U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-20915
GEO PETROLEUM, INC.
(Name of Small Business Issuer in Its Charter)
California 33-0328958
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization )
25660 Crenshaw Blvd., Suite 201
Torrance, California 90505
(Address of principal executive offices) (Zip Code)
Issuers telephone number (310) 539-8191
Securities registered under Section 12(b) of the Exchange Act:
Name of each Exchange
Title of each class on which registered
------------------- ----------------------
Common NASD Bulletin Board
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ]YES [ ]NO
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[ ]
The Registrant's revenues for its fiscal year ended December 31,
1996 were $1.01 million. At March 31,1997, 7,521,606 shares of
Common Stock (the Registrant's only class of voting stock) were
outstanding. The aggregate market value of the Common Stock on
that date (based upon the closing price on the NASD Electronic
Bulletin Board on March 14, 1997 of $6.88) held by non-affiliates
was approximately $25,400,000.
Documents incorporated by reference: Certain portions of the
Registrant's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A - Part III, Items 9, 10,
11, and 12.
Transitional Small Business Disclosure Format.
[ ]YES [ X ]NO
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Geo Petroleum, Inc. (herein "Geo" or the "Company") was
organized as a California corporation in 1986 by Gerald T. Raydon
to engage in the exploration for and production of oil and gas,
primarily in California. See "Directors, Executive Officers,
Promoters and Control Persons." To date, Geo's activities have
been limited to the acquisition of producing oil properties which
Geo deems are under-exploited and have additional potential, and
to the subsequent enhancement of the production from those
properties. Geo also has acquired acreage which it believes is
prospective for exploratory drilling, but financial limitations
have prevented Geo from exploring such properties to date. The
Company has one industry segment, which is the acquisition,
development, production and sale of crude oil and natural gas.
The Company's offices are located at 25660 Crenshaw Boulevard,
Torrance, California 90505; its telephone number is (310) 539-
8191, and its fax number is (310) 539-0101.
The Company's primary business method is to acquire
properties which have been in production for a number of years,
but which, in the judgment of the Company, still have undeveloped
potential for substantial increases in production and reserves.
Geo seeks to acquire properties after conducting geological and
engineering studies of them, and then attempts to enhance
production by opening and producing previously bypassed oil and
gas zones, by stimulating existing productive zones and by
improving production techniques and equipment. To date,
essentially all of Geo's activities have been concentrated in
three geologic areas, the Los Angeles Basin, the Santa Maria
Basin in Santa Barbara County and the Ventura Basin in Ventura
County, all of which are in Southern California. See the
discussion under "Description of Property" for information
concerning Geo's principal oil and gas properties.
Geo intends to continue remediation and development of its
existing properties, to acquire additional properties suitable in
Geo's judgment for enhancement of production, and to commence
exploration of its prospects. Geo has entered into a joint
venture agreement with Saba Petroleum, Inc., pursuant to which
development drilling on the Vaca Oil Sand project in the Oxnard
Field, Ventura County, California, is scheduled to commence by
mid- 1997. Saba must spend $10,000,000 on the project prior to
year-end 1998 to earn a 2/3rd interest in the project. If Saba
fails to make such expenditure, it will retain its interest only
in the wells in which it has invested, but will have no
continuing interest in the project. After Saba has invested
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$10,000,000, Geo will pay one-third of further costs and receive
one-third of the revenues. Geo will also receive one-third of
the revenues from wells invested solely in by Saba after Saba
recovers its investment therein. Geo is considering various ways
of securing funds for its share of expenditures should Saba's
efforts prove successful, but has not formulated a definitive
plan for securing such funds should they be necessary. Failure to
contribute its share of funds would result in reduction of Geo's
interest revenues from the project. See "Description of Property
- - Oxnard Field."
Geo has no subsidiaries and presently holds interests in
6880 gross acres (6430 net) of oil and gas leases or mineral
rights, of which 1,950 gross acres (1,820 net) are developed for
oil and gas production and 4,930 gross acres (4,610 net) are
undeveloped. Geo owns no drilling rigs or equipment and engages
the services of independent contractors to perform its drilling
and remedial activities. All of Geo's production of oil and gas
is sold to unaffiliated purchasers. See "Business - Principal
Purchasers." The Company also operates two water disposal wells.
See "Description of Property - Environmental Services."
ACQUISITION OF DIC
Effective April 9, 1996, Geo acquired by merger an inactive
California corporation, Drake Investment Corp. ("DIC"), primarily
for the purpose of increasing its shareholder base as an initial
step in establishing Geo as a public company. The acquisition was
accounted for as a purchase, and while increasing the number of
shareholders of Geo and contributing a minor amount of cash, had
no appreciable effect on Geo, its operations or financial
condition. See "Financial Statements."
REGULATION
The Company's operations are regulated by certain federal
and state agencies. In particular, oil and natural gas production
and related operations are or have been subject to price
controls, taxes and other laws relating to the oil and natural
gas industry. The Company cannot predict how existing laws and
regulation may be interpreted by enforcement agencies or court
rulings, whether additional laws and regulations will be adopted,
or the effect such changes may have on its business or financial
condition.
The Company's operations are subject to extensive federal,
state and local laws and regulations relating to the generation,
storage, handling, and transportation of materials and their
potential discharge into the environment. Permits are required
for various of the Company's operations, and these permits are
subject to revocation, modification and renewal by issuing
authorities.
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Governmental authorities have the power to enforce
compliance with their regulations, and violations are subject to
fines, injunctions or both. It is possible that increasingly
strict requirements will be imposed by environmental laws and
enforcement policies thereunder. The Company does not anticipate
that it will be required in the near future to expend amounts
that are material to the Company's financial position or results
of operations by reason of environmental laws and regulations,
but because such laws and regulations are frequently changed, the
Company is unable to predict the ultimate cost of such
compliance.
The Company believes that the oil and gas industry may
experience increasing liabilities and risks under the
Comprehensive Environmental Response, Compensation and Liability
Act, as well as other federal, state and local environmental
laws, as a result of increased enforcement of environmental laws
by various regulatory agencies. As an "owner" or "operator" of
property where hazardous materials may exist or be present, the
Company, like all others engaged in the oil and gas industry,
could be liable for the release of any hazardous substances.
Although the Company has not been subject to the imposition of
"clean-up" orders by the government, the potential for sudden and
unpredictable liability for environmental problems is a
consideration of increasing importance to the Company and the oil
and gas industry as a whole. During the three preceding years,
the Company has been subjected to administrative penalties on
three occasions, each being minor vapor leaks resulting from the
failure of sealing devices on oil storage tanks or on pipelines
at the Company's East Los Angeles/Bandini and Oxnard properties.
See "Description of Property - Principal Properties." The
penalties consisted of negotiated monetary fines which amounted
to $1,950.
The Company is required to comply with various federal and
state regulations regarding plugging and abandonment of oil and
gas wells. The Company provides reserves for the estimated cost
of plugging and abandoning its wells on a unit of production
basis. See "Financial Statements." In addition, as required by
state law, the Company maintains a $100,000 cash bond covering
its obligation to abandon wells. The Bond does not limit the
Company's abandonment liability. A similar bond, in the amount
of $50,000, is carried under City of Los Angeles laws.
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GLOSSARY
The following are used in this report and the definitions
contained herein are provided for the convenience of the reader:
BBL or BARREL means 42 United States gallons liquid volume,
usually used herein in reference to crude oil or other liquid
hydrocarbons.
DEVELOPED ACREAGE means the number of acres of oil and gas leases
held or owned, which are allocated or assignable to producing
wells or wells capable of production.
DEVELOPMENT WELL means a well which is drilled to and completed
in a known producing formation adjacent to a producing well in a
previously discovered field and in a stratigraphic horizon known
to be productive.
EXPLORATION means the search for economic deposits of minerals,
petroleum and other natural earth resources by any geological,
geophysical, or geochemical technique.
EXPLORATION WELL means a well drilled either in search of a new,
as-yet undiscovered oil or gas reservoir or to greatly extend the
known limits of a previously discovered reservoir, as indicated
by reasonable interpretation of available data, with the
objective of completing in that reservoir.
FIELD means a geographic area in which a number of oil or gas
wells produce from a continuous reservoir.
MBOE means one thousand barrels of oil equivalent.
MCF means one thousand cubic feet of natural gas.
NET ACRES OR NET WELLS mean the sum of fractional ownership
working interests in gross acres or gross wells.
OPERATOR means the person or company actually operating an oil or
gas well.
PRINCIPAL PURCHASERS and MARKETING OF PRODUCTION
VOLATILITY OF COMMODITY PRICES AND MARKETS
Oil and gas prices have been and are likely to continue to
be volatile and subject to wide fluctuations in response to any
of the following factors: relatively minor changes in the supply
of and demand for oil and gas; market uncertainty; political
conditions in international oil producing regions; the extent of
domestic production and importation of oil in certain relevant
markets; the level of consumer demand; weather conditions; the
competitive position of oil or gas as a source of energy as
compared with other energy sources; the refining capacity of oil
purchasers, the effect of regulation on the production,
transportation and sale of oil and natural gas, and other factors
beyond the control of the Company.
