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, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--------- ---------
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 )
501 Deep Valley Dr., Suite 300
Rolling Hills Estates, California 90274
(Address of principal executive offices) (Zip Code)
Issuers telephone number (310) 265-0721
Securities registered under Section 12(b) of the Exchange Act:
Name of each Exchange
Title of each class on which registered
------------------- ----------------------
Common NASD OTC 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
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, 1997 were
$1,299,759. At March 31, 1998, 8,226,632 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 31, 1998 of $0.56) held by non-affiliates was
approximately $2,500,000.
Documents incorporated by reference: Certain portions of the Registrant's
definitive proxy statement filed with the Commission pursuant to Regulation 14A
- - Part III, Items 9, 10, 11, and 12.
Transitional Small Business Disclosure Format.
[ ]YES [ X ]NO
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Geo Petroleum, Inc. ("Geo" or "the Company"), a publicly traded company
on the OTC Bulletin Board, symbol GOPL, was organized as a California
corporation in 1986 to conduct high technology energy development and the
environmentally safe disposal of oilfield waste. Geo's giant Vaca Tar Sands
("Vaca") property in the Oxnard Field, Ventura County, California, is the focus
of Geo's development strategy. This property offers the opportunity for: the
recovery of heavy oil using Steam Assisted Gravity Drainage ("SAGD") oil
recovery methods; and the expansion of industrial waste disposal operations,
whereby wastes are injected deep into subsurface wells.
Geo's Vaca Tar Sands property contains an estimated 216,000,000 gross
bbls of heavy oil in place. Geo, as operator with a 2/3 interest, and Saba
Petroleum Company, as a farm-in participant with a 1/3 interest, will commence
development with a SAGD pair of parallel horizontal wells by 1999. The SAGD
technology is expected to recover more than 50% of the oil in place. See
"Description of Property -- Oxnard Field."
Disposal of non-hazardous oilfield and industrial wastes is a growing
sector of Geo's business. The Company owns commercial disposal facilities under
a Class II permit, at which waste liquids produced by other oil and gas well
operators are injected deep into the subsurface in wells below the Vaca. The
California Division of Oil and Gas has given Geo permission to inject tank
bottoms, spent drilling fluid, and other sludges in its disposal wells. The
waste streams are permanently disposed of deep in the earth, where they cannot
cause pollution or liability for cleanup. All of the Company's revenue from
waste disposal services arise from Capitan Resources, Inc., a related party
which operates the Company's waste disposal well. The Company recognizes its
share of waste disposal revenues as the services are provided by Capitan. Geo
currently receives 75% of Capitan's gross revenues from waste disposal services.
The waste disposal services are operated by Capitan and the costs of operating
the water disposal services are borne by Capitan. The Company is planning for
the merger of Capitan into the Company by September 30, 1998. See "Description
of Property - Environmental Services."
See the discussion under "Description of Property" for information
concerning Geo's principal oil and gas properties.
Geo has no subsidiaries and presently holds interests in 6,880 gross
acres (6,430 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."
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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 this
Form 10-KSB have been adjusted to reflect the stock split.
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 all of the Company's operations, and these permits are
subject to revocation, modification and renewal by issuing authorities.
Governmental authorities have the power to enforce compliance with
their regulations, and violations are subject to fines, injunctions or both. It
is possible that increasingly strict requirements will be imposed by
environmental laws and enforcement policies thereunder. The Company does not
anticipate that it will be required in the near future to expend amounts that
are material to the Company's financial position or results of operations by
reason of environmental laws and regulations, but because such laws and
regulations are frequently changed, the Company is unable to predict the
ultimate cost of such compliance.
The Company believes that the oil and gas industry may experience
increasing liabilities and risks under the Comprehensive Environmental Response,
Compensation and Liability Act, as well as other federal, state and local
environmental laws, as a result of increased enforcement of environmental laws
by various regulatory agencies. As an "owner" or "operator" of property where
hazardous materials may exist or be present, the Company, like all others
engaged in the oil and gas industry, could be liable for the release of any
hazardous substances. Although the Company has not been subject to the
imposition of "clean-up" orders by the government, the potential for sudden and
unpredictable liability for environmental problems is a consideration of
increasing importance to the Company and the oil and gas industry as a whole.
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
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basis. The Company maintains a $100,000 certificate of deposit for state of
California authorization purposes to perform additional oil and gas well
recompletions. These funds are subject to certain withdrawal restrictions until
completion of the work. The Company also has $60,000 in restricted cash held in
government bonds, $50,000 with the City of Los Angeles and $10,000 with Ventura
County, for the purposes of paying for any future environmental liabilities that
could arise. See "Financial Statements." In addition, the Company carries
$2,000,000 in pollution insurance.
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
<PAGE>
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.
MARKETING OF PRODUCTION
Crude oil produced in the Los Angeles Basin is sold via pipeline to
Kern Oil & Refining Company, and approximated 88% of the Company's crude oil
sales for 1997. Production of crude from the Oxnard property is sold via truck
to Texaco Trading and Refining Co. which, during 1997, purchased 3% 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 54% of the Company's share of gas sold during
1997. Natural gas from the Company's Strain Ranch and Angel Slough leases during
1997 was sold to Pacific Gas & Electric Co. and accounted for approximately 46%
of the Company's share of gas sales during 1997.
Alternative purchasers are available for all of the Company's
production, except for the Rosecrans, Strain Ranch and Angel Slough leases where
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. Reserve information presented herein is based upon reports
prepared by the Company's independent petroleum reservoir engineers. 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.
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
<PAGE>
include, but are not limited to: 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 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, 1997 (the date of the estimates and the date of this
report), oil and gas prices have generally declined. At December 31, 1997, the
price of Buena Vista California Crude Oil (a California benchmark crude) as
quoted by several California refiners, was $13.70 per barrel and the comparable
price at May 21, 1998 was
<PAGE>
$9.45 per barrel. Prices received by the Company during the comparable periods
for natural gas were $2.6662 per Mcf and $2.3529 per Mcf, respectively. 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.
OXNARD FIELD
DRILLING AND PRODUCTION ACTIVITIES
The Vaca Tar Sands on Geo's property in the Oxnard Field, Ventura
County, California, contain an estimated 216,000,000 gross bbls of heavy oil in
place. Geo, as operator with a 2/3 interest, and Saba Petroleum Company, as a
farm-in participant with a 1/3 interest, will commence development with a SAGD
pair of parallel horizontal wells by 1999. The SAGD technology is expected to
recover more than 50% of the oil in place.
Geo and Saba will share equally in the cost of development until Saba
has invested $5,000,000. Thereafter, Saba will pay one-third of the costs and
receive one-third of the revenues, and Geo will pay two-thirds of the costs and
receive two-thirds of the revenues. As to the wells for which Saba has paid a
disproportionately higher share of the costs, Saba can recover its costs out of
one-half of production revenues, after which its interest in these wells will be
reduced to one-third. In order to finance its share of the development costs,
Geo plans to obtain financing through a private placement. Larry R. Burroughs
will direct the development of the Vaca Tar Sands for Geo and Saba.
SAGD is a process which consists of drilling two parallel horizontal
wells, with one spaced approximately 15 feet above the other, with the lower
well located at the bottom of the producing zone. The wells extend horizontally
for as far as 2,600 feet. Steam is injected into the upper well at a temperature
of approximately 500 degrees Fahrenheit. The steam lowers the viscosity of the
oil so that it becomes as fluid as water. The oil then gravitates to the lower
horizontal well, and then flows with high temperatures (above 400 degrees
Fahrenheit) and pressures to the surface through the lower well. The well
production rates increase each year until the tenth year, and then gradually
decline after achieving a productive life of approximately 17 years.
Geo plans to commence development by redrilling one of the twenty
vertical wells now located on the property. By redrilling, Geo will obtain tax
credits on the oil production pursuant to Section 29 of the Internal Revenue
Code. The Code states tax credits cannot apply to production from new wells. The
current tax credit is $6.10 for each barrel produced, and will escalate with
inflation until the termination of the credit on December 31, 2002. Each lower
well will be a redrill of a presently existing Vaca Tar Sands vertical well. The
wells will extend horizontally for as far as 1,300 feet.
