-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WFhTi4mYssu52udEIsHer6UcnYDLavLaOIfTP1YwxbFPFRlIGnSoZLZxM3ZOtYs9 fVO8u4ff1vXnbLw1su18HQ== 0001016275-96-000008.txt : 19960801 0001016275-96-000008.hdr.sgml : 19960801 ACCESSION NUMBER: 0001016275-96-000008 CONFORMED SUBMISSION TYPE: 10SB12G/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960731 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEO PETROLEUM INC CENTRAL INDEX KEY: 0001016275 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 330328958 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10SB12G/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-20915 FILM NUMBER: 96602022 BUSINESS ADDRESS: STREET 1: 25660 CRENSHAW BLVD STREET 2: SUITE 201 CITY: TARRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 3105398191 MAIL ADDRESS: STREET 1: 25660 CRENSHAW BLVD STREET 2: SUITE 201 CITY: TORRANCE STATE: CA ZIP: 90505 10SB12G/A 1 FORM 10-SB/A/2 GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS Under Section 12(b) or (g) of the Securities Exchange Act of 1934 Geo Petroleum, Inc. ------------------- (Name of Small Business Issuer in its charter) California ---------- (State or other jurisdiction of incorporation or organization) 25660 Crenshaw Boulevard, Suite 201 ----------------------------------- Torrance, California -------------------- (Address of principal executive offices) 33-0328958 ---------- (I.R.S. Employer Identification No.) 90505 ----- (Zip Code) Issuer's telephone number (310) 539-8191 -------------- Securities to be registered under Section 12(b) of the Act: Title of each class to be so registered Inapplicable Name of each exchange on which each class is to be registered Inapplicable Securities to be registered under Section 12(g) of the Act: Common shares ------------- (Title of Class) PART 1 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis for the years ended December 31, 1995, and 1994, and the quarters ended March 31, 1995, and March 31, 1996, are read in combination with the Financial Statements presented elsewhere herein. Results of Operations 1995 Compared with 1994. During the year ended December 31, 1995, GEO had net income of $153,401 and cash provided by operations of $201,844, compared to a net loss of $558,466 and cash used in operations of $202,185 for 1994. Oil and gas revenues increased 48% to $1,563,206 for 1995, compared to $1,053,036 for 1994. This was attributable mostly to increased production as a result of a well improvement and recompletion program. A 7% increase in average oil prices, to $16.23 per barrel, also contributed to the increase in revenues, but was partly offset by a 47% decrease in gas prices, to $1.48 per mcf. During the year ended December 31, 1994, oil prices averaged $15.08 per barrel and gas prices averaged $2.17 per Mcf, respectively. Average production costs per barrel of oil and equivalents decreased 29% to $7.06 for 1995, compared to $10.00 for 1994. Lease operating expenses for 1995 amounted to $943,283, as compared to $907,713 for 1994, a 4% increase over the previous year, reflecting the additional number of wells on production. In addition to the normal operating expenses of existing wells, expenses were incurred in repairing and recompleting wells to bring them on production, performing repairs on wells and facilities damaged by contractor negligence and by two major storms and a fire, and constructing automated custody transfer facilities necessary for the delivery of oil into a refiner's pipeline. General and administrative expenses for 1995 were $402,978, as compared to $256,519 for 1994, an increase of 57%. Legal costs and fees of approximately $77,000 were incurred in 1995 for prosecuting a lawsuit that resulted in a settlement payment of $250,000 to the Company. Substantial legal, auditing, engineering and investment banking costs were incurred in connection with the preparation, offering, and negotiating of equity offerings and of joint ventures. Additional administrative costs were incurred due to the increased number of wells and properties operated during 1995. Interest expense for 1995 was $377,706, as compared to $307,333 for 1994, an increase of 23%. This increase was due to additional short-term loans and to higher interest rates. The Company's provision for depletion and depreciation decreased to $196,484 for 1995, as compared to $222,453 for 1994, a decrease of 12%. Recurring sources of Other Revenue consist of sales of interests in future Net Profits; rent; miscellaneous income; and waste water disposal fees. Other sources include proceeds from the settlement of legal actions and a gain on the sale of an asset. Other Revenue for the years ended December 31, 1995 and 1994 is itemized as follows:
December 31, 1995 1994 ------------------- Other revenue Net Profits Interests $ 62,970 $ 29,111 Rent 4,800 - Miscellaneous Income 105,115 48,595 Waste Water Disposal 129,659 59,942 Legal Settlement 250,000 - -------- -------- Total 552,544 137,648 ========= ========
The reasons for the increase in Other Revenues from year-end 1994 to 1995 are as follows: a) Net Profits Interests: 1995 sales of these interests were higher than 1994 sales. b) Rent: Geo acquired a rental property in November 1994. Geo did not start collecting rent on said property until January 1995. c) Miscellaneous Income: Represents primarily management fees and royalties earned by the Company which were higher in 1995 than in 1994 due to higher production and prices for oil and gas. d) Waste Water Disposal: 1995 volumes of waste water received were higher than in 1994. e) Legal Settlement: In 1995, Geo received $250,000 from the settlement of a lawsuit against a contractor for damages incurred while performing services on one of the Company's oil and gas properties. Geo did not receive any such income in 1994. Other Revenue for the quarters ended March 31, 1996 and 1995 is itemized as follows:
March 31 1996 1995 ---- ---- Other revenue Net Profits Interests $ 18,200 $ 31,950 Rent 1,200 2,107 Miscellaneous Income 7,864 30,303 Waste Water Disposal 15,866 27,853 Legal Settlement 45,000 62,500 Gain on Sale of Asset 36,000 - -------- -------- Total 124,131 154,712 ========= ========
The reasons for the decrease in Other Revenue from the quarter ended March 31, 1995 to March 31, 1996 are as follows: a) Net Profits Interests: 1996 sales of these interests were less than 1995 sales. b) Rent: 1995 rent charges were higher than 1996. c) Miscellaneous Income: Primarily management fees and royalties earned by the Company, which were higher in 1995 than in 1996 due to higher production and prices for oil and gas. d) Waste Water Disposal: 1996 sales of this service were lower than in the 1995 period. e) Legal Settlement: In 1995, Geo received $250,000 from the settlement of a lawsuit against a contractor for damages incurred while performing services on one of the Company's oil and gas properties. Of this amount, $62,500 was allocated to the first quarter of 1995 because the settlement had been substantially negotiated and completed during this period. In the first quarter of 1996, Geo received $45,000 from the settlement of a lawsuit against an adjacent property owner for damages to Company property incurred while trespassing on a Company easement. f) Gain on Sale of Asset: Geo did not realize any gains on the sale of assets in 1995. Capital Resources and Liquidity Financial Position. At December 31, 1995, the Company's total assets increased by approximately $325,000 over December 31, 1994, primarily as a result of additions to oil and gas properties due to the recompletion and equipping of idle wells on its East Los Angeles and Bandini properties to bring them on production, installation of gas processing and automated oil shipping equipment, and purchase of two wells on the Orcutt property. At December 31, 1995, the Company had a working capital deficiency of $2,303,360, which deficiency is greater by $162,449 over such deficiency at December 31, 1994. The Company's $1,460,000 bank loan is with the City National Bank, 606 S. Olive Street, Los Angeles, California 90014. City National acquired First Los Angeles Bank, the original lender to Geo. The Company, the Bank, and those Geo shareholders who had provided the collateral for the loan, began negotiations in May, 1996, to extend the loan for at least one year. A third party, introduced by Geo's investment bankers, has stated an interest in assuming the loan and extending its term to at least August 1, 1997. The Company is current in payment of interest and fees, and no default has been declared by the Bank, while negotiations continue. As stated in Financial Condition above, the "going concern" reference set forth in the independent auditor's report on the Company's financial statements is largely a result of the fact that the Company's bank loan is due currently and that the Company currently does not have cash reserves or income sufficient to pay it off. The Company is seeking to extend the loan for a period sufficient to enable it to complete one or more equity financings, joint ventures, or, if such measures are not adequate, property sales. Based on the evaluations of an independent petroleum engineer and of its investment banker, and due to firm oil and gas prices, the Company expects that it can find financing sufficient to develop and rework its properties, thereby obtaining the cash flow necessary to pay off its bank loan. The engineering evaluations support the Company's belief that the sale of a portion of its properties would enable it to pay off the loan. The Company is discussing proposed financings from individual and institutional investors, and from large oil companies. In the event of noncompliance with the Bank's loan payment requirements, the Company will be required to allocate the proceeds of any financing first to the payment of the loan. If such funds are not available, the Company would sell off sufficient assets to pay the loan. If the Bank foreclosed on the pledgors' collateral, which had a market value as of June 30, 1996, of more than 150% of the amount of the loan, the pledgors could seek to collect the amount paid by them by foreclosing on a 20% interest in Geo's Vaca Tar Sands property. Historically, the net cash flow from the properties of the Company has been sufficient to fund its costs of operations but insufficient to fund such costs and its debt servicing requirements. The Company's primary sources of liquidity and capital resources in the near term will consist of working capital derived from its oil and gas production and water disposal operations, augmented by any such funds as may be