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MARKETING OF PRODUCTION
Crude oil produced in the Los Angeles Basin is sold via
pipeline to Kern Oil & Refining Company, and approximated 85% of
the Company's crude oil sales for 1996. Production of crude from
the Oxnard property is sold via truck to Texaco Trading and
Refining Co. which, during 1995, purchased 10% and during 1996,
6% 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
80% of the Company's share of gas sold during 1996. Natural gas
from the Company's Strain Ranches lease during 1996 was sold to
Pacific Gas & Electric Co. and accounted for approximately 20% of
the Company's share of gas sales during 1996.
Alternative purchasers are available for all of the
Company's production, except that for Rosecrans and the Strain
Ranches property there is only one purchaser. 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.
ITEM 2. DESCRIPTION OF PROPERTY
FORWARD LOOKING INFORMATION
With the exception of historical information, the matters
discussed in this Report contain forward-looking statements that
involve risks and uncertainties. Although the Company believes
that its expectations are based upon reasonable assumptions, it
can give no assurance that its goals will be achieved. Important
factors that could cause actual results to differ materially from
those in the forward-looking statements contained in this report
to include the time and extent of changes in commodity prices for
oil and gas, increases in the cost of conducting operations,
including remedial operations, the extent of the Company's
success in discovering, developing and producing reserves,
political conditions, condition of capital and equity markets,
changes in environmental laws and other laws affecting the
ability of the Company to explore for and produce oil and gas and
the cost of so doing and other factors which are described in
this report.
The proved developed and undeveloped oil and gas reserve
figures presented in this report are estimates based on reserve
reports prepared by independent petroleum engineers. The
estimation of reserves requires substantial judgment on the part
of the petroleum engineers, resulting in imprecise
determinations, particularly with respect to new discoveries.
Estimates of reserves and of future net revenues prepared by
different petroleum engineers may vary substantially, depending,
in part, on the assumptions made, and may be subject to material
<PAGE>
adjustment. Estimates of proved undeveloped reserves, which
comprise a substantial portion of the Company's reserves, are, by
their nature, much less certain than proved developed reserves.
The accuracy of any reserve estimate depends on the quality of
available data as well as engineering and geological
interpretation and judgment. Results of drilling, testing and
production or price changes subsequent to the date of the
estimate may result in changes to such estimates. The estimates
of future net revenues in this report reflect oil and gas prices
and production costs as of the date of estimation, without
escalation, except where changes in prices were fixed under
existing contracts. There can be no assurance that such prices
will be realized or that the estimated production volumes will be
produced during the periods specified in such reports. Proven
reserves are estimates of hydrocarbons to be recovered in the
future. Reservoir engineering is a subjective process of
estimating the sizes of underground accumulations of oil and gas
that cannot be measured in an exact way. The accuracy of any
reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment.
Reserve reports of other engineers might differ from the reports
contained herein. Results of drilling, testing, and production
subsequent to the date of the estimate may justify revision of
such estimate. Future prices received for the sale of oil and gas
may be different from those used in preparing these reports. The
amounts and timing of future operating and development costs may
also differ from those used. Accordingly, reserve estimates are
often different from the quantities of oil and gas that are
ultimately recovered. Since December 31, 1996 (the date of the
estimates) and the date of this report, oil and gas prices have
generally declined. At December 31, 1996, the price of West Texas
Sweet Intermediate Crude (a benchmark crude) as quoted on the New
York Mercantile Exchange, was $25.92 per barrel and the
comparable price at March 31, 1997 was $20.41 per barrel. Prices
received by the Company during the comparable periods for natural
gas were $3.754 per Mcf and $1.78 per Mcf, respectively. The
prices received by the Company for its crude oil have similarly
declined. At such dates, the estimated reserves and future net
revenues may be subject to material downward or upward revision
based upon production history, results of future development,
prevailing oil and gas prices and other factors. A material
decrease in estimated reserves or future net revenues could have
a material adverse effect on the Company and its operations.
References in this report to the Company's engineers are to
Sherwin L. Yoelin, Petroleum Engineers, Inc., which firm is the
Company's independent petroleum engineer.
EAST LOS ANGELES / BANDINI FIELDS
At December 31, 1996, these two separate, but adjacent
accumulations which are located in an industrial area of the City
of Los Angeles, produced a daily average (averaged over the year
<PAGE>
1996) of 111 barrels (85 net) of high gravity (33 degree API) oil
and 53 Mcf of 1200 BTU gas from a total of 7 wells. Estimated
total net proven developed reserves amounted to 2,469,018 barrels
of oil and 5,826,650 Mcf of natural gas, of which 421,838 barrels
and 477,660 Mcf, respectively, were classified as proved
producing.
The properties are located approximately one-half mile apart
and are operated together by the same employees. In the
aggregate, approximately 570 surface acres are covered by Geo's
leases and mineral rights. Geo's rights in both fields are held
by production. The Company owns the mineral rights in the East
Los Angeles Field and in a portion of the Bandini Field, subject
to overriding royalties of 16% of gross revenues. The Bandini
interests are comprised of town-lot leases and of Company-owned
mineral rights; the Bandini interests are subject to royalties
varying from 16% 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. Production in 1996 was below the
wells' capacity due to mechanical problems and breakdowns, and
delays in repairing wells due to inadequate working capital.
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 four out of eighteen existing
wells at the Bandini Field. At East Los Angeles, the Company
operates two producing wells out of a total of fifteen wells. As
a result of obtaining equity financing, Geo intends to spend
approximately $2,165,000 for recompleting the remaining wells and
restoring them to production during 1997 and 1998.
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
<PAGE>
field limits, discover shallower and deeper zones, and develop
production by horizontal drilling. Geo has entered into an
agreement with another oil company for the drilling in mid-1997
of one of these prospects. The Company will have a 25% interest
in the prospect. See "Business."
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 $150,000. See "Certain Relationships and
Related Transactions." On April 1, 1994, Geo acquired all but
five percent of the 25% interest held by Mr. Raydon in the Oxnard
Field for a consideration consisting solely of Common Stock.
The production in this field is from the prolific and
massive Vaca Oil Sand which is found at depths of between 1950
and 2400 feet. In 325 acres of the leases, the thickness of the
oil-saturated sand averages 225 feet. The reservoir is highly
porous (32%) and permeable (1800 Md.). The oil is heavy,
approximately 6-8 degrees API, and is highly viscous.
Consequently, 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 through
vertical wells. 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 1996, 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 has arranged to finance the first phase of the project
development by entering into a contract with Saba Petroleum,
Inc., which will pay for the first $10,000,000 of development
costs and thereby earn a two-thirds interest in the project.
Thereafter, Saba and Geo will jointly develop the field, paying
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for their respective, proportionate shares of costs and receiving
the same share of production.
Geo understands that, in addition to employing traditional
vertical well drilling and production, Saba intends to test a
relatively new technique which has proved successful in the heavy
oil fields of Alberta. This technique is referred to as "Steam-
Assisted Gravity Drainage ("SAGD"). It involves drilling pairs
of wells horizontally for distances of up to 2600 feet through
the pay zone. One well is located above and parallel to the
other at a distance of about 20 feet. The upper well is used for
continuous steam injection, and the lower well is used for
continuous oil production. The oil flows by gravity down to the
lower well and then flows under pressure without the use of
pumping equipment to the surface, because of the high temperature
and pressure created by the steam injection.
One important feature of this technique is that the recovery
of oil in place can approach 70%, as compared to the 22%
estimated to be recovered by conventional methods. The amount of
recoverable reserves is thus expected to be much greater than
that projected based on conventional recovery methods. Since the
Company is unaware of any use of the SAGD process in California,
it is possible that the technique will not achieve the desired
results and that resort to more conventional techniques will be
required.
Geo's independent petroleum engineers have estimated that
proved developed producing and proved developed non-producing
reserves in Geo's Oxnard Field leases amounted as of December 31,
1996, to 976,015 net barrels. Proved undeveloped reserves were a
net 29,566,230 barrels, based on expected results from the use of
conventional drilling methods. In order to produce these total
reserves, the Company would be required to obtain about
$70,800,000 for the drilling of 250 conventional wells. With
full development using conventional methods, future net revenues
of $280,836,000 would be achieved, having a present net worth,
discounted at 10% per annum, of $128,268,773, according to the
report of an independent petroleum engineer.
The revenues using the SAGD method are expected to be
greater but have not yet been calculated. The costs of full
development are expected to be about $45,000,000 for SAGD wells.