The use of the SAGD process in the field represents one of its first
applications in the United States, although the process has been widely and
successfully used in the vast heavy oil fields of Canada, where the method was
invented. Dr. Roger Butler, credited with the invention of SAGD, Al Albertson,
<PAGE>
P.Eng. (a steaming expert), and Larry Burroughs, P.Eng., will guide Geo's
redrilling and development program.
At the time Geo bought the property from Sun Oil Company in 1990, the
SAGD method was in an experimental stage and unknown in this country. Geo
produced the Vaca using conventional methods in the wells drilled by Sun and its
predecessor, and achieved a production rate of 275 barrels of oil per day. Low
oil prices and Geo's financial limitations have caused a cutback in production
in recent years.
Geo bought the property after an evaluation by an independent engineer
concluded that "the Vaca Tar Sands have all of the necessary rock and fluid
property characteristics needed for very successful steam stimulation
operations. These desirable qualities include massive, shallow (1,900 feet),
good quality reservoir sands, permeability greater than 1,500 millidarcies, oil
saturation greater than 80 percent, porosity greater than 30 percent, sufficient
reservoir pressure, excellent sand continuity, and large oil reserves." Sun had
purchased the property in 1984 for $14,000,000 and invested over $3,900,000 in
production facilities and drilling.
Geo's Vaca property is fully equipped for the transportation,
processing, storage, and sale of oil, the separation and disposal of waste
water, and for the injection of high pressure steam into the wells. The
equipment, in general, consists of: heated and insulated oil flow lines; gas and
water pipelines; an automatic well tester; 9,600 barrels of oil storage capacity
in three insulated, heated tanks; waste water disposal tanks; two steam
generators capable of producing high quality steam at rates of 24,000,000 BTU
per hour; tank heaters; a water treatment plant; a vapor recovery system; oil
shipping equipment; a fresh water well to provide unlimited good quality water
for steam generation; and an injection well to dispose of all water produced
with the oil. The property is also in close proximity to several oil pipelines
and a rail line.
The Geo/Saba joint venture will be entitled to the use of all of said
facilities and equipment, subject to payment of operating costs. The Geo/Saba
joint venture will be entitled to 100 percent of federal and state tax
deductions accruing from expenditure of their funds, in addition to their share
of the Section 29 tax credit. Tax deductions in 1998 will approximate 70 - 80
percent of the funds invested.
Under Sec. 29 of the Internal Revenue Code, a tax credit is allowed to
producers of "Non-Conventional Fuels." The tax credit for 1998 is estimated at
$6.10 per barrel, but will not be computed by the IRS until 1999 after inflation
adjustment figures are published. In the opinion of Geo's counsel, the tax
credit will be available to the Geo/Saba joint venture and is applicable to
production from all redrilled Vaca Tar Sands wells. The previous owners of Geo's
property, and the owners of offsetting leases, have taken the tax credit on
production from the Vaca Tar Sands since 1980, the first year of the credit. The
credit is adjusted for inflation each year.
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 1997, this
credit amounted to $6.10 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,
<PAGE>
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 and Gerald T. Raydon, Chairman and C.E.O. 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 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 Tar
Sands which is found at depths of between 1,950 and 2,400 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 (1,800 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, current operations are
comparatively expensive while the price received for the oil is relatively low.
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, 1997, to 611,175 net barrels. Proved
undeveloped reserves were a net 26,091,000 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 $28,900,000 for the
drilling of 36 SAGD wells. Future net revenues of $224,382,297 would be
achieved, having a present net worth, discounted at 10% per annum, of
$102,102,469, according to the report of an independent petroleum engineer.
The costs of full SAGD development are expected to be about
$45,000,000. The revenues using the SAGD method are expected to be greater but
have not yet been calculated in a full engineering study. Although the Company
has agreed to transfer one-third of its interests to Saba in exchange for
$5,000,000 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 increase in recoveries
by use of such method. There is no assurance that the SAGD process will achieve
the desired results.
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 14% of gross revenues to the lessor. Vertical wells cost
approximately $265,000 to drill and complete for production.
<PAGE>
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.
INDUSTRIAL WASTE DISPOSAL ACTIVITIES
Disposal of non-hazardous oilfield and industrial wastes is a growing
sector of Geo's business. The Company owns commercial disposal facilities under
a Class II permit, at which waste liquids produced by other oil and gas well
operators are injected deep into the subsurface in wells below the Vaca. The
California Division of Oil and Gas has given Geo permission to inject tank
bottoms, spent drilling fluid, and other sludges in its disposal wells. The
waste streams are permanently disposed of deep in the earth, where they cannot
cause pollution or liability for cleanup.
The Company currently has contracts with, among others, AERA Energy
L.L.C. (a consortium owned by Shell & Mobil), POPCO, Exxon Corporation, Chevron
Corporation, Southern California Gas Company, Rincon Island L.L.P., Torch
Operating Company, and several other independent oil companies. Geo has enlarged
and upgraded its facilities to accommodate the new sources of wastes and intends
to convert additional unproductive oil wells to disposal wells. The Company
plans to apply to the Environmental Protection Agency for a permit to operate a
Class I well, which can dispose of all non-hazardous industrial wastes. The fees
charged are generally at rates much higher than for Class II wastes.
These operations are conducted by a related party, Capitan Resources,
Inc., and the Company has a 75% revenue interest in such operations. The Company
is planning for the merger of Capitan into the Company by September 30, 1998.
The only compensation related to the transaction would be the issuance of
approximately 70,000 shares of the Company's common stock to an unrelated third
party in exchange for the cancellation of their overriding net profits interest
in Capitan and their $28,000 note due from Capitan. No other compensation is to
be paid to the shareholders of Capitan. If this transaction is consummated as
planned, the assets and liabilities of Capitan will be recorded on the Company's
books at their historical cost.
The Company's valuation of the discounted present value of Capitan's
revenue interests in the Company's gas wells, based upon the estimates included
in the Company's independent petroleum engineer's report, and in the Company's
waste disposal well is in excess of $1,000,000.
Under its agreement with Saba, Geo will retain the disposal wells, but
will contribute the oil field facilities to the venture.
See "Environmental Services" below.
<PAGE>
EAST LOS ANGELES / BANDINI FIELDS
At January 1, 1998, these two separate but adjacent accumulations,
located in an industrial area of the City of Los Angeles, had estimated total
net proven reserves of 2,619,153 bbls of light oil and 5,737,911 mcf of natural
gas.
Geo plans to sell its East L.A. and Bandini fields and its remaining
properties (excluding the Vaca) to increase its cash position and focus all of
its resources on its Vaca SAGD and waste disposal projects.
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 2,800 to 8,000 feet at Bandini and in the Miocene Puente formation at
depths of between 7,200 to 11,200 feet at East Los Angeles.
ROSECRANS FIELD
Geo plans to sell its Rosecrans Oil Field and its remaining properties
(excluding the Vaca) to increase its cash position and focus all of its
resources on its Vaca SAGD and waste disposal projects.
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 6,500 to 8,400 feet. The wells have
been drilled through these zones, but have not produced from all of them. This
provides the opportunity to commence production from bypassed zones in the
future. Presently, the gas produced from this yields no revenues for the
Company. The wells are expected to produce an estimated 896,000 Mcf of gas. A
gas processing facility has been completed by another company, and Geo's wells
are now connected by pipeline to this facility. Geo has negotiated an agreement
to sell its gas at market prices.
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
<PAGE>
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.
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.
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, among others, AERA Energy L.L.C. (a consortium owned by Shell & Mobil),
POPCO, Exxon Corporation, Chevron Corporation, Southern California Gas Company,
Rincon Island L.L.P., Torch Operating Company, and several other independent oil
companies. 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.
