a noncancelable operating lease agreement
expiring June 30, 1996. The Company also leases equipment under month-to-month
leases. Future minimum lease payments under the noncancelable operating lease
are $3,240 for the period from January 1, 1996 through June 30, 1996.
Total rental expense incurred under all lease agreements was $31,346 for the
years ended December 31, 1995 and 1994.
F-17
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
8. Events Subsequent to December 31, 1995
Effective April 9, 1996, the Company merged with Drake. The agreement provides
that 10% of the Company's outstanding common stock after the merger will be
issued to the Drake shareholders in exchange for the net assets of Drake.
Subsequent to December 31, 1995, the Articles of Incorporation were amended to
provide for an authorized capital of fifty million shares of common stock and,
in connection with the merger with Drake, the outstanding shares, including
those issued in connection with the acquisition, were split at the rate of
2.5505 to 1.
All amounts of common stock shares stated herein have been adjusted to reflect
the 2.5505 to 1 stock split.
9. Oil and Gas Operations (Unaudited)
At December 31, 1995, the Company had interests in oil and gas properties that
are principally located in Southern California. The Company does not own or
lease any oil and gas properties outside the United States.
Costs Incurred in Oil and Gas Producing Activities
Costs incurred in oil and gas producing activities were as follows:
Year ended December 31
1995 1994
-------------------------
(In Thousands)
(Unaudited)
Property acquisition costs:
Proved properties $ 90,289 $141,785
Exploration costs -- --
Development costs 346,585 613,611
-------------------------
Total costs $436,874 $755,396
=========================
Estimated Quantities of Proved Oil and Gas Reserves
Reserve information presented below is based upon reports prepared by the
Company's independent petroleum reservoir engineer. Reserve estimates are
inherently imprecise and estimates of new discoveries are more imprecise than
those of producing oil and gas properties. Accordingly, these estimates are
expected to change as future information becomes available.
F-18
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
Proved oil and gas reserves are the estimated quantities of crude oil, natural
gas and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions.
Proved developed oil and gas reserves are those expected to be recovered through
existing wells with existing equipment and operating methods.
<TABLE>
Net quantities of crude oil and natural gas for the Company as of the beginning
and the end of the years ended December 31, 1995 and 1994, as well as the
changes in proved reserves during such years, are set forth in the tables below:
Oil and Gas Reserve Data
<CAPTION>
Year ended December 31
1995 1994
------------------------------------------------------------
Oil Gas Oil Gas
Bbls MCF Bbls MCF
------------------------------------------------------------
(In Thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves (excluding Vaca Oil
Sands), net:
Beginning of year 3,495 5,329 3,468 11,078
Revisions of previous
estimates (193) 314 (291) (5,718)
Purchase of reserves in
place -- -- 400 --
Production (102) (112) (82) (31)
------------------------------------------------------------
End of year 3,200 5,531 3,495 5,329
============================================================
Proved undeveloped Vaca Oil
Sands reserves, net:
End of year 27,614 --
===============================
</TABLE>
F-19
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
The decrease in the quantity of gas reserves during the year ended December 31,
1994 pertains to process undeveloped reserves and is attributable primarily to
the experience of producing gas wells which indicated that due to the manner of
completion of the existing wells and the discontinuance nature of the producing
zones, rates of recovery and ultimate recovery from the existing wells would be
less than estimated and that the recovery of all such reserves would require the
drilling of new wells which, at this time, is not contemplated.
Prior to 1995, the Company had made no expenditures toward developing its
undeveloped Vaca Oil Sands reserves which were purchased in 1990. In 1995, the
Company took steps toward the development of these reserves by obtaining a
governmental permit allowing it to drill 120 wells on part of its acreage. A
plan for the development of the property using the same enhanced recovery
process presently in use on the producing Vaca Oil Sands wells has been deemed
feasible by the Company's independent petroleum engineer. A significant
uncertainty remains involving the financial ability of the Company to develop
the reserves. The future costs for the complete development of the property are
estimated by the independent petroleum engineer to be $66,650,000 with net cash
flow before income taxes estimated to be $169,977,000 on an undiscounted basis
or $69,879,000 discounted to present value at 10%. The cost allocated to the
undeveloped Vaca Oil Sands reserves is insignificant at December 31, 1995 and
1994 and the estimated volume of such reserves described above have been
excluded from the calculation of the Company's depletion expense through
December 31, 1995. The costs related to the Vaca Oil Sands reserves, including
future development costs, will be included in the Company's calculations of
depletion expense when production of these reserves commences.
No reserve report was filed with any federal authorities or agencies during 1995
and 1994.