Although the Company has agreed to transfer two-thirds of its
interests to Saba in exchange for $10,000,000 in drilling funds,
the Company expects that the use of the SAGD method could cause
its net reserves to increase over the level now projected for
conventional well recoveries as a result of the projected 318%
increase in recoveries by use of such method. There is no
assurance that the SAGD process will achieve the desired results.
<PAGE>
Production from existing (but not newly drilled) wells in
the Field appears to be qualified for the use of a tax credit
under section 29 of the Internal Revenue Code of approximately
$5.95 (for 1996) per barrel. Geo presently produces
approximately 20 barrels per day of oil from four wells in this
field. At January 1, 1997, the oil price was $16.67 per barrel.
Operating costs have averaged approximately $11.74 per barrel
during the one year period ended December 31, 1996. Operating
costs for the first quarter appear to be below the yearly
average. Geo expects that per barrel operating costs will decline
as production per well increases.
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. Under its agreement with
Saba, Geo will retain the disposal wells, but will contribute the
oil field facilities to the venture.
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. Vertical 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. Older drilling permits are in effect as to the balance
of Geo's property, and allow for an adequate number of wells to
develop the 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 423,000
barrels of oil (351,000 net). There are seven principal producing
zones of Miocene and Pliocene age in the Field, ranging from
depths of 6500 to 8400 feet. The wells have been drilled through
these zones, but have not produced from all of them. This
provides the opportunity to commence production from bypassed
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zones in the future. Presently, the gas produced from this
yields no revenues for the Company. The wells are expected to
produce an estimated 896,000 Mcf of gas. A gas processing
facility has been completed by another company, and Geo's wells
are now connected by pipeline to this facility. Geo is
delivering gas but is not been receiving payment for the gas, but
is negotiating an agreement to sell the gas at market prices.
The Company's independent petroleum engineer estimates that
by completing a program to improve equipment and facilities,
change production methods, stimulate the producing zones, and
bring proven bypassed zones on production at a cost of about
$128,000, production could be increased to about 798,000 net
barrels of oil and equivalents. Geo is using a portion of the
financing proceeds to conduct this program.
ORCUTT FIELD
Geo owns two oil and gas leases covering 2990 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
estimated that the formation contains significant oil in place,
drilling operations to date have not been consistently economic.
In 1996, Geo sold nine of its ten producing wells in the
field and 150 acres of its leasehold, retaining one well and 2990
acres. The retained well will be redrilled in 1997 as an high
angle deviated well through the Monterey fractured shale. The
Monterey formation, found at depths of 3500 to 5500 feet, yields
high-gravity oil from zones varying from 125 to 350 feet in
thickness. At December 31, 1996, the sales price of Orcutt oil
was $21.36 per barrel.
ENVIRONMENTAL SERVICES
The Company owns two commercial Class II (as designated by
the Environmental Protection Agency) disposal facilities at which
fluids and solids produced in oil field operations conducted by
Geo and by other operators are injected into the subsurface for
disposal. Such facilities are located at Geo's Oxnard property.
Historically, these operations did not contribute significantly
either to gross revenues or earnings, but Geo has over the last
two years increased its efforts to attract non-affiliates to
dispose of oil field wastes in Geo's facilities for a per-barrel
fee. These efforts have resulted in a significant increase in
revenues at the facilities.
<PAGE>
The most significant increase in revenues has resulted from
the September 1996 granting of a new permit to Geo by the
California Division of Oil and Gas. This permit provides for the
disposal of "tank bottoms" in Geo's wells, in addition to
produced waste water. Tank bottoms consist of the mud, paraffin,
and sand, which accumulate at the bottom of oil production tanks
and must be periodically removed and disposed of. The past
primary method for handling such wastes is an expensive surface
disposal process. Geo can offer substantial savings to oil
operators by disposing of the tank bottoms in its disposal well,
and still maintain an excellent profit margin.
Water and tank bottoms produced by other oil operators are
hauled to Geo's disposal sites, treated, stored, screened, 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. In 1996,
Capitan entered into a transaction with affiliates of Drake
Capital Securities, Inc. by which the latter acquired a portion
of Capitan's interest in the disposal facilities. See "Certain
Relationships and Related Transactions."
The price received by Geo for Class II fluids averages about
$0.60 per barrel for water and $6.50 for tank bottoms. The
Company currently has contracts with two major oil companies, a
utility, and eight independents to dispose of their wastes.
Because there are few high-capacity waste disposal wells
permitted by the California Division of Oil & Gas, and an
expanding need by operators to dispose of their waste water and
tank bottoms, Geo's operations of this type are capable of
substantial growth.
NATURAL GAS STORAGE PROJECT
Geo has been 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. However, the construction of pipelines bringing
large volumes of gas to California has caused the utility to
defer further action on the storage project indefinitely. Geo has
no plans to pursue the development of the underground storage
project.
<PAGE>
ESTIMATED OIL AND GAS RESERVES
At January 1, 1997, the Company's net proved oil and gas
reserves, as estimated by its independent petroleum engineers,
Sherwin D. Yoelin and Greg Martin, amounted to 33,546,716 barrels
of oil and 5,826,650 Mcf of natural gas, of which 3,427,523
barrels and 5,094,378 Mcf were classified as proved developed.
Future cash flows attributable to such proved developed reserves
(before income taxes) are estimated to be $57,001,635 at December
31, 1996, and the discounted value thereof, at 10%, is estimated
to be $33,964,428.
Proved undeveloped reserves were a net 29,566,230 barrels.
In order to develop these reserves, the Company would be required
to obtain about $70,800,000 for the drilling of 250 conventional
wells. With full development using conventional methods, future
net revenues of $280,836,000 would be achieved, having a present
net worth, discounted at 10% per annum, of $128,268,773,
according to the report of an independent petroleum engineer.
A major portion of the Company's oil reserves is comprised
of heavy crude. This portion is highly price sensitive, costs
more to produce than 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 a profit
utilizing current completion and production techniques.
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 amount. 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.
<PAGE>
For additional information concerning the discounted future
net cash flows to be derived from these reserves see Note 11 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 seven
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 cost-effective or otherwise
warranted under the circumstances. Generally, once production
has been established on an oil and gas lease, production must be
maintained in quantities sufficient to pay the costs of
operations, or the lease will terminate of its own accord. Geo
believes that all of its material leases have been kept in force
by production. See "Description of Property-Oxnard Field."
Title to the Company's properties is, in addition, subject
to royalty and overriding royalty interests and to contractual
arrangements customary in the oil and gas industry, to liens for
work and materials, current taxes not yet due and to other minor
encumbrances. Geo has not encumbered any of its properties to
secure bank indebtedness. See "Certain Transactions" for a
description of a lien to a shareholder which will be released
upon payment of Geo's existing bank indebtedness.
MARKETS
GENERAL.
The market for oil and natural gas produced by the Company
depends on factors beyond its control, including the extent of
domestic production and imports of oil and natural gas, the
proximity and capacity of natural gas pipelines and other
transportation facilities, demand for oil and natural gas, the
marketing of competitive fuels and the effects of state and
federal regulation of oil and natural gas production and sales.
The oil and gas industry as a whole also competes with other
industries in supplying the energy and fuel requirements of
industrial, commercial and individual consumers.
<PAGE>
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 commenced
delivery of a substantial portion of its oil to the Far East in
1996. Such reduction of Alaskan supplies to the West Coast has
commenced to the effect of increasing 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, 1996.
All of the Company's acreage is in California.
Developed Developed Undeveloped Undeveloped
Gross Net Gross Net
-------------------------------------------------------
1950 1790 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.
<PAGE>
PRODUCTION
The average sales prices received for and the related costs
of the Company's production for the periods ended December 31,
1994, 1995 and 1996 are shown below.
<TABLE>
<CAPTION>
December 31
-----------
Average Sales Price Received 1994 1995 1996
------------------------
<S> <C> <C> <C>
Oil $15.08 $16.23 $20.35
Gas $ 2.17 $ 1.48 $ 1.91
Average Production Cost per
equivalent barrel (1) $10.00 $7.06 $11.29
</TABLE>
(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 (net to the interest of the Company) of production
of oil and gas for the periods ended December 31, were as
follows:
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Gas (Mcf) 172,907 62,405
Oil and liquids (bbls) 110,560 49,407
</TABLE>
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,
1994, 1995 and 1996.
<TABLE>
<CAPTION>
December 31
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Gross 30 32 23
Net 26 29 22
</TABLE>
<PAGE>
RECENT DRILLING ACTIVITIES
During the three year period ended December 31, 1996, the
Company did not drill or participate in the drilling of
development or exploratory wells. During the quarter ended March
31, 1997, 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. It anticipates executing a lease on 2000
square feet of office space and moving into such space during the
second quarter of 1997.