ESTIMATED OIL AND GAS RESERVES
At January 1, 1998, the Company's net proved oil and gas reserves, as
estimated by its independent petroleum engineers, Sherwin D. Yoelin and Greg
Martin, amounted to 29,231,688 barrels of oil and 5,737,911 Mcf of natural gas,
of which 2,560,255 barrels and 4,884,569 Mcf were classified as proved
developed. Future cash flows attributable to such proved developed reserves
(before income taxes) are estimated to be $25,614,830 at December 31, 1997, and
the discounted value thereof, at 10%, is estimated to be $15,318,857.
Proved undeveloped reserves were a net 26,761,072 barrels of oil and
863,354 Mcf of gas. Future net revenues of $229,234,292 would be achieved,
having a present net worth, discounted at 10% per annum, of $104,518,051,
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
<PAGE>
more to produce than lighter crudes, and receives a lower price in the market.
Accordingly, a price at or above 1997 levels is needed in order to cover
operating costs and yield a profit utilizing conventional 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.
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 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.
<PAGE>
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.
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.
The Company, during 1997, experienced a substantial decrease
in the price paid for its oil. The company anticipates that there may be a
strengthening of 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.
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, 1997. All of the Company's acreage
is in California.
Developed Developed Undeveloped Undeveloped
Gross Net Gross Net
-------------------------------------------------------
1,950 1,790 4,930 4,610
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>
RECENT DRILLING ACTIVITIES
During the three year period ended December 31, 1997, the Company did
not drill or participate in the drilling of development or exploratory wells.
During the quarter ended March 31, 1998, the Company did not participate in or
drill any wells.
OFFICES
The Company leases office space in Rolling Hills Estates, California,
aggregating some 2,000 square feet. The Company has a four year lease
commitment.
EMPLOYEES
Geo has twelve full time employees, five of whom are general or
administrative; the remaining seven being field employees. Two of the employees
are related to Gerald T. Raydon, the chairman chief executive officer and
principal shareholder of the Company. In 1998, the Company intends to decrease
the number of its employees by the retirement and/or termination of
administrative and field personnel upon the sale of Geo's non-Vaca properties.
The Company is not a party to any collective bargaining or other collective
labor agreement.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal matters in the ordinary course
of business. In one particular case, an interlocutory judgment was awarded
against the Company by the court hearing litigation in which the Company is a
defendant. The judgment, if it becomes final, requires the Company to incur the
expense of clean up and abandonment of two idle wells and to pay fees and costs
of $32,000. No damages will be awarded unless the Company fails to comply
following a final judgment. On July 1, 1998, the Company filed an appeal of the
Court's Order. Additionally, if the Company fails to do so the courts may also
award damages for these costs including attorneys fees. These costs are not
possible to determine at this time, but the plaintiff has requested damages of
up to $300,000. The Company is considering whether to appeal the decision of the
court.
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 1997.
<PAGE>
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 forth 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 prices set forth below reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
Year Ended 1997 HIGH BID LOW BID
------------------------------------------------------------------
First Quarter 8.13 6
Second Quarter 6.73 6.31
Third Quarter 3 2.13
Fourth Quarter 3.31 2
On June 1, 1998, the reported closing price per share was $0.25.
HOLDERS OF COMMON EQUITY
At December 31, 1997, there were approximately 400 holders of record
known to the Company of the common equity of the Company. At May 21, 1998, there
were approximately 400 holders of record of the common equity known to the
Company.
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 year ended December 31,
1997 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.
As shown in the financial statements, as of December 31, 1997, the
Company's accumulated deficit totaled $2,572,331 and current liabilities
exceeded current assets by $980,052.
<PAGE>
Management is continuing its efforts to obtain additional funds so that
the Company can meet its obligations, eliminate its deficit, and return to
profitability. These potential alternatives include, among other things, a
private placement of debt or equity, the sale of certain non-strategic oil and
gas properties, a joint venture, a merger, and/or extending or refinancing the
bank loan using oil and gas properties as collateral.
RESULTS OF OPERATIONS
1997 compared with 1996. During the year ended December 31, 1997, Geo
had a net loss of $768,406 and cash used in operations of $542,538, compared to
a net loss of $430,559 and cash used in operations of $325,632 for 1996.
Oil and gas revenues decreased to $662,874 for 1997 compared to
$823,695 for 1996. This was attributable mostly to a sharp drop in oil prices
and 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.
Industrial waste disposal revenues increased to $437,675 for 1997
compared to $93,308 for 1996. This increase is due primarily to the addition of
new contracts with, among others, AERA Energy L.L.C. (a consortium owned by
Shell & Mobil), POPCO, Exxon Corporation, Chevron Corporation, Southern
California Gas Company, Rincon Island L.L.P., Torch Operating Company, and
several other independent oil companies. These operations are conducted by a
related party, Capitan Resources, Inc., and the Company has a 75% operating
interest in such operations. Geo has also enlarged and upgraded its facilities
to accommodate the new sources of wastes, resulting in increased revenues and
efficiencies.
Other revenue increased to $162,170 in 1997 from $82,735 in 1996, due
primarily to $60,000 in fees earned in 1997 from a private company for the use
of a wellbore in the drilling of an exploratory well.
Lease operating expenses for 1997 amounted to $696,648, as compared to
$675,292 for 1996, reflecting the larger number of wells on production and the
increased level of maintenance expenditures.
General and administrative expenses for 1997 were $580,866, as compared
to $277,107 for 1996. Substantial administrative costs were incurred in
connection with: preparing, offering, negotiating and consummating equity
offerings and joint ventures; in registering the Company's shares; and certain
legal, investment banking, and accounting expenses in connection with such
offerings. Additionally, Gerald T. Raydon began drawing his first salary in ten
years, at $120,000 per year. Mr. Raydon has since reduced his 1998 salary by 50%
in an effort to reduce costs and conserve cash.
Interest expense for 1997 was $144,791, as compared to $360,581 for
1996. This decrease was due to the reduction of loan principal amounts. The
Company's provision for depletion and depreciation increased to $102,797 for
1997, as compared to $88,596 for 1996.
The Company has recorded a valuation allowance of $500,000 during the
year ended December 31, 1997 to reduce the carrying value of the accounts
receivable due from Capitan Resources, Inc.
<PAGE>
The Company is planning for the merger of Capitan into the Company by
September 30, 1998. The only compensation related to the transaction would be
the issuance of approximately 70,000 shares of the Company's common stock to an
unrelated third party in exchange for the cancellation of their overriding net
profits interest in Capitan and their $28,000 note due from Capitan. No other
compensation is to be paid to the shareholders of Capitan. If this transaction
is consummated as planned, the assets and liabilities of Capitan will be
recorded on the Company's books at their historical cost, due to common control
of the two companies by the principal officer/shareholder.
The Company's valuation of the discounted present value of Capitan's
revenue interests in the Company's gas wells, based upon the estimates included
in the Company's independent petroleum engineer's report, and in the Company's
waste disposal well is in excess of $1,000,000.
CAPITAL RESOURCES AND LIQUIDITY
FINANCIAL POSITION
At December 31, 1997, the Company's total assets decreased by
approximately $553,618 over December 31, 1996, primarily as a result of a
decrease in current assets. At December 31, 1997, the Company had a working
capital deficit of $980,052 as compared to a working capital surplus of
$1,375,152 at December 31, 1996. In 1997 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.
On January 30, 1998, the Company signed an extension agreement with the
bank that extended the due date of the note to June 30, 1998, or December 1,
1998 if the Company receives certain investment capital by June 30, 1998. The
extension agreement requires the Company to make monthly payments of $10,000
starting February 1, 1998 through May 1, 1998 and a lump sum principal paydown
of 30% of the net investment proceeds received by the Company from any capital
financing. Unless the entire obligation becomes due and payable on June 30,
1998, the remaining principal balance is to be repaid in six equal installments
starting July 1, 1998. As compensation for the extension of this note, the
Company issued 25,000 shares of the Company's common stock to the owners of the
collateral. On January 30, 1998, the date of the extension agreement, the
Company's stock had a market price of $1 per share valuing the 25,000 shares at
a cost of $25,000. The Company is currently delinquent on the principal payments
and accrued interest on this loan.