derived from the sale of equity in the Company and of participating interest in its operations. The Company's net revenues from oil and gas sales in excess of production and operating expenses during 1995 and 1994 were $619,923 and $145,323 respectively. Cash provided by operations for the year ended December 31, 1995, was $201,844 compared to cash used in operations of $202,185 for the year ended December 31, 1994. This increase in cash provided by operations of $404,029 is primarily a result of increased oil and gas production and revenues and the recovery in a lawsuit of a net $183,000 for damages to a Company well. GEO is seeking long-term equity financing. The first step in obtaining it was a merger with Drake Investment Corporation, which closed on April 9, 1996. This was for the purpose of increased access to capital sources. The Company plans now to sell additional shares of its common or preferred stock in equity offerings, which, if successfully completed, will permit it to eliminate its working capital deficiency, debt and interest obligations, to perform improvement and remedial work on its existing properties, to acquire additional properties, and to drill a large number of wells on its properties. All of these activities are expected to substantially increase the revenues of the Company and permit it to continue to operate on a positive cash flow basis. Sources of Capital Resources. During the year ended December 31, 1995, the Company was able to extend the maturity date of its bank credit facility in the amount of $1,460,000 from January 15, 1995, to April 15, 1996 (later extended to July 15, 1996). This facility is secured by collateral pledged by minority shareholders of the Company and is not secured by any of the assets of the Company. A portion of the proceeds from the planned equity offering will be dedicated to the repayment of such indebtedness. At December 31, 1995, the increase in the Company's working capital deficiency from December 31, 1994, was primarily due to the classification of a portion of its debt due to investors as short-term, and to costs incurred in connection with the Company's planned acquisitions and a proposed financing of equity. Historically, the net cash flow from the properties of the Company has been insufficient to fund its costs of operations and its debt servicing requirements. The Company's cash used in investing activities, primarily additions to its oil and gas properties, was $451,551 in 1995 and $613,611 in 1994. This was financed in 1995 by cash provided by operations and the proceeds from the issuance of additional notes payable and, in 1994, solely from the latter source. Cash provided by financing activities amounted to $210,398 in 1995 and $802,815 in 1994. This cash was primarily the net proceeds from the issuance of notes payable in both years. During 1995, holders of $454,750 of notes payable exchanged such notes for $454,750 of redeemable convertible preferred stock. Results of Operations FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995. ---------------------------------------------------- During the quarter ended March 31, 1996, GEO had a net loss of $52,785 and cash used in operations of $43,783, compared to net income of $39,955 and cash provided by operations of $155,978 for the comparable 1995 quarter. Oil and gas revenues declined to $226,150 for the 1996 period, compared to $437,698 for the first quarter 1995. This was attributable mostly to normal declines and to a reduction of the number of wells on production in the Rosecrans and East Los Angeles Fields as a result of temporary mechanical malfunctions. Average oil prices increased to $17.53 per barrel in the 1996 period, compared to $15.66 per barrel in the comparable 1995 period, while gas prices remained about unchanged at $1.45 per mcf. Lease operating expenses for the first quarter of 1996 declined to $247,174, as compared to $264,119 in the comparable 1995 period, a 7% decrease reflecting the fewer number of wells on production. However, average production costs per barrel of oil and equivalents increased to $13.97 in the 1996 period from $7.01 in the 1995 period, due to increased repair costs and due to allocating fixed operating costs to a smaller quantity of produced barrels. In addition to the normal operating expenses of existing wells, expenses were incurred in repairing and recompleting wells to bring them on production, performing repairs on wells and facilities damaged by a fire caused by contractor negligence, and putting into service automated custody transfer facilities necessary for the delivery of oil into a refiner's pipeline. General and administrative expenses for the 1996 quarter were $52,075, as compared to $112,834 for the 1995 period, a decrease of 54%. The decrease was largely due to a reduction in legal costs and fees after substantially resolving two lawsuits successfully, and due to lower accounting and consulting fees. Interest expense for the 1996 quarter was $56,314, as compared to $105,758 for the comparable 1995 period, a decrease of 47%. This decrease was due primarily to the exchange of short-term loans for the Company's preferred stock. The Company's provision for depletion and depreciation decreased to $49,121 for the first quarter of 1996, as compared to $55,016 for the 1995 period, a decrease of 11%. Capital Resources and Liquidity FINANCIAL POSITION. ------------------- At March 31, 1996, the Company had a working capital deficiency of $2,338,410, which deficiency is greater by $35,050 than such deficiency at December 31, 1995. The Company has requested a one year extension of its bank loan of $1,460,000 which was due July 15, 1996. Negotiations are continuing and the Company has temporarily and informally extended the loan during such negotiations. Historically, the net cash flow from the properties of the Company has been sufficient to fund its costs of operations but insufficient to fund such costs and its debt servicing requirements. The Company's primary sources of liquidity and capital resources in the near term will consist of working capital derived from its oil and gas production and water disposal operations, augmented by any such funds as may be derived from the sale of equity in the Company and of participating interests in its operations. The Company's net revenues from oil and gas sales in excess of production and operating expenses during the first quarter of 1996 and 1995 were ($21,024) and $173,579, respectively. This decline is primarily attributable to the drop in revenues in the first quarter 1996 which was previously discussed. Cash used in operations for the quarter ended March 31, 1996, was $43,783 compared to cash provided by operations of $155,978 for the period ended March 31, 1995. This decrease in cash provided by operations of $199,761 is primarily a result of decreased oil and gas production and revenues, increased costs per unit of production, and costs of repair of fire damage. GEO is seeking long-term equity financing, as set forth above in this Item, to permit it to continue to operate on a positive cash flow basis. Sources of Capital Resources. The status of the Company's bank loan is discussed above in this Item. A portion of the proceeds from the planned equity offering will be dedicated to the repayment of such indebtedness. The Company's cash used in investing activities, primarily additions to its oil and gas properties, net of any sales or disposals, was $30,173 in the first quarter of 1996 and $127,032 for the period ending December 31, 1995. Inflation In recent years inflation has not had a significant impact on the Company, its operations or financial condition. Trends. Although there is no assurance that the Company will be able to successfully complete its planned equity offering, the Company believes that if it is successful, the Company will be able to increase its revenues by investing a portion of the anticipated proceeds in remedial and recompletion operations, development and exploratory drilling and planned acquisitions. As a result of any increase in activities, the Company anticipates that its general and administrative expenses will measurably increase, since the Company is contemplating hiring additional personnel, expanding its administrative offices and increasing compensation to its existing staff, including its president. Legislation has been enacted which permits the export of Alaskan North Slope crude oil, primarily to the Far East. Previously, large quantities of such crude were shipped to California for refining and sale, which depressed prices paid for crude oil produced in California. The major producer of Alaskan oil has announced plans to deliver a large portion of its oil production from Alaska to the Far East in 1996. As such reduction of Alaskan supplies to the West Coast occurs, it is expected to have a positive effect upon the price paid for California crude oil. During the first five months of 1996, crude oil prices have increased by an average of $2.20 per barrel. GEO anticipates that there will be a gradual strengthening in the prices for both its oil and gas production, but that periods of unstable pricing may occur. The Company will be subject to variations in cash flow depending upon changes in prices paid for oil and gas. Based upon historical swings in prices, the Company does not envision a situation where reductions in prices will create an operating loss from its properties at the field level. Severe drops in prices would, however, strain the Company's ability to conduct remedial work using it revenues. ITEM 3. DESCRIPTION OF PROPERTY All of the Company's properties are located in California, primarily in the southern portion of the State. Geo's material producing properties are described in this item. East Los Angeles / Bandini Fields At December 31, 1995, these two separate, but adjacent accumulations which are located in an industrial area of the City of Los Angeles, produced a daily average during 1995 of 210 barrels (172 net) of high gravity (33 degree API) oil and 306 MCf. of 1200 BTU gas from a total of 10 wells. Estimated total net proven developed reserves amounted to 2,039,114 barrels of oil and 5,530,765 MCF. of natural gas, of which 594,148 barrels and 865,143 MCF, respectively, were classified as proved producing. For the six month period ended June 30, 1996, these two properties produced a daily average of 110 barrels of oil and 101 Mcf of gas from a total of eight wells. At June 30, 1996, 14 wells were idle pending recompletion or repair operations, and eleven were idles awaiting reworking and re-equipping operations. The