EMPLOYEES
Geo has ten full time employees, three of whom are general
or administrative; the remaining seven being field employees. Two
of the employees are related to Gerald T. Raydon, the chief
executive officer and principal shareholder of the Company. In
1997, the Company intends to increase the number of its employees
by the addition of a Chief Financial Officer and both
administrative and field personnel in order to conduct the
expansion of its activities. The Company is not a party to any
collective bargaining or other collective labor agreement.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1996, the Company was a defendant to several
lawsuits in which the plaintiff claimed that the Company had
failed to perform certain obligations, which the Company
disputed. The aggregate amount claimed by all plaintiffs is
approximately $28,000. The Company believes that all of such
suits will be settled for less than the amount claimed and that
none is material to the Company or its properties.
In December 1995, the Company filed a law suit in the
Superior Court for the County of Los Angeles, California, styled
Geo Petroleum, Inc. v. Hydrotest, in the amount of $63,000
- ---------------------------------
against a contractor for lost revenue and damages incurred while
performing services on one of the Company's oil and gas
properties. The contractor-defendant has filed for protection
under the U.S. Bankruptcy Code and therefore the suit has been
stayed.
In August 1995, various persons affiliated with the W.
Averell Harriman interests commenced a suit, to which Geo is not
a party, in the Superior Court for the County of Los Angeles,
California, styled (No. SC 037968). The suit has been suspended
until at least January 1, 1998. Prior to such time, the
<PAGE>
plaintiffs had provided collateral which was used to secure a
loan from the Bank to Geo. In the suit, the plaintiffs claim,
inter alia, that the Bank or one of its officials converted
certain dividends that had accrued on the collateral. The
plaintiffs assert that had they known of the conversion, they
would not have consented to a renewal and recollateralization of
the bank loan. Geo is not a party to the litigation, but should
the plaintiffs be successful in the litigation, they might
receive back the collateral which secures repayment of Geo's loan
from the Bank. Geo is nevertheless liable to repay the bank loan,
which has an outstanding balance of approximately $710,000. See
"Certain Relationships and Related Transactions." The litigation
appears to be quiescent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a vote of Security Holders
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since August 1996, the shares of common stock of the Company
have been traded on the Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. Prior to August 1996,
there was no public market for the common stock. The following
table sets for the high and low bid prices of the common stock
for the periods indicated as reported by the National Association
of Securities Dealers, Inc. The average daily trading volume of
the common stock in 1996 was approximately 1592 shares. The
prices set forth below reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent
actual transactions.
Year Ended 1996 HIGH BID LOW BID
Third Quarter 4.00 4.00
Fourth Quarter 4.50 4.50
On March 31, 1997, the reported closing price per share was $6-
7/8.
HOLDERS OF COMMON EQUITY
At December 31, 1996, there were approximately 98 holders of
record known to the Company of the common equity of the Company.
At March 31, 1997, there were approximately 192 holders of record
of the common equity known to the Company.
<PAGE>
DIVIDENDS
The Company has never paid dividends on its common equity
and has no plans to do so in the foreseeable future. There are no
agreements to which the Company is a party or by which its
property is bound which restricts the payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF
OPERATION
The following discussion and analysis for the years ended
December 31, 1996, and 1995, should be read in conjunction with
the Consolidated Financial Statement of the Company and the Notes
thereto and the Selected Financial Data included elsewhere in
this statement.
RESULTS OF OPERATIONS
1996 compared with 1995. During the year ended December 31,
1996, Geo had a net loss of $430,559 and cash used in operations
--------
of $325,632, compared to net income of $153,401 and cash provided
--------
by operations of $201,844 for 1995. Oil and gas revenues
decreased 47% to $823,695 for 1996 compared to $1,563,206 for
1995. This was attributable mostly to decreased production as a
result of the idling or intermittent production of a significant
number of wells, due to inadequate funds for the repair and
maintenance of the wells. A 25% increase in average oil prices,
to $20.35 per barrel by year-end, and a 4% increase in gas
prices, to $1.91 per Mcf, partly offset the decreased production.
Average production costs per barrel of oil and equivalents
increased 60% to $11.29 for 1996, compared to $7.06 for 1995.
The 1996 percentage decrease in production revenues exceeded the
percentage decrease in costs, causing a greater allocation of
fixed and other costs to a smaller amount of BOE during 1996. In
the Company's experience, increased production per well, as
planned by the Company for 1997 could result in a decrease of
costs per BOE.
Lease operating expenses for 1996 amounted to $675,292, as
compared to $943,283 for 1995, a 28% decrease over the previous
year, reflecting the smaller number of wells on production and
the reduced level of maintenance expenditures.
<PAGE>
General and administrative expenses for 1996 were $277,107,
as compared to $402,978 for 1995, a decrease of 31%. While
substantial administrative costs were incurred in connection with
preparing, offering, negotiating and consummating equity
offerings and joint ventures, and in registering the Company's
shares, certain legal, investment banking, and accounting
expenses in connection with such offerings were offset against
paid-in capital.
Interest expense for 1996 was $360,581, as compared to
$377,706 for 1995, a decrease of 5%. This decrease was due to
the reduction of loan principal amounts. The Company's provision
for depletion and depreciation decreased to $88,596 for 1996, as
compared to $196,484 for 1995, a decrease of 55%.
CAPITAL RESOURCES AND LIQUIDITY
Financial Position. At December 31, 1996, the Company's
total assets increased by approximately $2,491,276 over December
31, 1995, primarily as a result of the capital obtained from the
sale of common stock in private placements. At December 31,
1996, the Company had a working capital surplus of $1,566,382 as
compared to a working capital deficiency of $2,303,360 at
December 31, 1995. This represents an improvement in the
Company's working capital position of $3,869,742. In 1996 and
prior years, the net cash flow from the properties of the Company
has been sufficient to fund its costs of operations but
insufficient to fund both such costs and its debt servicing
requirements.
The Company's primary sources of liquidity and capital
resources in the near term will consist of the working capital on
hand and the funds derived from its oil and gas production and
water disposal operations. The Company intends to invest the
funds remaining after debt reduction in order to commence
producing its proved developed non-producing and proved
undeveloped reserves. These activities are for the purpose of
increasing production and revenues. Capital resources will be
augmented by any such funds as may be derived from the sale of
equity in the Company and transfer of partial interests in its
properties in exchange for development capital. The Company's
net revenues from oil and gas sales in excess of production and
operating expenses during 1996 and 1995 were $148,403 and
$619,923, respectively.
Cash used in operations for the year ended December 31,
1996, was $325,632, compared to cash provided by operations of
$201,844 for the year ended December 31, 1995. This increase in
cash used in operations was primarily a result of decreased
revenues resulting from the circumstances set forth above in this
Discussion.
<PAGE>
During 1996, Geo sought 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 and expansion of
the shareholder base. The Company then sold shares of its common
stock and warrants in private offerings, which enabled the
Company to eliminate its working capital deficiency and reduce
its debt and interest obligations. The funds were received too
late in the year to allow Geo to commence its plan of performing
improvement and remedial work on its existing properties. Such
plan is now scheduled for implementation in 1997. The farm-out
agreement with Saba Petroleum will cause the drilling of a large
number of wells on Geo's properties if the initial wells are
successful. All of these activities are expected to
substantially increase the revenues of the Company and permit it
to continue to operate on a positive cash flow basis.
SOURCES OF CAPITAL RESOURCES. During the year ended
December 31, 1996, the Company was able to extend the maturity
date of its bank credit facility in the amount of $1,460,000 to
January 1, 1998. 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. The sum of $750,000 from the
proceeds of the equity offering was used to pay down the loan to
$710,000.
The Company's cash used in investing activities, primarily
additions to its oil and gas properties, was $270,565 in 1996 and
$451,551 in 1995. This was financed in 1996 by common stock sold
in private placements, by cash from by operations, and by the
proceeds from the issuance of additional notes payable.
Net cash provided by financing activities amounted to
$2,724,458 in 1996 and $210,398 in 1995. This cash was primarily
the net proceeds from the sale of common stock and warrants in
1996 and the issuance of notes payable in 1995.
TRENDS. As a result of successfully completing its equity
offerings, the redemption of preferred stock and promissory
notes, as well as the paydown of its bank loan, the costs of
capital and interest costs for the Company will decrease in
1997.The Company also expects that it will be able to increase
its revenues by investing a portion of the proceeds of the
offerings in remedial and recompletion operations and development
drilling. Such operations commenced promptly after obtaining the
equity funds. Due to the expected increase in activities, the
Company anticipates that its general and administrative expenses
will measurably increase for the purpose of hiring additional
personnel, expanding its administrative offices and increasing
compensation to its existing staff, including its president.
<PAGE>
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 commenced shipping a large portion of its oil production
from Alaska to the Far East. Such reduction of Alaskan supplies
to the West Coast has commenced to have the effect of increasing
the price paid for California crude oil, which has increased by
an average of $4.01 per barrel during 1996 as compared to 1995.