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
sell all of its properties, excluding the Oxnard Field (which consists of the
Vaca Tar Sands and waste disposal operations), and invest the proceeds from such
sales in development of the Vaca and disposal operations, and in debt reduction.
These activities are for the purpose of increasing production and revenues and
decreasing costs. 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, gas, and disposal sales in excess of production and
operating expenses during 1997 and 1996 were $403,901 and $241,711,
respectively.
<PAGE>
Cash used in operations for the year ended December 31, 1997, was
$542,538, compared to cash used in operations of $325,632 for 1996. This
increase in cash used in operations was primarily a result of decreased revenues
resulting from the circumstances set forth above in this Discussion.
During 1997, Geo sought long-term equity financing. The Company
attempted to sell shares of its common stock and warrants in private offerings,
which would enable the Company to eliminate its working capital deficiency and
reduce its debt and interest obligations. Such plan is continuing in 1998. 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. These
activities are expected to increase the revenues of the Company. However, the
Company can give no assurance that its goals will be achieved.
SOURCES OF CAPITAL RESOURCES
On January 30, 1998, the Company signed an extension agreement with the
bank that extended the due date of the note to June 30, 1998, or December 1,
1998 if the Company receives certain investment capital by June 30, 1998. The
extension agreement requires the Company to make monthly payments of $10,000
starting February 1, 1998 through May 1, 1998 and a lump sum principal paydown
of 30% of the net investment proceeds received by the Company from any capital
financing. Unless the entire obligation becomes due and payable on June 30,
1998, the remaining principal balance is to be repaid in six equal installments
starting July 1, 1998. As compensation for the extension of this note, the
Company issued 25,000 shares of the Company's common stock to the owners of the
collateral. On January 30, 1998, the date of the extension agreement, the
Company's stock had a market price of $1 per share valuing the 25,000 shares at
a cost of $25,000. The Company is currently delinquent on the principal payments
and accrued interest on this loan. 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. However, the collateral itself is secured by a recorded
deed of trust on 33% of the Company's interest in its Vaca Tar Sands property.
The sum of $750,000 from the proceeds of the equity offering in December 1996
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 $1,519,159 in 1997 and $270,565 in 1996. This
was financed in 1997 by common stock sold in private placements in December
1996, by cash from operations, and by the proceeds from the issuance of
additional notes payable.
Net cash provided by financing activities amounted to $251,264 in 1997
and $2,724,458 in 1996. This cash was primarily the net proceeds from the
issuance of notes payable in 1997.
TRENDS
The Company expects that it will be able to increase its revenues by
investing a portion of the net proceeds from the sale of its non-Vaca properties
in the development of Vaca using SAGD technology, and in the expansion of Vaca's
industrial waste disposal operations. Due to the expected simplification of its
asset management, the Company anticipates that its general and administrative
expenses
<PAGE>
will measurably decrease through the retirement of personnel and reduction of
its administrative offices. However, the Company can give no assurance that its
goals will be achieved.
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. Severe drops in prices
would strain the Company's ability to conduct remedial work using its revenues.
CAPITAL BUDGET
During 1998, the Company will utilize the net proceeds of its equity
offerings and asset sales, after payment of a portion of its debt and
accounts payable, primarily for the development of the Vaca Tar Sands and waste
disposal operations. However, the Company can give no assurance that its goals
will be achieved. The budget for 1998 is $650,000.
YEAR 2000
The Company's accounting software and other applications used in its
operations were purchased from outside vendors. It is management's understanding
that these applications are Year 2000 compliant. As a result, management of the
Company does not believe that the Year 2000 will have an impact on its financial
statements or on its operations.
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>
Item 7. Financial Statements
(a) 1. Index to Financial Statements
The following Financial Statements are included herein:
Page
Number
Report of Ernst & Young LLP, Independent Auditors............................F-1
Balance Sheets at December 31, 1997 and 1996.................................F-2
Statements of Operations
for the years ended December 31, 1997 and 1996............................F-4
Statements of Stockholders' Equity
for the years ended December 31, 1997 and 1996............................F-5
Statements of Cash Flows
for the years ended December 31, 1997 and 1996............................F-6
Notes to Financial Statements................................................F-8
<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, 1997 and 1996, 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, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had incurred recurring losses from operations
through December 31, 1997, and had an accumulated deficit and negative working
capital at December 31, 1997. In addition, all of the Company's debt is due in
1998. These conditions raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Los Angeles, California
May 15, 1998
F-1
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Balance Sheets
<CAPTION>
December 31
1997 1996
------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (includes restricted cash of
$160,000 in 1997 and $100,000 in 1996) $ 418,393 $ 2,228,826
Accounts receivable:
Accrued oil and gas revenues (net of allowance for
doubtful accounts of $6,942 in 1997 and none in 1996) 53,204 151,586
Joint interest and other (net of allowance for doubtful
accounts of $48,835 in 1997 and none in 1996) 69,809 228,131
Prepaid expenses and other, net 127,718 52,876
-----------------------------
Total current assets 669,124 2,661,419
Due from Capitan Resources, Inc. (net of valuation
allowance of $500,000 in 1997 and none in 1996) 213,545 191,230
Property and equipment:
Oil and gas properties 6,342,986 4,927,176
Office furniture and equipment 155,338 51,989
-----------------------------
6,498,324 4,979,165
Accumulated depletion and depreciation (1,201,602) (1,098,805)
-----------------------------
5,296,722 3,880,360
-----------------------------
Total assets $ 6,179,391 $ 6,733,009
=============================
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable:
Accrued royalties $ 361,326 $ 431,388
Trade and other 258,193 396,110
Dividends payable -- 14,104
Accrued expenses 139,504 119,643
Current portion of bank notes payable 622,500 180,000
Current portion of capitalized lease obligation 4,583 --
Notes payable to officers 240,000 --
Other notes payable 23,070 145,022
-----------------------------
Total current liabilities 1,649,176 1,286,267
Long-term portion of bank note payable -- 530,000
Capitalized lease obligation 13,747 --
10% convertible debentures 39,400 --
Redeemable convertible preferred stock, $1,000 par
value; authorized 100,000 shares; issued and
outstanding 101.29 shares at December 31, 1996
(none at December 31, 1997) -- 101,289
Stockholders' equity:
Common stock, no par value; authorized 50,000,000
shares; issued and outstanding 7,900,432 and
7,603,324 shares at December 31, 1997 and 1996,
respectively 7,049,399 6,615,634
Accumulated deficit (2,572,331) (1,800,181)
-----------------------------
Total stockholders' equity 4,477,068 4,815,453
-----------------------------
Total liabilities and stockholders' equity $ 6,179,391 $ 6,733,009
=============================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Statements of Operations
<CAPTION>
Year ended December 31
1997 1996
------------------------------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 662,874 $ 823,695
Waste disposal services (from related party) 437,675 93,308
Other revenue 162,170 82,735
Interest income 37,040 6,208
------------------------------------
1,299,759 1,005,946
Expenses:
Lease operating expenses 696,648 675,292
Depletion and depreciation 102,797 88,596
Amortization of deferred loan costs 43,063 34,929
General and administrative 580,866 277,107
Valuation allowance on receivable from related party 500,000 -
Interest expense 144,791 360,581
------------------------------------
2,068,165 1,436,505
------------------------------------
Loss before income taxes (768,406) (430,559)
Provision for income taxes -- --
------------------------------------
Net loss (768,406) (430,559)
Preferred stock dividends (3,744) (130,831)
------------------------------------
Net loss applicable to common stock $ (772,150) $ (561,390)
====================================
Basic and diluted net loss per share of common stock $ (0.10) $ (0.11)
====================================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Statements of Stockholders' Equity
<CAPTION>
Number of
Common
Shares Common Accumulated
Outstanding Stock Deficit Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 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, net
of related costs 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
Net loss -- -- (768,406) (768,406)
Issuances of common stock:
Sold in private placements, net
of related costs 124,000 86,709 -- 86,709
Conversion of redeemable
convertible preferred stock 36,473 91,183 -- 91,183
Exchange of certain notes
payable and related accrued
interest 43,558 102,428 -- 102,428
Payment for services 67,400 151,645 -- 151,645
Adjustment for number of shares
to be issued for prior year's
reverse stock split 25,077 -- -- --
Warrants exercised 600 1,800 -- 1,800
Preferred stock dividends -- -- (3,744) (3,744)
--------------------------------------------------------------------
Balance at December 31, 1997 7,900,432 $ 7,049,399 $ (2,572,331) $ 4,477,068
====================================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
Geo Petroleum, Inc.