Company believes that such operations, as completed, will add additional producing capability. The properties are located approximately one-half mile apart and are operated together by the same employees. In the aggregate, approximately 570 surface acres are covered by GEO's leases. GEO's rights in both fields are held by production. The Company owns all the mineral rights in the East Los Angeles Field, subject to overriding royalties of 16% of gross revenues. The Bandini interests are comprised of town-lot leases and of Company-owned mineral rights; the Bandini interests are subject to royalties varying from 16% to 29.5% of gross revenues. Production comes from multiple sand zones in the Pliocene Repetto formation at depths of 2800 to 8000 feet at Bandini and in the Miocene Puente formation at depths of between 7200 to 11200 feet at East Los Angeles. GEO acquired these fields in 1990, when they were producing less than 40 net barrels of oil per day, and had remaining economic reserves of less than 90,000 barrels. Since that time GEO has invested approximately $1,200,000 in reworking and remedial efforts, and has achieved the increases in production and reserves stated above. GEO determined that the previous operators had not recognized several potentially productive oil and gas zones. By recompleting existing wells, GEO has discovered two shallower gas zones and extended one oil zone at Bandini. In the East Los Angeles Field, two shallower oil and gas zones have been discovered. In each case, the recompleted wells flowed with excellent pressures. Geo regards the results of the foregoing work as demonstrative of the economic feasibility of the continued recompletion of wells and of the drilling of extension, deeper test, and horizontal wells in the fields. The Company presently operates five out of eighteen existing wells at the Bandini Field. At East Los Angeles, the Company operates three producing wells out of a total of fifteen wells. Subject to obtaining financing, GEO intends to spend approximately $2,165,000 for recompleting the remaining wells and restoring them to production. GEO's geologic studies have led the Company to conclude that there are also seven exploratory prospects in these fields, which, if productive when drilled, would extend the existing field limits, discover shallower and deeper zones, and develop production by horizontal drilling. Geo has no present schedule for drilling these prospects. Oxnard Field GEO and Gerald T. Raydon, President and principal shareholder of GEO, jointly acquired 26 oil wells and oil and gas leases covering approximately 625 acres of land in the area of Oxnard, Ventura County, California, from Oryx Energy in 1990, for a consideration of S150,000. See "Certain Relationships and Related Transactions." On April 1, 1994, GEO acquired all but five percent of the 25% interest held by Mr. Raydon in the Oxnard Field for a consideration consisting solely of Common Stock. The production in this field is from the prolific and massive Vaca Oil Sand which is found at depths of between 1950 and 2400 feet. In 325 acres of the leases, the thickness of the oil-saturated sand averages 225 feet. The reservoir is highly porous (32%) and permeable (1800 md.). The oil is heavy, approximately 6-8 degrees API, and is highly viscous. Consequently, cyclic steam injection is necessary to heat the oil and reduce its viscosity, permitting it to flow readily through the well bores. In existing operations, GEO generates steam at the surface and injects it into the producing formation. The heat permeates the formation, and GEO then pumps the oil in a conventional manner. Because of the use of steam, operations are comparatively expensive while the price received for the oil is relatively low. Geo treats the production from existing wells in the Oxnard Field as oil from "non-conventional" sources, which thus qualifies for tax credits provided under Section 29 of the Internal Revenue Code. For the year 1995, this credit amounted to approximately $5.95 per produced barrel, and is subject to annual increases with inflation. At such time as the Company has an obligation to pay federal income taxes, the accrued credits may be used to offset directly any taxes due. GEO has, in the past, secured funds for operations on this lease by entering into transactions designed to provide these credits to investors in exchange for payments. GEO intends to continue such funding on an ad hoc basis. Funding from such sources would not, however, be sufficient to develop the property to any material extent. GEO is examining project financing and other methods of providing funding for development of this accumulation, but has not determined the feasibility of any such method. Proved developed non-producing reserves in Geo's leases amount as of January 1, 1996, to 775,121 net barrels and proved undeveloped reserves are a net 27,613,000 barrels. In order to produce these total reserves, the Company would be required to obtain about $66,000,000 for the drilling of 250 conventional wells, or about $45,000,000 if horizontal wells should prove feasible. With full development, future net revenues of $169,977,000 would be achieved, having a present net worth, discounted at 10% per annum, of $69,879,000, according to the report of an independent petroleum engineer. The tax credit of approximately $6.00 (for 1996) for each barrel produced from this field available under Section 29 of the Internal Revenue Code adds substantially to the after-tax revenues per barrel. GEO presently produces approximately 40 barrels per day of oil from four wells in this field. Subject to the availability of financing, GEO anticipates spending about $415,000 for reworking and equipping fifteen existing wells. At December 31, 1995 and at March 31, 1996, the oil price was respectively, $13.16 and $17.15 per barrel. Operating costs have averaged approximately $7.45 per barrel during the one year period ended December 31, 1995. Operating costs for the first quarter appear to be consistent with the yearly average. GEO expects that per barrel operating costs will decline as production per well increases. No provision has been made for funding development drilling on the property. The Company is seeking ways in which to improve the economics of the field's production. Recently, the Company entered into a letter of intent with a manufacturing firm which will test its newly developed down-hole steam generator on the Oxnard wells. This device is designed to operate at a greatly reduced cost and much more efficiently than methods in use currently. By generating steam in the well rather than at the surface, much less fuel is required, the heat loss is avoided which occurs when steam travels through surface pipelines and down the wells to a depth of over 2000 feet, and higher temperatures can be delivered to the oil zone. Since electricity is used for fuel instead of gas, major environmental permitting and compliance costs will be avoided. If this process is successful, it is expected to substantially enhance the economics of the present wells and of the 250 development wells needed to recover the proven undeveloped reserves. Produced water is disposed of in wells on site owned and operated by GEO. See "Environmental Services." GEO has two steam generators, a large capacity (9300 barrels) tank farm, disposal wells, fresh water source wells and all other equipment needed for steam operations on this lease. GEO's leases have no current drilling obligations nor do they require the payment of rentals to keep the leases in good standing. The leases reserve a royalty of 17% of gross revenues to the lessor. Wells cost approximately $265,000 to drill and complete for production The Company in 1995 received a conditional use permit from Ventura County, allowing it to drill 120 wells on part of its property. Steaming operations require compliance with various environmental regimes, including those designed to protect air quality. GEO's operations have been permitted by the local air pollution control district and have been found to be in compliance with relevant requirements. There is no assurance that such operations will remain in compliance. Rosecrans Field GEO purchased 30 wells in the Rosecrans Oil Field located in Los Angeles County, California, in December, 1994, with the plan of improving the seven active wells and repairing or reworking an additional 19 wells in order to return them to production. Wells in this field were drilled during a period of between ten and fifty years ago. The royalty amounts to 16.67% of gross revenues. If the wells were to be produced under present conditions to depletion, future cumulative production would amount to 434,000 barrels of oil (360,000 net). There are seven principal producing zones of Miocene and Pliocene age in the Field, ranging from depths of 6500 to 8400 feet. The wells have been drilled through these zones, but have not produced from all of them. This provides the opportunity to commence production from bypassed zones in the future. Presently, the gas produced from this yields no revenues for the Company. The wells are expected to produce an estimated 896,000 MCf of gas. Geo in the process of negotiating an agreement to market the gas through the existing pipeline system, which, if successfully negotiated, should result in the Company receiving payment for the gas it produces from this field. The Company's independent petroleum engineer estimates that by completing a program to improve equipment and facilities, change production methods, stimulate the producing zones, and bring proven bypassed zones on production at a cost of about $128,000, production could be increased to about 798,000 net barrels of oil and equivalents. Geo does not have the funds available to perform these operations and no assurance may be given that the results will be as estimated by the engineer. Orcutt Field GEO owns two oil and gas leases covering 3140 acres on the south flank of the giant Orcutt Field in Santa Barbara County, California. Royalty burdens on this lease are 21% of gross revenues. There are two producible formations which underlie the lease. The shallower formation is the massive, oil-saturated Diatomite Zone, which is between 250 and 500 feet thick and lies at depths of from 850 feet to 1500 feet. This formation has low permeability, which requires that it be hydraulically fractured in order to be productive. Although GEO's engineers have attributed possible reserves of approximately 8 million barrels of oil to this formation, past operations have not established the commerciality of the Zone which