Geo anticipates that there will be a gradual strengthening
in the prices for both its oil and gas production, but that
cyclical swings in pricing will likely occur. The Company will
be subject to variations in cash flow depending upon changes in
prices paid for oil and gas. Based upon historical swings in
prices, the Company does not envision a situation where
reductions in prices will create an operating loss from its
properties at the field level. Severe drops in prices would,
however, strain the Company's ability to conduct remedial work
using its revenues.
CAPITAL BUDGET
During 1997, the Company will utilize the proceeds of its
equity offerings, after payment of a portion of its debt and
accounts payable, primarily for the repair, reworking, and
recompletion of wells and improvement of production facilities in
the East Los Angeles/Bandini and Rosecrans Fields. The amount
budgeted is $1,650,000, to be spent on 27 wells and on the
related production facilities.
INFLATION
In recent years inflation has not had a significant impact
on the Company, its operations or financial condition.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements and supplementary data
for the Company are included as part of this form 10-KSB:
Page
Number
------
Report of Ernst & Young LLP, Independent Auditors F-1
Balance Sheets at December 31, 1996 and 1995 F-2
Statements of Operations
for the years ended December 31, 1996 and 1995 F-4
Statements of Stockholders' Equity
for the years ended December 31, 1996 and 1995 F-5
Statements of Cash Flows
for the years ended December 31, 1996 and 1995 F-6
Notes to Financial Statements F-9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company changed its independent accountants as of the
end of its 1994 year. Deloitte & Touche LLP had audited the
financial statements of Geo for the year ended December 31, 1994.
There were no disagreements with Deloitte & Touche LLP respecting
accounting or auditing matters. Effective January 1, 1996, Geo
as a matter of business judgment engaged the services of Ernst &
Young LLP for Geo's 1995 audit. The change was approved by the
Board of Directors of Geo.
A letter confirming the foregoing from Deloitte & Touche LLP
was filed as an exhibit to Geo's Form 10-SB 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>
Report of Independent Auditors
Stockholders and Board of Directors
Geo Petroleum, Inc.
We have audited the accompanying balance sheets of Geo Petroleum,
Inc. as of December 31, 1996 and 1995 and the related statements
of operations, stockholders' equity, and cash flows for the years
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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Geo Petroleum, Inc. at December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Los Angeles, California
March 28, 1997
Page F-1
<PAGE>
Geo Petroleum, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,228,826 $ 100,565
Accounts receivable:
Accrued oil and gas revenues
(net of allowance for doubtful
accounts of $17,775 in 1995) 151,586 161,308
Joint interest and other 419,361 200,026
Prepaid expenses and other, net 52,876 52,413
---------------------------
Total current assets 2,852,649 514,312
Property and equipment:
Oil and gas properties 4,927,176 4,698,877
Office furniture and equipment 51,989 65,948
---------------------------
4,979,165 4,764,825
Accumulated depletion and
depreciation (1,098,805) (1,037,404)
---------------------------
3,880,360 3,727,421
---------------------------
Total assets $ 6,733,009 $ 4,241,733
===========================
SEE ACCOMPANYING NOTES.
</TABLE>
Page F-2
<PAGE>
Geo Petroleum, Inc.
Balance Sheets (Continued)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Accrued royalties $ 431,388 $ 438,507
Trade and other 396,110 283,161
Dividends payable 14,104 20,120
Accrued expenses 119,643 107,821
Current portion of notes payable 325,022 1,968,063
---------------------------
Total current liabilities 1,286,267 2,817,672
Long-term portion of notes payable 530,000 -
Redeemable convertible preferred stock,
$1,000 par value; authorized 100,000
shares; issued and outstanding 101.29
and 505.15 shares at December 31, 1996
and 1995, respectively 101,289 505,150
Stockholders' equity:
Common stock, no par value; authorized
50,000,000 shares; issued and
outstanding 7,603,324 and 4,477,913
shares at December 31, 1996 and 1995,
respectively 6,615,634 2,157,702
Accumulated deficit (1,800,181) (1,238,791)
---------------------------
Total stockholders' equity 4,815,453 918,911
---------------------------
Total liabilities and stockholders'
equity $ 6,733,009 $ 4,241,733
===========================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 823,695 $ 1,563,206
Other revenue 176,043 552,544
Interest income 6,208 3,102
---------------------------
1,005,946 2,118,852
Expenses:
Lease operating expenses 675,292 943,283
Depletion and depreciation 88,596 196,484
Amortization of deferred loan costs 34,929 45,000
General and administrative 277,107 402,978
Interest expense 360,581 377,706
---------------------------
Income (loss) before income taxes (430,559) 153,401
Provision for income taxes - -
---------------------------
Net income (loss) (430,559) 153,401
Less preferred stock dividends (130,831) (20,120)
---------------------------
Net income (loss) applicable to
common stock $ (561,390) $ 133,281
===========================
Net income (loss) per share of
common stock $ (0.11) $ 0.03
===========================
SEE ACCOMPANYING NOTES.
</TABLE>
Page F-4
<PAGE>
Geo Petroleum, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Number of
Common
Shares Common Accumulated
Outstanding Stock Deficit Total
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1994 4,288,454 $ 2,147,702 $(1,372,072) $ 775,630
Net income - - 153,401 53,401
Issuance of common stock
as payment for services 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
Net loss - - (430,559) (430,559)
Issuances of common stock:
Sold in private
placements 2,320,506 3,779,790 - 3,779,790
Conversion of redeemable
convertible preferred
stock and related
dividends payable 156,749 391,872 - 391,872
Exchange of certain notes
payable and related
accrued interest 74,570 186,428 - 186,428
Payment for services 76,040 79,842 - 79,842
Acquisition of Drake
Investment Corp. 497,546 20,000 - 20,000
Preferred stock dividends - - (130,831) (130,831)
-----------------------------------------------------
Balance at
December 31, 1996 7,603,324 $ 6,615,634 $(1,800,181) $ 4,815,453
=====================================================
SEE ACCOMPANYING NOTES.
</TABLE>
Page F-5
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (430,559) $ 153,401
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Depletion and depreciation 88,596 196,484
Amortization of deferred loan costs 34,929 45,000
Payment in common stock for services 79,842 10,000
Changes in operating assets and liabilities:
Accounts receivable (209,613) (107,626)
Prepaid expenses and other (463) (46,619)
Accounts payable 99,814 (77,920)
Accrued expenses 11,822 29,124
---------------------------
Net cash (used in) provided by
operating activities (325,632) 201,844
INVESTING ACTIVITIES
Acquisition of Drake Investment Corp. 20,000 -
Additions to property and equipment (396,565) (451,551)
Sale of property 106,000 -
---------------------------
Net cash used in investing activities (270,565) (451,551)
</TABLE>
Page F-6
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from notes payable $ 171,246 $ 307,000
Payments on notes payable (1,075,178) (121,000)
Payments in common stock for interest 43,565 -
Bank overdraft - (26,002)
Common stock sold in private placements 3,779,790 -
Preferred stock sold 23,500 50,400
Dividends paid (72,523) -
Preferred stock redeemed (145,942) -
---------------------------
Net cash provided by financing
activities 2,724,458 210,398
---------------------------
Net increase (decrease) in cash and
cash equivalents 2,128,261 (39,309)
Cash and cash equivalents at
beginning of year 100,565 139,874
---------------------------
Cash and cash equivalents at
end of year $ 2,228,826 $ 100,565
===========================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year
for interest $ 308,261 $ 414,821
===========================
Cash paid during the year for
income taxes $ 810 $ 800
===========================
</TABLE>
<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 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, 1996. Also, the Company
issued 189,459 shares of common stock to a consulting company as
payment for services that were performed in 1995 and 1994.
During 1996, the Company issued 66.25 shares of the Company's
redeemable convertible preferred stock in exchange for the
retirement of certain notes payable aggregating $66,250.
Additionally, the Company issued 74,570 shares of the Company's
common stock in exchange for the retirement of certain notes
payable and related accrued interest aggregating $186,428. The
Company issued 156,749 shares of the Company's stock in exchange
for the retirement of 347.67 shares of the Company's redeemable
convertible preferred stock and related dividends payable
aggregating $391,872. Also, the Company issued 51,040 shares of
common stock to the holders of the collateral for the note
payable to bank as compensation for extending the availability of
the collateral for the note to January 1, 1998. Also, the Company
issued 25,000 shares of common stock for legal services that were
performed in 1996.
SEE ACCOMPANYING NOTES.
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Geo Petroleum, Inc. (the "Company") is an oil and gas production
company founded in 1986 and incorporated in the state of
California. The Company engages in the development, production
and management of oil and gas properties located in California.