Statements of Cash Flows
<CAPTION>
Year ended December 31
1997 1996
------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (768,406) $ (430,559)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depletion and depreciation 102,797 88,596
Amortization of deferred loan costs 43,063 34,929
Payment in common stock for services 151,645 79,842
Changes in operating assets and liabilities:
Accounts receivable 256,702 (174,069)
Due from Capitan Resources, Inc., net (22,315) (35,544)
Prepaid expenses and other (117,905) (463)
Accounts payable (207,980) 99,814
Accrued expenses 19,861 11,822
------------------------------------
Net cash used in operating activities (542,538) (325,632)
Investing activities
Acquisition of Drake Investment Corp. - 20,000
Additions to property and equipment (1,610,159) (396,565)
Disposition of property 91,000 106,000
------------------------------------
Net cash used in investing activities (1,519,159) (270,565)
Financing activities
Proceeds from notes payable 385,078 171,246
Payments on notes payable (265,908) (1,075,178)
Payments in common stock for interest 72,037 43,565
Common stock sold in private placements 86,709 3,779,790
Preferred stock sold - 23,500
Dividends paid (750) (72,523)
Preferred stock redeemed (27,702) (145,942)
Warrants exercised 1,800 -
------------------------------------
Net cash provided by financing activities 251,264 2,724,458
------------------------------------
Net (decrease) increase in cash and cash equivalents (1,810,433) 2,128,261
Cash and cash equivalents at beginning of year 2,228,826 100,565
------------------------------------
Cash and cash equivalents at end of year $ 418,393 $ 2,228,826
====================================
</TABLE>
F-6
<PAGE>
Geo Petroleum, Inc.
Statements of Cash Flows (continued)
Year ended December 31
1997 1996
---------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 104,426 $ 308,261
===========================
Cash paid during the year for income taxes $ -- $ 810
===========================
Supplemental disclosure of noncash investing and financing activities
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.
During 1997, the Company issued 43,558 shares of the Company's common stock in
exchange for the retirement of certain notes payable and related accrued
interest aggregating $102,428. The Company issued 36,473 shares of the Company's
stock in exchange for the retirement of 91.18 shares of the Company's redeemable
convertible preferred stock and related dividends payable aggregating $91,183.
Also, the Company issued 67,400 shares of common stock to third parties for
services that were performed in 1997.
See accompanying notes.
F-7
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
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. A well on one of the Company's oil properties is used for waste
disposal services. These operations are conducted by a related party (see Note
5) and the Company has a 75% revenue interest in such operations.
Basis of Presentation
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, as of December 31, 1997, the Company's accumulated deficit totaled
$2,572,331 and current liabilities exceeded current assets by $980,052, and the
Company is in arrears on payments due on its note payable to the bank. These
factors, among others, indicate that the Company may be unable to continue as a
going concern for a reasonable period of time.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its current obligations on a timely basis,
to obtain additional financing, and ultimately to obtain successful operations.
Management is continuing its efforts to obtain additional funds so that the
Company can meet its obligations and sustain operations. These potential
alternatives include, among other things, a private placement of debt or equity,
extending or refinancing the bank loan using oil and gas properties as
collateral and/or the sale of oil and gas properties. There can be no assurance
that any of these potential alternatives will materialize. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The Company has significant transactions with related parties as more fully
described in Notes 4, 5 and 10.
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.
F-8
<PAGE>
1. Organization and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash equivalents include certificates of deposit with original maturity dates of
less than three months. The Company maintains a $100,000 certificate of deposit
for state of California authorization purposes to perform additional oil and gas
well recompletions. These funds are subject to certain withdrawal restrictions
until completion of the work. The Company also has $60,000 in restricted cash
held in government bonds, $50,000 with the city of Los Angeles and $10,000 with
Ventura County, for the purposes of paying for any future environmental
liabilities that could arise.
Deferred Charge
The deferred charge consists of unamortized loan costs. Deferred loan costs of
$77,992 were incurred in 1996 and were amortized over the term of the Company's
note payable to bank due June 30, 1998. Related amortization expense was $43,063
and $34,929 in 1997 and 1996, respectively.
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,
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
excluding future estimated costs and related proved undeveloped oil reserves at
the Vaca Tar Sands property, which relate to a major development project
involving an enhanced recovery process as more fully discussed 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,
1997 and 1996, was $88,157 and $83,417, respectively.
Substantially all additions to oil and gas properties in 1997 and 1996 relate to
recompletions of existing producing or previously producing wells. During 1997
and 1996, the Company received proceeds of $91,000 and $166,000 from the sale of
certain oil and gas interests which were credited to property and equipment.
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
$14,340 and $5,179 for the years ended December 31, 1997 and 1996, 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 for its oil and gas production in 1997
and 1996 that accounted for approximately 88% and 82% of gross oil and gas
sales, respectively. All of the Company's revenue from waste disposal services
arises from a related party (see Note 5) which operates the Company's waste
disposal well. The Company recognizes its share of waste disposal revenues as
the services are provided by Capitan.
10
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies (continued)
Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings per
share adjusted for the stock split described above:
1997 1996
---------------------------
Numerator:
Net loss $ (768,406) $ (430,559)
Preferred stock dividends (3,744) (130,831)
---------------------------
Numerator for basic and diluted loss
per common share (772,150) (561,390)
Denominator:
Denominator for basic and diluted loss
per common share-weighted-average
shares 7,732,989 4,976,764
---------------------------
Basic and diluted loss per common shares $ (0.10) $ (0.11)
===========================
The following additional potential common shares were outstanding during 1997
and 1996, but were not included in the computation of diluted loss per share
because such assumptions are antidilutive:
At December 31, 1996, $101,289 of convertible preferred stock was
outstanding, convertible into shares of the Company's common stock at
$2.50 per share, or 40,516 shares. In addition, at the time the preferred
stock is converted, the shareholder also receives common stock warrants to
purchase shares totaling one-half of the number of common stock shares
converted, or 20,258 shares. At December 31, 1997, there was no
convertible preferred stock outstanding.
11
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies (continued)
Earnings (Loss) Per Common Share (continued)
At December 31, 1996, $145,022 of notes payable to investors convertible
into shares of the Company's common stock at $2.50 per share or 58,009
shares were outstanding. In addition, at the time the notes are converted,
the shareholder also receives common stock warrants to purchase shares
totaling one-half of the number of common stock shares converted or 29,005
shares. At December 31, 1997, all of these notes had either been redeemed
or converted.
At December 31, 1997, $39,400 of convertible subordinated debentures were
outstanding. These debentures are convertible into the Company's common
stock at a 10% discount of the closing price at the date of these
debentures and mature in July 2000.
Options to purchase 500,000 shares of the Company's common stock at $2.07
per share and 125,000 shares of the Company's common stock at $4.125 per
share were outstanding during 1997.
At December 31, 1997 and 1996, the Company had an aggregate of 997,361 and
957,946 warrants outstanding, respectively, to purchase shares of its
common stock at $3.00 per share which expire at various dates during 1999
through 2001.
Subsequent to December 31, 1997, the Company has issued a total of 66,763 common
stock shares as compensation to its employees, officers, consultants and
vendors.
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.
12
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
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.