requires stimulation by hydraulic fracturing. The high cost of fracturing, the variable resulting production, and the low price of oil have made most wells uneconomic (six out of ten wells). The last two wells drilled are producing in commercial quantities, and Geo believes that improved fracturing technology and firm to higher oil prices may result in enhancing the economics of the Zone, but the overall profitability of operations has not yet been demonstrated. Production of the existing wells to depletion is estimated by the Company's staff to provide a net 126,000 BOE. GEO subleased shallow rights in the Diatomite Zone to Santa Fe Energy Resources, Inc. In 1991, Santa Fe drilled, hydraulically fractured and completed two wells at a depth of 1,400 feet in the Diatomite, confirming the Zone's productive potential. However, the high costs of completing the wells on an experimental basis made it unlikely that Santa Fe would recover its costs, and it sold the two wells to GEO in June, 1995. GEO owns ten wells which have been completed in the Diatomite Zone, of which four are presently producing an aggregate of 25 barrels of oil and 20 MCf of gas per day. At December 31, 1995 and March 31, 1996, respectively, GEO was receiving $13.60 and $17.60 per barrel for Orcutt oil. Because gas is produced in association with the oil, it is necessary to market or otherwise dispose of the gas. The plant which had been purchasing the gas has been closed. Since it is impermissible to vent the gas to the atmosphere, GEO has been delivering gas for only a nominal payment. The Company is exploring other methods for dealing with the gas, including co-generation, re-injection, and construction of a pipeline to a nearby utility pipeline. More production will be needed before the latter alternative will be economically feasible. The second formation underlying GEO leasehold interests is the Monterey formation, found at depths of 3500 to 5500 feet. GEO owns seven wells which are bottomed in the Monterey formation, of which two wells are presently producing. At December 31, 1995, such wells produced daily an aggregate of 12 barrels of oil and 150 MCf of gas. The oil is 30 gravity and was sold for $14.80 per barrel in December, 1995, and in April, 1996, sold for approximately $18.80 per barrel. Payment for gas has not been received for the reasons described above. Environmental Services The Company owns two commercial water disposal facilities at which water produced in oil field operations conducted by GEO and by other operators is reinjected into the subsurface for disposal. Such facilities are located at GEO's Oxnard and Orcutt properties. Historically, these operations did not contribute significantly either to gross revenues or earnings, but GEO has recently increased its efforts to attract non-affiliates to dispose of oil field waste water in GEO's facilities for a per- barrel fee. These efforts have resulted in a significant increase in revenues at the facilities. Water produced by other oil operators is hauled to GEO's disposal sites, cleaned, stored, and injected into wells operated in a joint venture with Capitan Resources, Inc., an affiliate, which provides the capital for disposal facilities and retains 25% of the revenues. See "Certain Transactions." At Orcutt, GEO operates one disposal well which discharges waste water into a formation located approximately 3,300 feet from the surface. Waste water is received from trucks into holding tanks and then pumped under pressure into the well. At Oxnard, GEO operates one well which has the unusual characteristic of usually siphoning or receiving the water on a natural vacuum or at a low pressure, thereby allowing the water to be disposed of more inexpensively than in the usual case of wells requiring injection under high pump pressure. GEO has augmented its existing facilities by installing equipment which allows GEO to salvage oil from the waste water and sell it. The wells have injected 20,000 to 30,000 barrels of water per month at charges averaging about $0.60 per barrel. The Company currently has contracts with two major oil companies and eight independents to dispose of their water. Because there are few high-capacity waste water wells permitted by the California Division of Oil & Gas, and an expanding need by operators to dispose of their waste water, GEO's operations of this type are capable of substantial growth. Natural Gas Storage Project GEO is conducting preliminary negotiations with a large California utility regarding the use of one of GEO's fields for the underground storage of up to thirty billion cubic feet (30 BCF) of natural gas. Preliminary studies have indicated the feasibility of the project. It is expected that construction of the project would result in payment of storage and injection fees to GEO. In addition, the injection of gas under pressure into the oil zones would increase production by driving the oil to the well bores. Estimated Oil and Gas Reserves At December 31, 1995, the Company's net proved oil and gas reserves, as estimated by its independent petroleum engineer, Sherwin D. Yoelin, Petroleum Engineer, Inc., amounted to 30,428,000 barrels of oil and 5,530,000 mcf. of natural gas, of which 2,824,000 barrels and 5,530,000 mcf. were classified as proved developed. Future cash flows attributable to such proved developed reserves (before income taxes) are estimated to be $30,594,000 at December 31, 1995, and the discounted value thereof, at 10%, is estimated to be $18,745,000. Much of the Company's reserve of oil is comprised of heavy crude. Consequently, a major portion of the Company's proved reserve of oil is highly price sensitive, the Company's heavy crude costs more to produce than the lighter crudes, and receives a lower price in the market. Accordingly, a price at or above 1995-1996 levels is needed in order to cover operating costs and yield profit. There are numerous uncertainties inherent in estimating oil and gas reserves and their values, including many factors beyond the control of the producer. The reserve data set forth above represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact amounts. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers may vary. In addition, estimates of reserves are subject to revision by the results of drilling, testing and production subsequent to the date of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they were based. In general, the volume of production from oil and gas properties declines as reserves are depleted. Except to the extent the Company acquires properties containing proved reserves or conducts successful exploration and development activities, or both, the proved reserves of the Company will decline as reserves are produced. The Company's future oil and gas production is, therefore, highly dependent upon its level of success in acquiring or developing additional reserves. For additional information concerning the discounted future net cash flows to be derived from these reserves see Note to the Financial Statements included elsewhere herein. The Company's estimates of reserves have not been filed with or included in reports to any federal agency other than the Securities and Exchange Commission. Title to Properties While GEO has been in possession of its major properties, Bandini-East Los Angeles, Orcutt and Oxnard, for at least six years and has not received notice of an adverse claim, GEO has not obtained title insurance or a title opinion covering such properties, but has relied upon title abstracts of the public records and the apparently unchallenged possession of its predecessors in interest. Consequently, while GEO believes that title to its properties is satisfactory, it would be unable to demonstrate such fact without obtaining title insurance or opinions. which GEO believes is not warranted under the circumstances. Title to the Company's properties is, in addition, subject to royalty and overriding royalty interests and to contractual arrangements customary in the oil and gas industry, to liens for work and materials, current taxes not yet due and to other minor encumbrances. GEO has not encumbered any of its properties to secure bank indebtedness. See "Certain Transactions" for a description of a lien to a shareholder which will be released upon payment of GEO's existing bank indebtedness. Markets General. The market for oil and natural gas produced by the Company depends on factors beyond its control, including the extent of domestic production and imports of oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for oil and natural gas, the marketing of competitive fuels and the effects of state and federal regulation of oil and natural gas production and sales. The oil and gas industry as a whole also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. Legislation has been enacted which permits the export of Alaskan North Slope crude oil primarily to the Far East. Previously, large quantities of such crude were shipped to California for refining and sale, which depressed prices paid for California crudes. The major producer of Alaskan oil has announced plans to deliver a large portion of its oil to the Far East in 1996. As such reduction of Alaskan supplies to the West Coast occurs. it is expected to have a positive effect upon the price paid for California crude oil. The Company, during 1996, experienced a substantial increase in the price paid for its oil and anticipates that there may be a further strengthening in the prices for both its oil and gas production, but that periods of unstable pricing may occur. The Company will be subject to variations in cash flow depending upon changes in prices paid for oil and gas. Based upon historical swings in prices, the Company does not envision a situation where reductions in prices will create an operating loss from its properties, taken as a whole, at the field level. Severe drops in prices would, however, strain the Company's ability to conduct remedial work using its revenues. Competition The oil and gas industry is highly competitive. Competitors include major oil companies, other independent oil and gas companies, and individual producers and operators, many of which have financial resources, staffs and facilities substantially greater than those of the Company. The Company faces intense competition for the acquisition of producing oil and gas properties that are being divested by major and independent oil and gas companies. Acreage The following table reports the Company's developed and undeveloped leasehold and mineral acreage at December 31, 1995. All of the Company's acreage is in California.