COMMON STOCK SPLIT
On April 30, 1996, the Company's common stock was split at a rate
of 2.5505-for-1 in accordance with a resolution of the Company's
Board of Directors. All references to the number of common stock
shares contained in these financial statements have been adjusted
to reflect the stock split.
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 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. Certain
deferred loan costs were amortized over five years through
September 1995 (see Note 4), and related amortization expense was
$45,000 in 1995. Other deferred loan costs of $77,992 were
incurred in 1996 and are being amortized over the term of the
Company's note payable to bank which is due January 1, 1998.
Related amortization expense was $34,929 in 1996.
Page F-9
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 of its 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 additional in Note 11.
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, 1996 and 1995 was
$83,417 and $196,484, respectively.
Substantially all additions to oil and gas properties in 1996 and
1995 relate to recompletions of existing producing or previously
producing wells. During 1996, the Company received of $166,000
from the sale of certain oil and gas interests which were
credited to property and equipment.
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT (CONTNUED)
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 $5,179 and $5,198 for the years
ended December 31, 1996 and 1995, 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 1996 and 1995 which
comprised approximately 82% and 53% of gross oil and gas sales,
respectively.
OTHER REVENUE
Included in other revenue 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.
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) per common share is based upon average number
of outstanding common shares, adjusted for the stock split
described above, during each year (4,976,764 shares in 1996 and
4,383,183 shares in 1995). Such calculations for 1996 do not
assume any conversion of the redeemable convertible preferred
stock into common stock or the exercise of outstanding warrants
into common stock because such assumptions are anti-dilutive.
Such calculations for 1995 do not assume any conversion of the
redeemable convertible preferred stock into common stock because
determination of the conversion price was subject to future
events at that time.
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.
2. ACQUISITION OF DRAKE INVESTMENT CORP.
On April 9, 1996, the Company acquired all of the outstanding
common stock of Drake Investment Corp. ("Drake") in exchange for
497,546 shares of the Company's common stock. The primary purpose
of the acquisition was to expand the base of the Company's
stockholders. Drake's net assets were comprised primarily of cash
and cash equivalents. This transaction was accounted for as a
purchase in accordance with Accounting Principles Bulletin
No. 16, "Business Combinations," and the transaction was recorded
at the fair value, $20,000, of the assets received for the
Company's common stock.
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
3. FARM-OUT OF VACA OIL SANDS PROPERTY
On December 23, 1996, the Company entered into an agreement with
Saba Petroleum, Inc. ("Saba") to farm-out two-thirds (2/3) of the
Company's rights and interests in the Vaca Oil Sands property in
exchange for Saba to expend a minimum of $10,000,000 in operating
and developing the property over a two year period from the date
of the agreement. Saba has the right to receive all revenues from
the properties until its costs are recouped. Subsequent thereto,
the Company shall participate as to its one-third (1/3) interest
in the property and shall co-operate the property with Saba.
If Saba does not expend the agreed sum of $10,000,000 within the
two year term or ceases operations at the property for a period
of 90 days after assuming operations, Saba shall re-assign all
interests in the property to the Company except for any property
interests acquired by Saba and spacing units, as defined in the
agreement, around each well Saba wishes to retain.
The agreement calls for Saba to attempt to acquire certain other
interests in the property not previously acquired by the Company.
The Company has the option to participate as to a one-third (1/3)
interest in such acquisitions by reimbursing Saba for one-third
(1/3) of its acquisition cost.
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
Note payable to bank $ 710,000 $ 1,460,000
Notes payable to investors 145,022 508,063
---------------------------
855,022 1,968,063
Less current portion 325,022 1,968,063
---------------------------
Total long-term debt $ 530,000 $ -
===========================
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
NOTES PAYABLE TO INVESTORS
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 certain of the notes have extended the
maturities of the notes to various dates in 1997, and all of the
notes are secured by interests in the Company's oil and gas
properties. During 1996, $171,246 of new notes payable to
investors were issued, $325,178 of notes payable were repaid,
$142,863 of notes payable were exchanged for shares of the
Company's common stock, and $66,246 of notes payable were
exchanged for shares of the Company's redeemable convertible
preferred stock.
NOTE PAYABLE TO BANK
The note payable to bank bears interest at prime plus 2.0%. At
December 31, 1996 and 1995, the prime rate was 8.25% and 8.5%,
respectively. Interest payments are due monthly. During 1996 and
1995, the bank extended the maturity of the note several times.
On October 11, 1996, retroactive to June 15, 1996, the bank
amended certain terms and extended the maturity date of the note
from June 15, 1996 to January 1, 1998, including a $750,000
principal payment due January 15, 1997 and subsequent principal
payments in the amount of $20,000 per month due on the 15th of
each month beginning April 15, 1997. On December 13, 1996, the
Company made the principal payment of $750,000. As of
December 31, 1996, the Company was in compliance with all loan
covenants.
During most of 1995 and 1996, the Company was not in compliance
with certain loan covenants, including restrictions on incurring
additional debt and failure to make certain payments to outside
vendors on a timely basis. While the bank did not take any action
regarding such noncompliance, the covenants were not waived
through this period. As a result, the bank note payable was
classified as current at December 31, 1995.
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
NOTE PAYABLE TO BANK (CONTINUED)
In 1990, the Company issued 273,669 shares of common stock, an
option to purchase 180,660 additional shares of common stock at
$2.35 per share and a recorded deed of trust on 20% of the
Company's interest in its Vaca Oil Sands property to certain
parties in exchange for those parties providing the collateral,
35,000 shares of Union Pacific Corp. common stock, for the
Company's note payable to a bank. The consideration issued was
valued at $300,000, its estimated fair market value, and was
amortized as additional loan costs over five years. The 35,000
shares of Union Pacific Corp. common stock is held in a trust and
had an approximate value of $2,104,375 at December 31, 1996. In
the event of default on the bank note payable, the parties
providing the collateral may take steps to recover from the
Company the value of any collateral taken by the bank. The
collateral agreements and the stock purchase option expired on
September 11, 1995. During 1996, in connection with the extension
of the maturity date of the bank note payable to January 1, 1998,
the collateral agreement was extended to January 1, 1998. As
compensation for this extension, the Company issued 51,040 shares
of the Company's common stock to the owners of the collateral.
The parties agreed that the stock issued had a value of $53,592
or $1.05 per share.
5. 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 $127,000 and $257,024 in
1996 and 1995, respectively. At December 31, 1996 and 1995, the
Company had a net receivable balance of $191,230 and $155,686,
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 Oil 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 Oil Sands property from the
principal officer/shareholder. In exchange for these interests,
the Company issued 1,148,054 shares of common stock valued at
$103,421, which was the approximate cost of the properties to the
principal officer/shareholder. At the date of the acquisition in
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
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, the Company had notes payable to relatives
of the principal officer/shareholder totaling $53,563. No such
amounts were payable at December 31, 1996.
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 6).
During 1996, notes payable by the Company to a relative of the
principal officer/shareholder totaling $46,250 were converted
into 46.25 shares of the Company's redeemable convertible
preferred stock aggregating $46,250 (see Note 6).
During 1996, notes payable by the Company to a relative of the
principal officer/shareholder totaling $121,850 were converted
into 48,740 shares of the Company's common stock aggregating
$121,850 (see Note 7). Additionally, 24,370 warrants were issued
to purchase a share of the Company's common stock at $3.00 per
share which expire at various dates during 1999.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1994, the Company authorized 100,000 shares of preferred
stock with a par value of $1,000 per share. 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 (see Note 10). As originally
issued, the preferred stock was 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. During the year ended
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
December 31, 1996, the Company and the holders of the preferred
stock agreed that each share of the preferred stock could be
converted into 400 shares of the Company's common stock and 200
warrants to purchase a share of the Company's common stock at
$3.00 per share which expire at various dates during 1999.
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 fee payment for services
performed in 1995.
Also during December 1995, 17 holders of notes payable totaling
$454,750 converted such notes into 454.75 shares of the Company's
redeemable convertible preferred stock.
In January 1996, the Company issued 23.5 shares of its redeemable
convertible preferred stock to two investors for cash totaling
$23,500.
During 1996, three holders of notes payable totaling $66,250
converted such notes into 66.25 shares of the Company's
redeemable convertible preferred stock.
During 1996, 347.69 shares of the Company's redeemable
convertible preferred stock totaling $347,668 were converted into
139,067 shares of the Company's common stock and 69,534 warrants
to purchase a share of the Company's common stock at $3.00 per
share which expire at various dates during 1999.
During 1996, accrued dividends on the Company's redeemable
convertible preferred stock totaling $44,204 were converted into
17,682 shares of the Company's common stock and 8,841 warrants to
purchase a share of the Company's common stock at $3.00 per share
which expire at various dates during 1999.
The Company believes that the fair value of its issued redeemable
convertible preferred stock, at its date of issuance,
approximates its carrying value in the Company's balance sheets.