3. Farm-Out of Vaca Tar 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 Tar 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 had the right to receive all revenues from the
properties until its costs are recouped. Subsequent thereto, the Company was to
participate as to its one-third (1/3) interest in the property and shall
co-operate the property with Saba.
If Saba did not expend the agreed sum of $10,000,000 within the two-year term or
ceased operations at the property for a period of 90 days after assuming
operations, Saba was to 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.
On November 1, 1997, the contract agreement with Saba was renegotiated and
modified so that the Company's interest would increase from one-third to
two-thirds as Saba did not make the required operating and developing
expenditures. The modification requires Saba to pay for one-half of the
operating and developing costs until they expend $5,000,000. At that point, Saba
will have earned a one-third interest and the Company will retain a two-thirds
interest in the property and these two parties will share in the costs and
revenues based on their respective interests.
13
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
4. Notes Payable
Notes payable consist of the following:
December 31
1997 1996
-----------------------------
Note payable to bank $ 622,500 $ 710,000
Notes payable to investors 10,000 145,022
Notes payable to officers 240,000 --
10% convertible debentures 39,400 --
Automobile loan 13,070 --
-----------------------------
924,970 855,022
Less current portion 885,570 325,022
-----------------------------
Total long-term debt $ 39,400 $ 530,000
=============================
Note Payable to Bank
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 Tar Sands
property to certain parties in exchange for those parties providing the
collateral, 35,000 shares of Union Pacific Corp. common stock, for the Company's
note payable to a bank. The consideration issued was valued at $300,000, its
estimated fair market value, and was amortized as additional loan costs over
five years. The 35,000 shares of Union Pacific Corp. common stock are held in a
trust and had an approximate value of $2,191,875 and $2,104,375 at December 31,
1997 and 1996, respectively. 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 1997, 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. During 1997, the recorded deed of
trust on the Company's interest in its Vaca Tar Sands property to certain
parties in exchange for those parties providing the collateral was changed to
33% of the Company's interest.
14
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
4. Notes Payable (continued)
Note Payable to Bank (continued)
The note payable to bank bears interest at prime plus 2.0%. At December 31, 1997
and 1996, the prime rate was 8.50% and 8.25%, respectively. Interest payments
are due monthly. During 1997 and 1996, 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. In October 1997, the bank
amended the monthly payments from $20,000 per month to $7,500 per month.
On January 30, 1998, the Company signed an extension agreement with the bank
that extended the due date of the note to either June 30, 1998, or December 1,
1998, if the Company receives certain investment capital by June 30, 1998. The
extension agreement requires the Company to make monthly payments of $10,000
starting February 1, 1998 through May 1, 1998, and a lump-sum principal paydown
of 30% of the net investment proceeds received by the Company from any capital
financing. Unless the entire obligation becomes due and payable on June 30,
1998, the remaining principal balance is to be repaid in six equal installments
starting July 1, 1998. As compensation for the extension of this note, the
Company issued 25,000 shares of the Company's common stock to the owners of the
collateral. On January 30, 1998, the date of the extension agreement, the
Company's stock had a market price of $1 per share valuing the 25,000 shares at
a cost of $25,000. The Company is currently delinquent on the principal payments
and accrued interest on this loan.
During 1998, the bank also released 27,500 shares of the Union Pacific Corp.
common stock used as collateral reducing the collateral to 7,500 shares. In
addition to the 7,500 shares of Union Pacific Corp. common stock, the loan is
also secured by 7,642 shares of Union Pacific Resource common stock which was
spun-off from Union Pacific Corp. and $328,260 in cumulative dividends earned on
these two stocks.
See Note 10 for additional unaudited information related to the note payable to
bank.
15
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
4. Notes Payable (continued)
Notes Payable to Investors
The Company at various times 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 had extended the maturities of the notes to various dates
in 1997, and all of the notes were secured by interests in the Company's oil and
gas properties. During 1997 and 1996, $71,300 and $171,246, respectively, of new
notes payable to investors were issued, $179,181 and $325,178, respectively, of
notes payable were repaid, $102,428 and $142,863, respectively, of notes payable
and accrued interest were exchanged for shares of the Company's common stock.
Officer Loans
During 1997, the Company borrowed $240,000 from two of its officers. A loan of
$50,000 from one of the officers bears interest at a rate of 8.25% with the
principal and accrued interest due on demand. The Company received the other
loan of $190,000 from the other officer which bears interest at a rate of
10.25%, accrued interest due monthly commencing January 1, 1998, and principal
and any unpaid interest due on or before July 1, 1998.
See Note 10 for additional unaudited information related to officer loans.
Convertible Debentures
During 1997, the Company issued 10% convertible subordinated debentures totaling
$39,400 to various investors which are due in July 2000. These debentures are
convertible into shares of the Company's common stock convertible at a 10%
discount of the closing price at the date of these debentures.
Interest payments are due monthly.
5. Related Party Transactions
Capitan Resources, Inc.
The Company has certain agreements with Capitan Resources, Inc. (Capitan) to
sell gas produced from wells owned by the Company and to offer water disposal
services on sites owned by the Company. The principal officer/shareholder of the
Company is also the
16
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
5. Related Party Transactions (continued)
Capitan Resources, Inc. (continued)
principal officer/shareholder of Capitan. Under the agreements, the Company is
to receive 70% of Capitan's gross revenues from gas sales and 75% of Capitan's
gross revenues from waste disposal services. The waste disposal services are
operated by Capitan and the costs of gas production and of operating the waste
disposal services are borne by Capitan.
Accounts receivable due from Capitan for the years ended December 31, 1997 and
1996, is as follows:
Year ended December 31
1997 1996
------------------------------
Balance at beginning of year $ 191,230 $ 155,686
Company's portion of Capitan's gross revenues 476,300 167,194
Other advances to Capitan 96,015 --
Less payments received from Capitan (50,000) (131,650)
------------------------------
713,545 191,230
Less allowance for doubtful accounts (500,000) --
------------------------------
Balance at end of year $ 213,545 $ 191,230
==============================
As of December 31, 1997, Capitan does not have sufficient liquidity to pay the
entire amounts due the Company in the foreseeable future. Although the Company's
management believes that the fair market value of Capitan's net assets, which
consists primarily of Capitan's revenue interests in the Company's properties,
exceeds amounts owed to the Company, the Company has recorded a valuation
allowance of $500,000 during the year ended December 31, 1997, to reduce the
carrying value of the accounts receivable due from Capitan. See Note 10
(unaudited) for a description of planned transaction with Capitan subsequent to
December 31, 1997.
Other
The Company's principal officer/shareholder previously held a net profit
interest of 25% in the East Los Angeles and Vaca Tar Sands oil and gas
properties. In 1994, the Company acquired the 25% net profit interest in the
East Los Angeles property and 20% of the net profit interest in the Vaca Tar
Sands property from the principal officer/shareholder. In exchange for these
interests, the Company issued 1,148,054 shares of common stock
17
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
5. Related Party Transactions (continued)
Other (continued)
valued at $103,421, which was the approximate cost of the properties to the
principal officer/shareholder. At the date of the acquisition in 1994, the
principal officer/shareholder owed the Company $31,516, which amount was
forgiven as part of the purchase consideration.
In 1987, the Company acquired certain interests in oil and gas properties from
its principal officer/shareholder in exchange for 2,125,587 shares of the
Company's common stock valued at $781,400, which was the approximate cost of the
properties to the principal officer/shareholder.
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 1997 and 1996, notes payable by the Company to a relative of the
principal officer/shareholder totaling $12,014 and $121,850, respectively, were
converted into 4,806 and 48,740 shares, respectively, of the Company's common
stock aggregating $12,014 and $121,850, respectively (see Note 7). Additionally,
24,505 and 23,740 warrants, respectively, were issued to purchase a share of the
Company's common stock at $3.00 per share which expire at various dates during
1999 through 2001.
At December 31, 1997, the Company had notes payable and convertible debentures
to relatives of the principal officer/shareholder totaling $24,000.