DEVELOPED DEVELOPED UNDEVELOPED UNDEVELOPED --------- --------- ----------- ----------- GROSS NET GROSS NET ----- --- ----- --- 2100 1940 4930 4610
As is customary in the oil and gas industry, the Company is generally able to retain its ownership interest in undeveloped acreage by production of existing wells, by drilling activity which establishes commercial reserves sufficient to maintain the lease, or by payment of delay rentals. All of the acreage listed above as "undeveloped" is acreage which is held by production, but upon which no wells have presently been drilled. Production The average sales prices received for and the related costs of the Company's production for the periods ended December 31, 1993, 1994 and 1995 are shown below.
DECEMBER 31 ----------- 1993 1994 1995 ---- ---- ---- Average Sales Price Received Oil $12.67 $15.08 $16.23 Gas 1.66 2.17 1.48 Average Production Cost per equivalent barrel(1) $ 7.48 $10.00 $ 7.06 (1) Since all of the Company's gas is produced in association with oil, it is not feasible to separately determine production costs. Consequently, production costs have been stated in equivalent barrels. Average cost includes the cost of producing oil attributable to landowners royalty and overriding royalty and, thus, represents the cost of gross production.
Volumes of production of oil and gas for the one year period ended December 31, 1995, were as follows: Gas 112,000 mcf Oil and liquids 110,560 bbls Producing Well Summary Set forth below is a tabulation of the number of producing wells in which the Company possessed an interest at December 31, 1993, 1994 and 1995. Producing Oil and Gas Wells
1993 1994 1995 GAS OIL GAS OIL GAS OIL --- --- --- --- --- --- Gross 1 21 3 27 3 29 Net 1 19 2 24 2 27
Purchasers of Production Crude oil produced in the Los Angeles Basin is sold via pipeline to Kern Oil & Refining Company, and approximated 78% of the Company's crude oil sales for 1995. Production of crude from the Oxnard property is sold via truck to Texaco Trading and Refining Co. which, during 1994, purchased 14% and 10% during 1995 of the Company's oil production. Natural gas produced from the Los Angeles Basin properties is sold to Pacific Tube Company, an end user in Commerce, California, and accounted for approximately 75% of the Company's share of gas sold during 1995. Natural gas from the Company's Strain Ranches lease during 1995 was sold to Pacific Gas & Electric Co. and accounted for approximately 20% of the Company's share of gas sales during 1995. Alternative purchasers are available for all of the Company's production, except for natural gas produced from Orcutt where there is a single purchaser. The Company does not receive fair market value from its sales of Orcutt gas, but because of a single purchaser, the Company's present options are limited. The Company is seeking ways to develop an additional outlet for its gas, but has been unsuccessful to date in so doing. Loss of Pacific Tube Company as a purchaser would, in all probability, result in a reduction in the price received for gas from the Bandini-East Los Angeles properties, probably in the range of 20%, but would not result in a loss of market for such gas. Recent Drilling Activities During the three year period ended December 31, 1995, the Company drilled or participated in the drilling of development and exploratory wells as set forth in the table below:
YEAR ENDED DECEMBER 31 ---------------------- 1993 1994 1995 ---- ---- ---- Gross Net Gross Net Gross Net Development Wells: Oil 8 8 0 0 0 0 Gas 0 0 0 0 0 0 Dry 8 8 0 0 0 0 Exploratory Wells: Oil 0 0 0 0 0 0 Gas 0 0 0 0 0 0 Dry 0 0 0 0 0 0 Total Wells: 8 0 0 0 0 0
During the quarter ended March 31, 1996, the Company did not participate in or drill any wells. Offices The Company leases office space in Torrance, California, aggregating some 500 square feet. The Company has no long-term lease commitments and anticipates acquiring additional office facilities when finances permit the same. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of the Company's common shares as of April 30, 1996, by: (1) each stockholder who is known by the Company to own beneficially more than five percent of the common shares; (2) each Named Executive Officer of the Company; (3) each director of the Company; and (4) all directors and executive officers of the Company as a group. The information set forth below gives effect to a 2.5505 for one stock split which occurred subsequent to December 31, 1995.
DIRECTORS, EXECUTIVE OFFICERS, - ------------------------------ AND FIVE PERCENT SHAREHOLDERS SHARES BENEFICIALLY OWNED PERCENT OF CLASS - ----------------------------- ------------------------- ---------------- Gerald T. Raydon1 Suite 201, 25660 Crenshaw Blvd. Torrance, Ca. 90505 3,647,225 73.30 Alyda Raydon1 Suite 201, 25660 Crenshaw Blvd. Torrance, Ca. 90505 3,647,225 73.30 William J. Corcoran2 2,710,202 0.21 Michael F. Moran3 3,710,202 0.21 All executive officers and directors as a group (4 persons) 3,668,904 73.74 Harriman affiliated interests4 c/o Brown & Wood One World Trade Center New York, New York 10048 522,853 11.00 Eric J. Raydon5 1,275 0.03 Drake Holding Corp.6,7 1250 Fourth St. Santa Monica, Ca. 90401 558,657 11.23 ============================================================================== 1. Gerald T. and Alyda Raydon are husband and wife. Shares listed as beneficially owned by one spouse includes shares owned beneficially by the other. In the aggregate, Mr. and Mrs. Raydon own 3,647,225 shares or 73.30% of the common shares of the Company. Excludes, in all cases, the shares held by Eric J. Raydon and by Bryan T. Raydon (7,787), as to which each of Mr. and Mrs. Raydon disclaim beneficial interest. 2. William J. Corcoran was affiliated with certain of the Harriman family interests. The shares held by Mr. Corcoran were issued as directors' compensation. 3. Michael F. Moran was affiliated with certain of the Harriman family interests. The shares held by Mr. Moran were issued as directors' compensation. 4. Represents shares held by various descendants or affiliates of W. A. Harriman. Such shares are owned as follows: Associated Partners LTD- 245,613, Crispin Connery - 51,010, Mary Dixon 51,010, Thomas F. Dixon - 51,010, Pamela Harriman - 8,162, Hillside Syndicate - 14,028, Arden H. Mason - 51,010, Edward Northrop - 51,010. The appellation "Harriman Affiliated Interests" does not connote a legal relationship among the holders nor is it a title suggested by the persons designated as components. Associated Partners LTD is a limited partnership managed by the general partner, Merchant Minerals Corp. Joan Coleman is the President of the general partner, based in Alexandria, Virginia, and exercises voting powers over the shares held by the partnership. Hillside Syndicate is a joint venture, of which the person exercising voting power over the shares is the Manager, William J. Rich, New York City, New York. Hillside Syndicate owns about 0.27% of Geo's shares. 5. Eric J. Raydon is the son of Mr. and Mrs. Raydon. The latter parties disclaim beneficial ownership of the shares held in the name of Eric J. Raydon. Shares indicated as being owned by Mr. and Mrs. Raydon do not include shares attributable to Eric J. Raydon. 