This is based upon the sales of shares of the preferred stock at
par value for an equivalent amount of cash in December 1995 and
during 1996, to unrelated parties in arm's length transactions.
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
7. COMMON STOCK
During 1996, the Company's Articles of Incorporation were amended
to provide for an authorized capital of fifty million shares of
common stock.
In December 1996, the Company sold 522,000 shares of the
Company's common stock attached with 522,000 warrants to purchase
a share of the Company's common stock at $3.00 per share, which
expire at various dates during 1999, at a price of $2.50 per
share for cash totaling $1,305,000, before related commissions,
costs and expenses of $187,301.
On December 31, 1996, the Company sold 1,750,000 shares of the
Company's common stock to affiliates of Saba at a cash price of
$1.50 per share for cash totaling $2,625,000 (see Note 3), before
related costs and expenses of $63,159. Additionally, the Company
sold 300,000 warrants at a price of $15,000 to Saba for its
commission. Each warrant provides for the purchase of a share of
the Company's common stock at $3.00 per share and expire on
December 31, 1999.
At December 31, 1996, an aggregate of 957,946 warrants to
purchase a share of the Company's common stock at $3.00 per share
which expire at various dates during 1999 were outstanding.
8. INCOME TAXES
Deferred income taxes result from temporary differences in the
recognition of revenues and expenses for financial accounting and
tax reporting purposes. Net deferred income taxes were composed
of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
Deferred income tax asset - operating
loss carryforwards $ 1,700,000 $ 1,450,000
Deferred income tax liability -
differences between book and tax
basis of property (1,120,000) (1,050,000)
Valuation allowance (580,000) (400,000)
---------------------------
Net deferred income taxes $ - $ -
===========================
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
As of December 31, 1996 and 1995, the Company had estimated 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 $4,290,000 and $3,740,000 for 1996 and
1995, respectively, and expire during the years 2001 through
2009. For state income tax purposes, net operating loss
carryforwards amounted to approximately $2,680,000 and $1,950,000
for 1996 and 1995, respectively, and expire during the years 2004
through 2010. Due to the "change in ownership" provisions of the
Tax Reform Act of 1986, utilization of the Company's net
operating loss carryforwards may be subject to a substantial
limitation if a greater than 50% ownership change, as defined,
occurs subsequent to the incurrence of the losses. The Company is
delinquent in filing its 1994 and 1995 income tax returns.
9. COMMITMENTS
Total rental expense incurred under all lease agreements was
$43,598 and $31,346 for the years ended December 31, 1996 and
1995, respectively. At December 31, 1996, all of the Company's
leases were on a month-to-month basis.
10. EVENTS SUBSEQUENT TO DECEMBER 31, 1996
Subsequent to December 31, 1996, $145,022 of notes payable to
investors were exchanged for shares of the Company's common stock
and warrants to purchase shares of the Company's common stock on
a basis consistent with those exchanged during 1996 (see Notes 4
and 5).
Also subsequent to December 31, 1996, 101.29 shares of the
Company's redeemable convertible preferred stock totaling
$101,289 were converted into shares of the Company's common stock
and warrants to purchase shares of the Company's common stock on
a basis consistent with those converted during 1996 (see Note 6).
11. OIL AND GAS OPERATIONS (UNAUDITED)
At December 31, 1996, 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.
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
11. OIL AND GAS OPERATIONS (UNAUDITED) (CONTINUED)
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
Costs incurred in oil and gas producing activities were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Property acquisition costs:
Proved properties $ - $ 90,289
Exploration costs - -
Development costs 412,974 346,585
---------------------------
Total costs $ 412,974 $ 436,874
===========================
</TABLE>
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Reserve information presented herein is based upon reports
prepared by the Company's independent petroleum reservoir
engineer. Reserve estimates are inherently imprecise and
estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, these estimates
are expected to change as future information becomes available.
Proved oil and gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved developed oil and gas reserves are those expected to be
recovered through existing wells with existing equipment and
operating methods.
Net quantities of crude oil and natural gas for the Company as of
the beginning and the end of the years ended December 31, 1996
and 1995, as well as the changes in proved reserves during such
years, are set forth in the tables below:
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
11. OIL AND GAS OPERATIONS (UNAUDITED) (CONTINUED)
OIL AND GAS RESERVE DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
------------------------------
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 3,200 5,531 3,495 5,329
Revisions of previous
estimates 649 358 (193) 314
Purchase of reserves in place - - - -
Production (45) (62) (102) (112)
------------------------------
End of year 3,804 5,827 3,200 5,531
==============================
Proved developed non-producing
Vaca Oil Sands reserves, net:
End of year 993 - 775 -
==============================
Proved undeveloped Vaca Oil
Sands reserves, net:
End of year 29,566 - 27,614 -
==============================
</TABLE>
The increase in reserves during the year ended December 31, 1996
is due primarily to the addition of proved undeveloped reserves
in the East Los Angeles/Bandini Fields.
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
11. OIL AND GAS OPERATIONS (UNAUDITED) (CONTINUED)
OIL AND GAS RESERVE DATA (CONTINUED)
With respect to the Vaca Oil Sands property, which contains
nearly all of the Company's proven undeveloped reserves, the
Company in 1995 had obtained permits for the drilling of
120 wells. Because of the approximately $66,600,000 capital
expenditure required to develop the property fully, management
decided to obtain a partner who could provide the funds required
to at least commence development. In December 1996, the Company
entered into a farm-out agreement with Saba to provide at least
$10,000,000 for the operation and development of the property,
for which Saba would earn a two-thirds interest in the property.
The development method envisioned by Saba provides for the
drilling of horizontal wells extending as much as 2,600 feet
horizontally. Each well will be twinned by a parallel borehole
above it into which steam will be injected continuously. The
heated, thinned oil will flow from the lower borehole.
The cost allocated to the Vaca Oil Sands undeveloped reserves is
insignificant at December 31,1996 and the estimated volume of
reserves allocated to the property has been excluded from the
calculation of the Company's depletion expense through
December 31, 1996. 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 those reserves commences.
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 the Company's proved reserves at December 31, 1996 and 1995,
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
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
11. OIL AND GAS OPERATIONS (UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING
TO PROVED RESERVES (CONTINUED)
costs. Such costs include, but are not limited to drilling
development wells and installation of production facilities.
Inflation and other anticipatory costs are not considered until
the actual cost change takes effect. Estimated future income tax
expenses are computed using the appropriate year-end statutory
tax rates. Consideration is given to the effects of permanent
differences, tax credits and allowances. A discount rate of 10%
is applied to the annual future net cash flows after income
taxes.
The methodology and assumptions used in calculating the
standardized measure are those required by FASB Statement No. 69.
It is not intended to be representative of the fair market value
of proved reserves. The valuations of revenues and costs do not
necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other
factors are considered in evaluating known and prospective oil
and gas reserves.
The standardized measure of discounted future net cash flows
relating to proved developed oil and gas reserves, which excludes
the Company's proved undeveloped Vaca Oil Sands reserves,
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Future cash inflows $ 109,744 $ 60,853
Future production and development costs (42,621) (29,699)
Future income tax expenses (22,736) (8,727)
---------------------------
Future net cash flows 44,387 22,427
10% annual discount for estimated
timing of cash flows (20,970) (8,735)
---------------------------
Standardized measure of discounted
future net cash flows $ 23,417 $ 13,692
===========================
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
11. OIL AND GAS OPERATIONS (UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING
TO PROVED RESERVES (CONTINUED)
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
$20.35 per barrel and $15.84 per barrel at December 31, 1996 and
1995, respectively, and the average gas price, a combination of
spot gas prices and contract prices, was $1.91 per thousand cubic
feet and $1.84 per thousand cubic feet at December 31, 1996 and
1995, respectively.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS
The changes in standardized measure for discounted future net
cash flows relating to proved developed reserves, which excludes
the Company's proved undeveloped Vaca Oil Sands reserves,
follows:
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements (continued)
11. OIL AND GAS OPERATIONS (UNAUDITED) (CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Sales of oil and gas produced, net
of production costs $ (132) $ (620)
Net changes in prices and
production costs 16,948 (763)
Changes in estimated future
development costs (4,186) (332)
Development costs incurred during
the period 413 347
Revisions of previous quantity
estimates 6,738 (1,252)
Purchase of reserves in place - -
Accretion of discount 1,369 1,496
Net change in income taxes (8,452) 1,022
Other, principally changes in timing
of estimated production (2,973) (1,163)
---------------------------
Net increase (decrease) 9,725 (1,265)
Beginning of year 13,692 14,957
---------------------------
End of year $ 23,417 $ 13,692
===========================
</TABLE>
<PAGE>
PART III
ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION
Exhibit Sequential
Number Description of Exhibit Location No.