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%, was 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. 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
18
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
6. Redeemable Convertible Preferred Stock (continued)
public offering of the common stock of the Company. During the year ended
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 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 1997 and 1996, 91.18 and 347.69 shares, respectively, of the Company's
redeemable convertible preferred stock totaling $91,183 and $347,668,
respectively, were converted into 36,473 and 139,067 shares, respectively, of
the Company's common stock and 14,717 and 69,534 warrants, respectively, to
purchase a share of the Company's common stock at $3.00 per share which expire
at various dates during 1999 through 2001.
During 1997 and 1996, accrued dividends on the Company's redeemable convertible
preferred stock totaling $17,596 and $44,204, respectively, were converted into
7,038 and 17,682 shares, respectively, of the Company's common stock and 3,519
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 through 2001.
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 and 2000, at a
price of $2.50 per share for cash totaling $1,305,000, before related
commissions, costs and expenses of $187,301.
19
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
7. Common Stock (continued)
On December 31, 1996, the Company sold 1,764,000 shares of the Company's common
stock to private parties at a price of $1.50 per share for cash totaling
$2,646,000 (see Note 3), before related costs and expenses of $155,659. The
Company sold 300,000 warrants at a price of $15,000, in connection with services
provided to the Company related to the sale of the stock. Each warrant provides
for the purchase of a share of the Company's common stock at $3.00 per share and
expires on December 31, 1999.
At December 31, 1997 and 1996, an aggregate of 997,361 and 957,946 warrants,
respectively, to purchase a share of the Company's common stock at $3.00 per
share which expire at various dates during 1999 through 2001 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:
December 31
1997 1996
--------------------------
Deferred income tax asset - operating loss
carryforwards $ 2,000,000 $ 1,700,000
Deferred income tax liability - differences between
book and tax basis of property (1,100,000) (1,120,000)
Valuation allowance (900,000) (580,000)
--------------------------
Net deferred income taxes $ -- $ --
==========================
As of December 31, 1997 and 1996, 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 $5,100,000 and $4,290,000 for 1997 and
1996, respectively, and expire during the years 2001 through 2009. For state
income tax purposes, net operating loss carryforwards amounted to approximately
$3,400,000 and $2,680,000 for 1997 and 1996, respectively, and expire during the
years 2004 through 2010. Due to the "change in
20
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
8. Income Taxes (continued)
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 1995
and 1996 income tax returns.
9. Commitments and Contingencies
Future Minimum Rental Payments
Total rental expense incurred under all lease agreements was $78,368 and $43,598
for the years ended December 31, 1997 and 1996, respectively. At December 31,
1997, the Company had the following future lease commitments:
1998 $ 33,600
1999 33,600
2000 33,600
2001 33,600
2002 8,400
------------
Total $ 142,800
============
The Company is currently delinquent in paying their 1994/1995, 1995/1996 and
1996/1997 property taxes.
Litigation
The Company is involved in certain legal matters in the ordinary course of
business. In one particular case, an interlocutory judgment was awarded against
the Company by the court hearing litigation in which the Company is a defendant.
The judgment requires the Company to incur the expense of clean up and
abandonment of two idle wells. Additionally, if the Company fails to do so the
courts may also award damages for these costs including attorneys' fees. These
costs are not possible to determine at this time, but the plaintiff has
requested damages of up to $300,000. The Company is considering whether to
appeal the decision of the court.
See Note 10 for additional unaudited information related to the Company's
litigation.
21
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
10. Events Subsequent to December 31, 1997 (Unaudited)
Default in Notes Payable to Bank
As of August 3, 1998, the Company was in default of its note payable to bank.
The bank has not exercised its rights and remedies under the terms and
conditions of the note. Negotiations between the Company and the bank are
currently ongoing. Management of the Company is attempting to revise the due
date on the note to August 31, 1999; however, there are no assurances that this
date will be achieved.
Extension of Officer Loan
The $190,000 loan from an officer due on or before July 1, 1998 was subsequently
extended to November 1, 1998. No other changes to the terms or conditions of
this officer loan have been made.
Litigation
During July 1998, the court hearing litigation issued a final judgment against
the Company requiring it to clean up and abandon two idle wells and to pay
$32,000 in damages to the plaintiff. The Company plans to proceed with the well
clean up and abandonment; however, it has filed an appeal with respect to the
damages awarded the plaintiff.
Shut-in of Certain Oil and Gas Production
During June 1998, the Company decided to shut-in its oil and gas production at
all of its property locations except for the Vaca Tar Sands property. The
Company plans to focus its resources on the development of the Vaca Tar Sands
property and other waste disposal projects.
Planned Merger with Capitan Resources, Inc.
The Company is planning for the merger of Capitan (see Note 5) into the Company
by September 30, 1998. Capitan is an entity under common control of the
principal officer/shareholder of the Company. The only compensation related to
the transaction would be the issuance of approximately 70,000 shares of the
Company's common stock to an unrelated third party in exchange for the
cancellation of their overriding net profits interest in Capitan and their
$28,000 note due from Capitan. No other compensation is to
22
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
10. Events Subsequent to December 31, 1997 (Unaudited) (continued)
Planned Merger in the Capitan Resources, Inc. (continued)
be paid to the shareholders of Capitan. If this transaction is consummated as
planned, the assets and liabilities of Capitan will be recorded on the Company's
books at their historical cost.
The Company's valuation of the discounted present value of Capitan's revenue
interests in the Company's gas wells, based upon the estimates included in the
Company's independent petroleum engineer's report, and in the Company's waste
disposal well is in excess of $1,000,000.
11. Quarterly Financial Information (Unaudited)
<TABLE>
As of December 31, 1997, the Company has recorded a valuation allowance of
$500,000 to reduce the carrying value of the accounts receivable due from
Capitan (see Note 5). The recording of this valuation allowance results in
certain quarterly information previously reported by the Company during fiscal
1997 under Form 10-QSB to be different. Such amounts are as follows:
<CAPTION>
Three Months ended March 31, 1997
-----------------------------------------------------
As Originally Restated
Reported Adjustment Amount
------------------ ---------------- -----------------
<S> <C> <C> <C>
Revenues $ 365,859 $ -- $ 365,859
Gross profit (loss) 90,452 -- 90,452
Valuation allowance on receivable from
related party -- (99,000) (99,000)
Net income (loss) 24,302 (99,000) (74,698)
Net income (loss) applicable to common stock 24,302 (99,000) (74,698)
Net income (loss) per share of common stock $ 0.00 $ (0.01) $ (0.01)
23
</TABLE>
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
<TABLE>
11. Quarterly Financial Information (Unaudited) (continued)
<CAPTION>
Three Months ended June 30, 1997
-------------------------------------------------------
As Originally Restated
Reported Adjustment Amount
------------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues $ 342,213 $ -- $ 342,213
Gross profit (loss) (55,337) -- (55,337)
Valuation allowance on receivable from
related party -- (102,000) (102,000)
Net income (loss) (56,389) (102,000) (158,389)
Net income (loss) applicable to common stock (56,389) (102,000) (158,389)
Net income (loss) per share of common stock $ (0.01) $ (0.01) $ (0.02)
Three Months ended September 30, 1997
-------------------------------------------------------
As Originally Restated
Reported Adjustment Amount
------------------- ----------------- -----------------
Revenues $ 571,533 $ -- $ 571,533
Gross profit (loss) 43,412 -- 43,412
Valuation allowance on receivable from
related party -- (195,000) (195,000)
Net income (loss) 324,820 (195,000) 129,820
Net income (loss) applicable to common stock 324,820 (195,000) 129,820
Net income (loss) per share of common stock $ 0.04 $ (0.02) $ 0.02
</TABLE>
12. Year 2000 Issue (Unaudited)
The Company's accounting software and other applications used in its operations
were purchased from outside vendors. It is management's understanding that these
applications are Year 2000 compliant. As a result, management of the Company
does not believe that the Year 2000 will have an impact on its financial
statements or on its operations.