6. Includes 122,546 shares held in the name of Drake Energy Corp., an affiliate, and 185,498 shares held in the name of Drake Capital Securities, Inc., an affiliate. Such shares represent 2.46% and 3.73%, respectively of the outstanding shares of the Company. Drake Holding Corp. is the parent of Drake Capital Securities, Inc., which is the parent of Drake Energy Corp. The directors of each of the corporations are Joseph Di Lillo, John Mazza, and Mark Tipton. Messrs. Di Lillo and Mazza own more than 10% of the equity of each corporation, and Mr. Tipton more than 8%. Such persons are also the executive officers of Drake Holding Corp. 7. Messrs. Corcoran and Moran were employed until 1995 by a firm successively known as Harriman Administrative Management and Middleburg Management Corp. which managed investments for various members of the family of W. A. Harriman. Since 1995, neither has been affiliated with such company nor with the Harriman family. To the Company's knowledge, the Harriman Affiliated Interests have no interest in the shares shown as beneficially owned by such persons, as to which such persons have sole voting and dispositive authority.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. Directors and Executive Officers The directors, executive officers and key employees of Geo and their ages as of March 31, 1996 are as follows: NAME - ---- POSITION WITH THE COMPANY AGE - ------------------------- --- Gerald T. Raydon President and Chief Executive Officer, Chairman of the Board of Directors 65 Alyda L. Raydon Secretary, Treasurer, Chief Financial Officer 54 William J. Corcoran Director 65 Michael F. Moran Director 41 Charles F. Peters Manager, East Los Angeles /Bandini Field operations 37 Eric J. Raydon Assistant to the President and Assistant Secretary 26 Gerald T. Raydon founded GEO in 1986. He has over 40 years of experience in the California oil industry as a geologist, attorney, and oil company president, commencing his career with Chevron U.S.A., Inc. He was for 16 years the President of American Pacific International, Inc., a public oil company located in Los Angeles, California, which achieved a market capitalization of $55,000,000 before its 1984 merger into Worldwide Energy Corporation. Subsequently he served as a director of Worldwide and as President of its West Coast subsidiary until 1986. In March 1989, he was appointed as Receiver of Fountain Oil & Gas Company by the Chief Judge of the United States District Court, Central District of California, and served four years until the receivership was concluded. Mr. Raydon holds B.A. and M.A. degrees in Geological Sciences from the University of California, Berkeley, and the J.D. degree from the University of Southern California, School of Law. He is a member of the American Association of Petroleum Geologists and of the California State Bar. Mr. Raydon is the husband of Alyda L. Raydon and the father of Eric J. Raydon. Mr. Raydon devotes approximately 95% of his working time to the performance of his duties with Geo. The balance is devoted to managing personal and business interests. See "Certain Relationships and Related Transactions." Alyda L. Raydon is Secretary/Treasurer and has been employed in such position since October, 1986. She has completed college courses in financial and investment management, accounting, computer science, and office procedures. Alyda L. Raydon is the wife of Gerald T. Raydon and the mother of Eric J. Raydon. William J. Corcoran was employed by an investment management firm representing the W. Averell Harriman family from 1963 until his retirement in 1995. He served as Secretary-Treasurer of the Mary A. H. Rumsey Foundation, the Gladys and Roland Harriman Foundation, and the W. Averell Harriman and Pamela C. Harriman Foundation. Mr. Corcoran graduated from Fordham University with B.A. and M.A. degrees in accounting. Michael F. Moran was employed in various accounting, tax analysis, and management capacities by a firm which made investments for members of the Harriman family from 1980 to 1995. He was the Treasurer of Middleburg Management Corporation and also served as Director and Chief Financial Officer of several Harriman family firms. He graduated from St. Peters College with a degree in accounting. Mr. Moran is currently employed in a similar capacity by affiliates of the Linder Family in New York City. Charles F. Peters has seventeen years of experience in oil and gas field operations. Mr. Peters has operated oil and gas wells and production facilities in California, including fourteen years experience in operations at the East Los Angeles-Bandini properties. Mr. Peters became manager of the properties in 1991. Eric J. Raydon joined the Company in June, 1995. He has over four years of experience in finance, real estate development, accounting and management, which he gained while working for a privately held unaffiliated real estate development company. While so employed, Mr. Raydon was responsible for financial, accounting, and contract management of projects involving the construction of over 1,200 residential units in the Las Vegas, Nevada and Phoenix, Arizona areas. Mr. Raydon's responsibilities included management of the Las Vegas accounting department, loan and contract administration, and cash management. Mr. Raydon was also responsible for the selection and implementation of a computerized cost accounting system for the company. His last job title was Construction Finance Coordinator. Mr. Raydon received his B.S. degree in Business Administration/Real Property Development and Management from the University of Southern California in May, 1991. Eric J. Raydon is the son of Gerald and Alyda Raydon. ITEM 6. EXECUTIVE COMPENSATION. Director Compensation Directors currently receive an annual issuance of 1000 shares of common stock as compensation. Directors do not receive reimbursement for their out of pocket costs in attending board meetings. Executive Compensation No officer of the Company received compensation, including salary and bonus, in excess of $100,000 during any of the three preceding years. Gerald T. Raydon received no salary or bonus during any such years. The Board has authorized compensation to Mr. Raydon in the amount of $110,000 per year commencing January 1, 1996. The following table sets forth certain information regarding compensation earned during each of the Company's last three fiscal years by the Company's Chief Executive Officer and all other executive officers of the Company. Summary Compensation Table
Annual Compensation Other Annual Restricted Name & Principal Salary Bonus Compensation Stock Awards & Position Year ($) ($) ($) ($) - ---------------- ---- ------ ----- ------------ ------------ Gerald T. Raydon 1993 0 0 0 0 1994 0 0 0 0 1995 0 0 0 0 Alyda L. Raydon 1993 36,000 0 0 0 1994 39,000 0 0 0 1995 40,500 0 0 0
Long-term Compensation Awards Payouts Securities Long-term Underlying Incentive Options/ Plan All Other Name & Principal SARs Payouts Compensation & Position Year (#) ($) ($)(1) - ---------------- ---- ---------- --------- ------------ Gerald T. Raydon 1993 0 0 1.000 1994 0 0 1.000 1995 0 0 1.000 Alyda L. Raydon 1993 36,000 0 1.000 1994 39,000 0 1.000 1995 40,500 0 1.000 (1) Consists of stock granted annually to each director, whether or not an employee. The value of each share of stock was established at $1 by action of the Board of directors of the Company in 1990. No trading market existed for the stock at the time of the grants.