F-20
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves
The following tables set forth the computation of the standardized measure of
discounted future net cash flows relating to proved reserves at December 31,
1995 and 1994, respectively. The standardized measure is the estimated future
cash inflows from proved reserves less estimated future production and
development costs and estimated future income taxes. Future cash inflows
represent expected revenues from the production of proved reserves based on
prices and any fixed determinable future escalation provided by contractual
arrangements in existence at fiscal year end. Escalation based on inflation,
federal regulatory changes and supply and demand is not considered. Estimated
future production and development costs related to future production of reserves
are based on historical costs. Such costs include, but are not limited to
drilling development wells and installation of production facilities. Inflation
and other anticipatory costs are not considered until the actual cost change
takes effect. Estimated future income tax expenses are computed using the
appropriate year-end statutory tax rates. Consideration is given to the effects
of permanent differences, tax credits and allowances. A discount rate of 10% is
applied to the annual future net cash flows after income taxes.
The methodology and assumptions used in calculating the standardized measure are
those required by FASB Statement No. 69. It is not intended to be representative
of the fair market value of proved reserves. The valuations of revenues and
costs do not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
F-21
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
The standardized measure of discounted future net cash flows relating to proved
developed oil and gas reserves, which excludes the Company's proved undeveloped
Vaca Oil Sands reserves, follows:
December 31
1995 1994
---------------------
(In Thousands)
(Unaudited)
Future cash inflows $ 60,853 $ 63,719
Future production and development costs (29,699) (29,316)
Future income tax expenses (8,727) (10,384)
---------------------
Future net cash flows 22,427 24,019
10% annual discount for estimated timing of
cash flows (8,735) (9,062)
---------------------
Standardized measure of discounted future
net cash flows $ 13,692 $ 14,957
=====================
For the calculations in the preceding table, estimated future cash inflows from
estimated future production of proved developed reserves were computed using
average year-end oil and gas prices. The average oil price, primarily based on
posted prices, was $15.84 per barrel and $15.11 per barrel at December 31, 1995
and 1994, respectively, and the average gas price, a combination of spot gas
prices and contract prices, was $1.84 per thousand cubic feet and $2.05 per
thousand cubic feet at December 31, 1995 and 1994, respectively.
F-22
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
9. Oil and Gas Operations (Unaudited) (continued)
Changes in Standardized Measure of Discounted Future Net Cash Flows
The changes in standardized measure for discounted future net cash flows
relating to proved developed reserves, which excludes the Company's proved
undeveloped Vaca Oil Sands reserves, follows:
Year ended December 31
----------------------
1995 1994
----------------------
(In Thousands)
(Unaudited)
Sales of oil and gas produced, net of production
costs $ (620) $ (145)
Net changes in prices and production costs (763) 3,275
Changes in estimated future development costs (332) (131)
Development costs incurred during the period 347 614
Revisions of previous quantity estimates (1,252) (8,778)
Purchase of reserves in place -- 291
Accretion of discount 1,496 1,624
Net change in income taxes 1,022 2,873
Other, principally changes in timing of estimated
production (1,163) (905)
----------------------
Net decrease (1,265) (1,282)
Beginning of year 14,957 16,239
----------------------
End of year $ 13,692 $ 14,957
======================
F-23
<PAGE>
PART III
ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION
Exhibit Sequential
Number Description of Exhibit Location No.
- --------------------------------------------------------------------------------
16.1 Consent of Ernst & Young LLP to use of their opinion in
this document, dated August 6, 1996, and Changes in
Accountants
16.2 Consent of Deloitte & Touche LLP to use of their opinion in
this document, dated August 6, 1996.
16.3 Changes in Accountants -- Deloitte & Touche LLP
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this third amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Geo Petroleum, Inc.
--------------------
(Registrant)
Date: August 6, 1996
By
---------------------------------------
Gerald T. Raydon, President (signature)
CONSENT OF INDEPENDENT AUDITORS
We agree to the inclusion in this offering circular on Form 10-SB Amendment No.
3 of our report dated April 30, 1996, with respect to the financial statements
of Geo Petroleum, Inc. and consent to the reference to our firm under the
caption "Changes In and Disagreements With Accountants."
Ernst & Young LLP
August 6, 1996
Los Angeles, California
Exhibit 16.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Form 10-SB/A/3 of GEO Petroleum, Inc. of our
report dated June 28, 1995, except for Notes 2 and 8 for which the date is
November 29, 1995 (which expressed an unqualified opinion and included an
explanatory paragraph relating to the Company's ability to continue as a going
concern).
Deloitte & Touche LLP
Los Angeles, California
August 6, 1996
Exhibit 16.2
August 6, 1996
Securities and Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, D.C. 20549
We have read and agree with the Comments in Part II, Item 3 of Form 10-SB/A/3 of
GEO Petroleum, Inc. dated August 6, 1996, except for the fifth sentence of the
first paragraph and the third sentence of the second paragraph of such Item, as
to which we have no basis to agree or disagree.
Yours truly,
Deloitte & Touche LLP
Los Angeles, California
August 6, 1996
Exhibit 16.3