24
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
13. Oil and Gas Operations (Unaudited)
At December 31, 1997, the Company had interests in oil and gas properties that
are principally located in Southern California. The Company does not own or
lease any oil and gas properties outside the United States.
Costs Incurred in Oil and Gas Producing Activities
Costs incurred in oil and gas producing activities were as follows:
Year ended December 31
1997 1996
------------------------------------
(In Thousands)
(Unaudited)
Property acquisition costs:
Proved properties $ -- $ --
Exploration costs -- --
Development costs 1,041,393 412,974
------------------------------------
Total costs $ 1,041,393 $ 412,974
====================================
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.
25
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
13. Oil and Gas Operations (Unaudited) (continued)
<TABLE>
Net quantities of crude oil and natural gas for the Company as of the beginning
and the end of the years ended December 31, 1997 and 1996, as well as the
changes in proved reserves during such years, are set forth in the tables below:
Oil and Gas Reserve Data
<CAPTION>
Year ended December 31
1997 1996
--------------------------------------------------
Oil Gas Oil Gas
Bbls MCF Bbls MCF
--------------------------------------------------
(In Thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves (excluding Vaca Tar
Sands), net:
Beginning of year 3,804 5,827 3,200 5,531
Revisions of previous estimates (786) (58) 649 358
Purchase of reserves in place -- -- -- --
Production (41) (31) (45) (62)
--------------------------------------------------
End of year 2,977 5,738 3,804 5,827
==================================================
Proved developed non-producing
Vaca Tar Sands reserves, net:
End of year 611 -- 993 --
==================================================
Proved undeveloped Vaca Tar Sands
reserves, net:
End of year 26,091 -- 29,566 --
==================================================
</TABLE>
The decrease in reserves during the year ended December 31, 1997, is due
primarily to a decrease in production and the decline in oil prices. 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.
With respect to the Vaca Tar 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 $28,400,000 capital
expenditure required to
26
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
13. Oil and Gas Operations (Unaudited) (continued)
Oil and Gas Reserve Data (continued)
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 the Company provided for the drilling of horizontal wells
extending as much as 2,600 feet horizontally. Each well was to be twinned by a
parallel borehole above it into which steam will be injected continuously. The
heated, thinned oil was to flow from the lower borehole.
In 1997, the farm-out agreement was modified with Saba so that the Company's
interest increased from one-third to two-thirds. The modification requires Saba
to pay for one-half of the operating and developing costs until they expend
$5,000,000. At that point, Saba will have earned a one-third interest and the
Company will retain a two-thirds interest in the property and these two parties
will share in the costs and revenues based on their respective interests.
The cost allocated to the Vaca Tar Sands undeveloped reserves is insignificant
at December 31, 1997, 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, 1997. The costs related to the Vaca Tar 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, 1997 and 1996, 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
27
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
13. Oil and Gas Operations (Unaudited) (continued)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves (continued)
reserves are based on historical costs. Such costs include, but are not limited
to drilling development wells and installation of production facilities.
Inflation and other anticipatory costs are not considered until the actual cost
change takes effect. Estimated future income tax expenses are computed using the
appropriate year-end statutory tax rates. Consideration is given to the effects
of permanent differences, tax credits and allowances. A discount rate of 10% is
applied to the annual future net cash flows after income taxes.
The methodology and assumptions used in calculating the standardized measure are
those required by FASB Statement No. 69. It is not intended to be representative
of the fair market value of proved reserves. The valuations of revenues and
costs do not necessarily reflect the amounts to be received or expended by the
Company. In addition to the valuations used, numerous other factors are
considered in evaluating known and prospective oil and gas reserves.
<TABLE>
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 Tar Sands reserves, follows:
<CAPTION>
December 31
1997 1996
--------------------------
(In Thousands)
(Unaudited)
<S> <C> <C>
Future cash inflows $ 66,491 $ 109,744
Future production and development costs (33,729) (42,621)
Future income tax expenses (9,230) (22,736)
--------------------------
Future net cash flows 23,532 44,387
10% annual discount for estimated timing of
cash flows (8,328) (20,970)
--------------------------
Standardized measure of discounted future
net cash flows $ 15,204 $ 23,417
==========================
</TABLE>
28
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
13. 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 $18.97 per barrel and $20.35 per barrel at December 31, 1997
and 1996, respectively, and the average gas price, a combination of spot gas
prices and contract prices, was $2.50 per thousand cubic feet and $1.91 per
thousand cubic feet at December 31, 1997 and 1996, respectively. Oil prices have
further declined subsequent to December 31, 1997
Changes in Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
The changes in standardized measure for discounted future net cash flows
relating to proved developed reserves, which excludes the Company's proved
undeveloped Vaca Tar Sands reserves, follows:
<CAPTION>
Year ended December 31
1997 1996
----------------------------
(In Thousands)
(Unaudited)
<S> <C> <C>
Sales of oil and gas produced, net of production
costs $ 33 $ (132)
Net changes in prices and production costs (19,931) 16,948
Changes in estimated future development costs (867) (4,186)
Development costs incurred during the period 1,041 413
Revisions of previous quantity estimates 258 6,738
Purchase of reserves in place - -
Accretion of discount 2,342 1,369
Net change in income taxes 8,384
(8,452)
Other, principally changes in timing of estimated
production 527 (2,973)
----------------------------
Net (decrease) increase (8,213) 9,725
Beginning of year 23,417 13,692
----------------------------
End of year $ 15,204 $ 23,417
============================
</TABLE>
29
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
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
30
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
Terry and Esther Terry to Wayne Hoylman and Helen W. Hoylman
(exemplar).*
10.3(a) Form of Oil and Gas lease covering various lands in Oxnard Field (Vaca
Tar Sands Unit) (exemplar), dated January 1, 1987.*
10.3(b) Pooling Agreement, Vaca Tar Sands 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)
31
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
between Unocal Corporation and Geo Petroleum, Inc. dated February 3,
1993.*
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.
16.2 Agreement for Assignment of Leases 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. SAID APPLICATION WITHDRAWN ON
SEPTEMBER 25, 1997 BY GEO PETROLEUM, INC. SAID AGREEMENT IS
INCORPORATED
32
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
HEREIN BY REFERENCE TO FORM 10KSB/A FILED BY SABA PETROLEUM COMPANY ON
JULY 23, 1997, CENTRAL INDEX KEY: #0000312340; STANDARD INDUSTRIAL
CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311]; IRS NUMBER:
470617589; FORM TYPE: 10KSB/A; SEC ACT: 1934 ACT; SEC FILE NUMBER:
001-13880; FILM NUMBER: 97644058. SAID AGREEMENT IS OBTAINABLE
DIRECTLY FROM THE U.S. SECURITIES AND EXCHANGE COMMISSION ON THE
WORLDWIDE WEB AT HTTP://WWW.SEC.GOV/EDAUX/FORMLYNX.HTM, OR FROM SABA
PETROLEUM COMPANY AT:
SABA PETROLEUM COMPANY
17512 VON KARMAN AVE
IRVINE, CA 92714
16.3 April 9, 1997 Consent of Sherwin D. Yoelin to use all information from
his evaluation reports in this document.
33
<PAGE>
Geo Petroleum, Inc.
Notes to Financial Statements
December 31, 1997
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.
Dated: July 8, 1998
By: /s/ GERALD T. RAYDON
-----------------------------------
GERALD T. RAYDON
Chairman of the Board and President
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 Chairman/C.E.O. July 8, 1998
Larry R. Burroughs President/C.O.O./Director July 8, 1998
Alyda L. Raydon Secretary/Treasurer/Director July 8, 1998
William J. Corcoran Director July 8, 1998
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.
34
Exhibit 16.3
May 21, 1998 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
May 21, 1998
Geo Petroleum, Inc.
501 Deep Valley Drive, Suite 300
Rolling Hills Estates, CA 90274
Subject: Consent of Independent Petroleum Engineer
Gentlemen:
I agree to the inclusion in this Form 10-KSB of my reports dated January 1,
1998, 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
35