2.1 Agreement of Merger and Plan of Reorganization between
Drake Investment Corp. and Geo Petroleum, Inc. dated
November 1, 1995.*
2.2 Certificate of Approval of Agreement of Merger between
Drake Investment Corp. and Geo Petroleum, Inc., dated
April 9, 1996.*
2.3 Permit to issue stock in merger, dated March 26,1996.*
3.1 Articles of Incorporation of Geo Petroleum, Inc., filed
November 6, 1986.*
3.1(a) First Amendment to Articles of Incorporation of Geo
Petroleum, Inc. filed June 1, 1994.*
3.1(b) Second Amendment to Articles of Incorporation of Geo
Petroleum, Inc. filed November 7, 1995.*
3.1(c) Third Amendment to Articles of Incorporation of Geo
Petroleum, Inc. filed December 5, 1995.*
3.2 By-laws of Geo Petroleum, Inc., dated November 30,
1986.*
4.1 Corporate Resolution establishing Rights, Preferences
and Privileges of Preferred Stock, Series A, dated
August 23, 1994.*
4.1(a) Form of Preferred Stock Certificate.*
4.2 Form of Common Stock Certificate.*
4.3 Form of Promissory Note, Deed of Trust, and Assignment
of Oil Payment of Geo Petroleum, Inc.*
10.1 Form of Oil and Gas lease covering various lands in
Bandini oil field unit (exemplar), dated January 2,
1975.*
10.2 Assignment of Overriding Royalty Interest (East Los
Angeles/Bandini) dated February 1, 1979, from Irving
Terry and Esther Terry to Wayne Hoylman and Helen W.
Hoylman (exemplar).*
<PAGE>
10.3(a) Form of Oil and Gas lease covering various lands in
Oxnard Field (Vaca Tar Sand Unit) (exemplar), dated
January 1, 1987.*
10.3(b) Pooling Agreement, Vaca Tar Sand Unit, Ventura County,
California.*
10.4 Form of Oil and Gas lease covering various lands in the
Rosecrans Oil Field, Los Angeles County, CA.
(exemplar), dated October 15, 1956.*
10.5 Gas Sales Contract dated August 31, 1991, between Geo
Petroleum Inc. and Capitan Resources, Inc. (East Los
Angeles/Bandini fields).*
10.6(a) Gas Sales Contract dated August 9, 1991 between Pacific
Tube Company and Geo Petroleum, Inc.*
10.6(b) Assignment of Gas Sales Contract, Geo Petroleum, Inc.
To Capitan Resources, Inc.*
10.7 Oil Sales Contract dated August 1, 1995 between Geo
Petroleum, Inc. and Kern Oil & Refining (East Los
Angeles/Bandini fields).*
10.8(a) Oil Sales Contract dated November 22, 1994 between Geo
Petroleum, Inc. and Texaco Trading and Transportation
Inc. (Oxnard).*
10.8(b) Oil Sales Contract dated July 5, 1995 between Geo
Petroleum, Inc. and Unocal Corp. (Rosecrans field).*
10.9 Oil Sales Contract between Geo Petroleum, Inc. and Kern
Oil & Refining Co., dated July 10th, 1995 (Orcutt
field).*
10.10 Oil and Gas Lease between Gene Careaga, et al and
Central California Oil Co., (Geo's predecessor in
interest) (Orcutt Field) dated October 3, 1972.*
10.13 Water Disposal Agreement between J.W. Hansen and Geo
Petroleum, Inc. dated May 14, 1992.*
10.14 Water Disposal Agreement between Geo Petroleum, Inc.
and Capitan Resources, Inc. dated June 1, 1990.*
10.15 Services and Drilling Master Contract (water disposal)
between Unocal Corporation and Geo Petroleum, Inc.
dated February 3, 1993.*
<PAGE>
10.16 Term Loan Agreement, as amended and extended to June
15, 1996, dated June 6, 1994, between First Los Angeles
Bank (now City National Bank) and Geo Petroleum, Inc.*
10.17 Letter Agreement between Geo Petroleum, Inc. and
William Rich III, as attorney in fact, (Harriman
interests) dated September 6, 1990.*
10.18 Surface Use Agreement dated March 31, 1978, as amended,
between Los Angeles and Salt Lake Railroad Company and
Union Pacific Railroad Co. and Irving Terry. (East Los
Angeles and Bandini fields).*
10.19 Standard Industrial Lease dated January 1, 1979 between
Irving Terry et ux. and Western Avenue Properties (East
Los Angeles tank farm).*
10.20 Deed from Terry Oil Company, Inc. dated February 5,
1979 to Western Avenue Properties, covering various
rights and easements for oil operations (East Los
Angeles/Bandini pipeline easements).*
10.21 Assignment and Bill of Sale, Rosecrans Area Leases, by
and between Kelt California, Inc., and Geo Petroleum,
Inc., dated December 1, 1994.*
10.23 Quitclaim Deed, Assignment of Leases and Bill of Sale,
East Los Angeles and Bandini Oil Fields, by and between
Western Avenue Properties, a California general
partnership, and Geo Petroleum, Inc., dated January 19,
1990.*
16.1 Consent of Sherwin D. Yoelin to use all information
from his evaluation reports in this document.*
*Filed as exhibits to Registrant's Form 10 Registration Statement
dated June 6, 1996 and incorporated herein by reference thereto.
Form 10-KSB:
16.2 Farmout Agreement dated December 31, 1996 by and
between Geo Petroleum, Inc. as Assignor and Saba
Petroleum, Inc. as Assignee with respect to Geo's oil
properties in the Oxnard Field, Ventura County,
California. Filed with Application for an Order
Granting Confidential Treatment to an Exhibit Filed
With the Report of Geo Petroleum, Inc. on Form 10-KSB.
16.3 April 9, 1997 Consent of Sherwin D. Yoelin to use all
information from his evaluation reports in this
document.
<PAGE>
Exhibit 16.3
April 9, 1997 Consent of Sherwin D. Yoelin to use all information
from his evaluation reports in this document.
Sherwin D. Yoelin, Petroleum Engineer, Inc.
Consulting Petroleum Engineer
California Certificate Number P 1241
1439 Bonnie Jean Road
La Habra Heights, California 90631
310 697-3700
April 9, 1997
Geo Petroleum, Inc.
25660 Crenshaw Blvd., Suite 201
Torrance, CA 90505
Subject: Consent of Independent Petroleum Engineer
Gentlemen:
I agree to the inclusion in this Form 10-KSB of my reports dated
January 1, 1997, with respect to the proved oil and gas reserves
and revenues of Geo Petroleum, Inc. and consent to the reference
to our firm under the captions "Estimated Oil and Gas Reserves"
and "Experts."
Sincerely,
/s/ SHERWIN D. YOELIN
- ------------------------
SHERWIN D. YOELIN
Consulting Petroleum Engineer
State of California
Certificate No. P 1241
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Geo Petroleum Inc.
<TABLE>
<S> <C>
Dated: April 11, 1997
By: /s/ GERALD T. RAYDON
-----------------------------------
GERALD T. RAYDON
Chairman of the Board and President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the date
indicated.
Signatures and dates of directors.
Signature Title Date
Gerald T. Raydon President/Chairman April 9, 1997
Alyda L. Raydon Secretary-Treasurer/Director April 9, 1997
William J. Corcoran Director April 7, 1997
Michael F. Moran Director April 6, 1997
Signatures for all directors and chief executive officer and
Principal Financial and Accounting Officer.
The above Index to Exhibits and Exhibit Identification form is
incorporated herein by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
AUDITED CONDENSED FINANCIAL STATEMENTS AT 12/31/96
</LEGEND>
<CIK> 0001016275
<NAME> GEO PETROLEUM, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> $2,228,826
<SECURITIES> $0
<RECEIVABLES> $570,947
<ALLOWANCES> $52,876
<INVENTORY> $0
<CURRENT-ASSETS> $2,852,649
<PP&E> $4,979,165
<DEPRECIATION> $(1,098,805)
<TOTAL-ASSETS> $6,733,009
<CURRENT-LIABILITIES> $1,286,267
<BONDS> $0
$0
$101,289
<COMMON> $6,615,634
<OTHER-SE> $(1,270,181)
<TOTAL-LIABILITY-AND-EQUITY> $6,733,009
<SALES> $823,695
<TOTAL-REVENUES> $1,005,946
<CGS> $675,292
<TOTAL-COSTS> $1,075,924
<OTHER-EXPENSES> $0
<LOSS-PROVISION> $0
<INTEREST-EXPENSE> $360,581
<INCOME-PRETAX> $(430,559)
<INCOME-TAX> $0
<INCOME-CONTINUING> $0
<DISCONTINUED> $0
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $(430,559)
<EPS-PRIMARY> $(0.06)
<EPS-DILUTED> $(0.06)
</TABLE>