The following table sets forth stock options granted during 1995 to the named executive officers of the Company. Option/SAR Grants in the Last Fiscal Year
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term - ----------------------------------------------------------------------------- Number of % of Total Securities Options Underlying Granted to Options Employees Exercise Granted in Fiscal or Base Expiration 5% 10% Name (#) Year Price Date ($) ($) - ---- ---------- ---------- -------- ---------- --- --- Gerald T. Raydon 0 0 Alyda L. Raydon 0 0
The following table sets forth information with respect to stock options (none of which have been granted) which were exercised in the year ended December 31, 1995, by the named executive officers and the value of such officers' unexercised options at December 31, 1995. Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
Shares Number of Securities Acquired on Value Underlying Unexercised Exercise Realized Options at Fiscal Year end Name (#) ($) Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- Gerald T. Raydon 0 0 0 0
Value of Unexercised In-the-Money Options at Fiscal Year-end Name Exercisable Unexercisable - ---- ----------- ------------- Gerald T. Raydon 0 0
Benefit Plans and Employment Agreements The Company has no benefit plans and no employment agreements, other than at will agreements, with any of its employees. In 1996, the Board authorized the Company to enter into employment contracts for periods of five years with each of Mr. Gerald T. Raydon, Mrs. Alyda Raydon and Mr. Eric J. Raydon. Such agreements when executed will provide for annual compensation of $110,000, $45,000 and $40,000, respectively, all subject to escalation on an annual basis as approved by the Board. The agreements will not contain provisions restricting a change of control in the Company. It is expected that formal contracts will be executed sometime during September, 1996. No payments have been made to the executives pursuant to such authorized contracts because of the Company's working capital deficiency, while Eric J. Raydon and Alyda L. Raydon have drawn salaries in amounts less than the contract amounts. The Company has accrued the contract salaries since July 1, 1996, and anticipates payment of the accrued amounts during the last quarter of 1996. The Company believes that the terms of the transactions described above are no less favorable than the Company would have received in arm's-length transactions. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. At the time the Company acquired its interests in the East Los Angeles-Bandini and Oxnard properties, Mr. Gerald T. Raydon, president and major shareholder of the Company, acquired 25% of the joint interests in such properties. Such joint interests were acquired through Joint Venture Agreements pursuant to which the Company paid costs of operations and Mr. Raydon supplied the investment capital. Effective as of April 1, 1994, GEO acquired 20% of the 25% interest of Gerald T. Raydon in the Company's Oxnard properties and all of the 25% interest of Mr. Raydon in the Company's East Los Angeles-Bandini properties for 1,114,805 shares of common stock valued at $103,421, which was the approximate cost of the properties to Mr. Raydon. Capitan Resources, Inc. owns an undivided 25% interest in the waste disposal facilities owned and operated by GEO at GEO's Orcutt and Oxnard properties. See "Properties - Environmental Services." Gerald T. Raydon and his family own all of the stock of Capitan Resources, Inc.. Relations between the Company and Capitan Resources are governed by an agreement which provides for a proportionate sharing of costs and revenues. Capitan Resources, Inc. is the purchaser of natural gas from the Company's Bandini-East Los Angeles properties. Capitan purchases the natural gas under a contract dated June 30, 1991, which provides for a payment to Capitan of 25% of gross sales in exchange for advancing capital and other costs of gas processing and transportation. Capitan then resells the natural gas to other purchasers. To date, resale transactions have not resulted in Capitan's recovery of its investment; however, it is expected that ultimately Capitan will achieve a significant profit on its investment. From time to time there are outstanding balances and credits between the Company and Capitan pursuant to the agreements above mentioned. At December 31, 1995 GEO had a receivable of $155,686 due from Capitan. Similar credits and balances were outstanding from time to time with respect to the Bandini-East Los Angeles properties and Vaca properties; during the two years ended December 31, 1995, the largest balance receivable from Mr. Raydon was $31,516 and at such date the receivable balance was 0. The Harriman affiliated group currently owns approximately 11% of the outstanding common stock of GEO. In 1990, members of the group provided collateral to a bank for a loan to GEO in the principal amount of $1,200,000 (now $1,460,000). As consideration, the group received 273,669 shares of common stock (as adjusted to reflect the stock split), an option to purchase 70,833 shares (unadjusted), and a security interest in 20% of the Company's Oxnard Field properties. The option was not exercised, and expired on September 11, 1995. Such loan remains unpaid as of the date hereof. In 1995, members of such group brought suit against the bank that made the loan to the Company, claiming, among other things, that the agent of the Harriman group that executed the collateral pledge agreement was not authorized so to do. The loan matured on April 15, 1996, was extended to June 15, 1996, and has been informally extended to the present while the bank, the pledgors, and the Company are negotiating for a one- year extension. Interest is being paid on a current basis by the Company. See "Litigation." In 1987 Gerald T. Raydon and Alyda L. Raydon conveyed to the Company their interests in various properties now held by the Company for an aggregate consideration of 2,125,587 shares of common stock (833,400 shares prior to split), valued at $718,400, which was the approximate cost of the properties to the principal officer/shareholders. In 1988, the Company acquired certain minor properties and other assets from the Harriman group in exchange for 267,803 shares of common stock. On February 1, 1995, the Company issued promissory notes to a relative of Gerald T. Raydon for $57,813 in consideration of an equal amount of cash. On September 1, 1995, 30 shares of preferred stock at $1,000 per share were issued in exchange for a $30,000 portion of such promissory notes. At September 30, 1995, relatives of Gerald T. Raydon owed the Company $6,471 relating to net revenue interests in the Company's Vaca property. Such relatives acquired their interest in 1992 for a consideration of $3,500 which was the same price for which the interest was offered to third persons. The debt bears no interest. Drake Capital Securities, Inc., the shareholders of which were shareholders of DIC is the Company's investment banker. Drake Capital Securities, Inc. entered into an agreement with the Company dated December 20, 1995, by which Drake Capital Securities, Inc. agreed on a best efforts basis to manage a private placement of up to 2,500,000 shares of the common shares of the Company for an offering price of $2.50 per share. Drake Capital Securities, Inc. will be compensated by the Company with commissions of 7.5 - 10%. In addition, Drake Capital Securities, Inc. has acted as a financial advisor to the Company in the past. ITEM 8. DESCRIPTION OF SECURITIES. The following is qualified by reference to the Company's Articles of Incorporation and Bylaws, copies of which have been filed as exhibits to this registration statement. Description of the Common Equity. The Company's Articles authorize the issuance of 5 million shares of Common equity, of which 1.755,700 had been issued at December 31, 1995 Subsequent to such date, the Articles of Incorporation were amended to provide for an authorized capital of fifty million shares of common stock and, in connection with the acquisition of DIC, the outstanding shares, including those issued in connection with the acquisition, were split into 2.5505 shares, resulting in 4,975,460 shares of common stock being outstanding at April 30, 1996. See "Recent Sales of Unregistered Securities." Holders of the Common equity are entitled to dividends when and as declared by the Board of Directors from funds legally available therefor and upon liquidation are entitled to share ratably in any distribution to stockholders. All holders of Common equity are entitled to one vote per share on any matter coming before the stockholders for a vote. Shareholders are entitled to cumulate their votes in the election of directors. Thus, each shareholder is given a number of votes equal to the number of shares held multiplied by the number of directors to be elected, and the shareholder is entitled to apportion such votes among the nominees as the shareholder selects. All issued and outstanding shares of the Common equity are fully paid and non-assessable. Shareholders do not have preemptive rights. Description of the Preferred Stock The Board of Directors is empowered, by the Articles as amended on August 23, 1994 to issue 100,000 shares of Preferred Stock and to divide the same into series, fix the number of shares constituting each series, and to fix or alter the voting rights, dividend rights, dividend rates, conversion rights, rights and term or redemption, rights upon dissolution or liquidation and other special rights on any unissued series of Preferred Stock. During 1995, the Board authorized the creation of a $1,000 preferred stock and pursuant to that authorization the Company issued a total of 505.15 shares in exchange for $505,150. The series of preferred stock issued, carries an annual dividend of 30%, is callable by the Company at par at any time on notice to the holder. If the Company has not called the preferred stock for redemption by January 1, 1997, the holder may require the Company to redeem the preferred stock. The preferred stock is convertible into common stock, at the option of the holder, at a price equal to 80% of the price at which the common stock may be sold in an initial public offering of the common stock of the Company. PART II ITEM 1. MARKET PRICE, DIVIDENDS AND OTHER SHAREHOLDER MATTERS. Market Information. Lack of Public Market There has been no market for the shares of the Company. It is expected that as a result of the acquisition of DIC a market may develop, but the nature and extent thereof is speculative. See "Business - Acquisition of DIC." Shares issued At April 30, 1996, the Company's Articles of Incorporation authorized the issuance of fifty million common shares, of which 4,975,460 were issued and outstanding. As of such date, there were no options or warrants convertible into common equity outstanding. However, as of such date the Company had outstanding a class of Preferred Stock which is under certain conditions convertible into common shares; at such date 505.15 shares of such preferred stock had been issued. Such preferred stock is convertible into common stock at a price equal to eighty percent of the price at which a share of common stock is sold to the public in the Company's initial public offering. See "Description of the Preferred Shares." Shares Available for Resale At April 30, 1996, had the Company been subject to the reporting requirements of the Securities and Exchange Act, approximately 4,467,914 shares of the common equity of the Company would have been eligible for resale under Rule 144 under the Securities Act of 1933, of which approximately 4,393,661 shares were held by affiliates of the Company and constituted "restricted" shares. In addition, shares issued in connection with the acquisition of DIC (See "Business - Acquisition of DIC") were issued pursuant to an exemption from the registration and prospectus delivery requirements of the Securities Act pursuant to section 3(a)10) thereof and are believed to be freely transferable. In such transaction, 497,546 shares were issued. To the knowledge of the Company, none of the issuees constitutes an "affiliate" of the Company, nor does any such issuee hold more than five percent of the common equity of the Company. The remaining 4,477,914 shares of common stock held by existing stockholders (the "Restricted Shares") were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be sold in the public market only if registered or pursuant to an exemption from registration such as Rules 144, or 144(k) under the Securities Act, which are summarized below. Approximately 207,000 of these Restricted Shares are eligible for sale in the public market upon compliance with Rule 144(k). In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's common stock (approximately 49,754 shares) (ii) the average weekly trading volume of the Company's Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or person whose shares are aggregated) who is not deemed to have been an Affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least three years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. None of the shares otherwise eligible for resale under Rule 144, will be so eligible until the Company has been subject to the reporting requirements of the Securities and Exchange Act for a period of 90 days. It is expected that such 90 day period will expire on or about October 1, 1996. These shares may be sold in the public market only if registered or pursuant to an exemption from registration, such as Rules 144, 144 (k), or 701 under the Securities Act. Possible Sale of Shares by the Company and Registration Rights The Company has no agreements by which it is obligated to register any shares of common equity. However, the Company plans to privately offer shares of its common stock in the near future and is considering the issuance of common equity in a transaction registered under the Securities Act, but has not formulated definitive plans for the latter. The Company is seeking to implement the first alternative by a placement of up to 2,500,000 shares of its common stock privately through the efforts of Drake Capital Securities, Inc. See "Certain Relationships and Related Transactions." If the Company privately places any of its common shares, it is anticipated that the purchasers thereof will be accorded rights to require the Company to register the shares. In addition, if the Company conducts an initial public offering of its shares, it is probable that the existing holders of the Preferred Stock will be accorded the right to have their shares registered as part of the offering. The Company is also considering the issuance of common equity in a transaction registered under the Securities Act, but has not formulated definitive plans therefor. Holders of Common Equity At April 30, 1996, there were approximately 73 holders of record known to the Company of the common equity of the Company. Dividends The Company has never paid dividends on its common equity and has no plans to do so in the foreseeable future. Payment of dividends is implicitly restricted by the Company's bank loan agreement, and by the General Corporation Law of the State of California, since the latter prohibits the payment of dividends if the distribution thereof would result in it being unlikely that the corporation would be able to meet its liabilities as they mature. At present the Company has a working capital deficiency and would thus be unable to pay dividends currently. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. The Company elected, effective January 1, 1996, to change its independent accountants. Deloitte & Touche LLP had audited the financial statements of Geo for the year ended December 31, 1994. Geo, as a matter of business judgment, engaged the services of Ernst & Young LLP to audit its financial statements for the year 1995. There were no disagreements with Deloitte & Touche LLP respecting accounting or auditing matters. Geo has provided a copy of this disclosure to its present and its former accountants and has requested both to review such disclosure. A letter confirming the foregoing from Deloitte & Touche LLP has been filed as an exhibit to this registration statement. Geo did not discuss the application of accounting principles to any specific transaction or the type of audit opinion that might be rendered, prior to engaging its new accounting firm. PART F/S Geo Petroleum, Inc. Index to Financial Statements Report of Ernst & Young LLP, Independent Auditors F-2 Report of Deloitte & Touche LLP, Independent Auditors F-3 Balance Sheets at December 31, 1995 and 1994 F-4 Statements of Operations for the years ended December 31, 1995 and 1994 F-6 Statements of Stockholders' Equity for the years ended December 31, 1995 and 1994 F-7 Statements of Cash Flows for the years ended December 31, 1995 and 1994 F-8 Notes to Financial Statements F-10 Report of Independent Auditors Stockholders and Board of Directors Geo Petroleum, Inc. We have audited the accompanying balance sheet of Geo Petroleum, Inc. as of December 31, 1995, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1995 financial statements referred to above present fairly, in all material respects, the financial position of Geo Petroleum, Inc. at December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company had incurred recurring losses from operations through December 31, 1994, and had an accumulated deficit and negative working capital at December 31, 1995. In addition, the Company has defaulted on a loan agreement with a bank and has not complied with certain related covenants. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Ernst & Young LLP Los Angeles, California April 30, 1996 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders GEO Petroleum, Inc. Torrance, California We have audited the accompanying balance sheet of GEO Petroleum, Inc. ("the Company") as of December 31, 1994, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses from operations and had an accumulated deficit and negative working capital at December 31, 1994. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Deloitte & Touche LLP Los Angeles, California June 28, 1995, except for Notes 2 and 8 for which the date is November 29, 1995 Geo Petroleum, Inc. Balance Sheets
DECEMBER 31 1995 1994 ------------------------- ASSETS Current assets: Cash and cash equivalents (NOTE 1) $ 100,565 $ 139,874 Accounts receivable: Accrued oil and gas revenues (net of allowances for doubtful accounts of $17,775 in 1995 and $6,430 in 1994) 161,308 121,194 Joint interest and other (NOTE 3) 200,026 132,514 Prepaid expenses and other 52,413 5,794 ----------- ------------ Total current assets 514,312 399,376 Property and equipment (NOTES 1 AND 3) Oil and gas properties 4,698,877 4,262,003 Office furniture and equipment 65,948 51,271 ----------- ----------- 4,764,825 4,313,274 Accumulated depletion and depreciation (1,037,404) (840,920) ----------- ----------- 3,727,421 3,472,354 Deferred charge, net (NOTE 1) - 45,000 ----------- ------------ Total assets $4,241,733 $ 3,916,730 =========== ============
DECEMBER 31 1995 1994 ------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable: Accrued royalties $ 438,507 $ 289,076 Trade and other (NOTE 3) 283,161 510,512 Bank overdraft - 26,002 Dividends payable 20,120 - Accrued expenses 107,821 78,697 Current portion of notes payable (NOTE 2) 1,968,063 1,636,000 ----------- ----------- Total current liabilities 2,817,672 2,540,287 Notes payable (NOTE 2) - 600,813 Redeemable convertible preferred stock, $1,000 par value; authorized 100,000 shares; issued and outstanding 505.15 shares at December 31, 1995 (NOTE 4) 505,150 - Stockholders' equity (NOTES 2, 3 AND 5) Common stock, no par value; authorized 50,000,000 shares; issued and outstanding 4,477,913 and 4,288,454 shares at December 31, 1995 and 1994, respectively 2,157,702 2,147,702 Accumulated deficit (1,238,791) (1,372,072) ------------ ----------- Total stockholders' equity 918,911 775,630 ------------ ----------- Total liabilities and stockholders' equity $ 4,241,733 $ 3,916,730 ============ ============ SEE ACCOMPANYING NOTES.
Geo Petroleum, Inc. Statements of Operations
YEAR ENDED DECEMBER 31 1995 1994 ------------------------- Revenues (NOTES 1 AND 3) Oil and gas sales $ 1,563,206 $ 1,053,036 Other revenue 552,544 137,648 Interest income 3,102 4,868 ------------ ------------ 2,118,852 1,195,552 Expenses: Lease operating expenses 943,283 907,713 Depletion and depreciation 196,484 222,453 Amortization of deferred loan costs (NOTE 1) 45,000 60,000 General and administrative 402,978 256,519 Interest expense 377,706 307,333 ------------ ------------ Income (loss) before income taxes 153,401 (558,466) Provision for income taxes (NOTE 6) - - ------------ ------------ Net income (loss) 153,401 (558,466) Less preferred stock dividends (20,120) - ------------ ------------ Net income (loss) applicable to common stock $ 133,281 $ (558,466) ============ ============ Net income (loss) per share of common stock $ 0.03 $ (0.13) ============ ============ SEE ACCOMPANYING NOTES.
Geo Petroleum, Inc. Statements of Stockholders' Equity
Number of Common Shares Common Accumulated Outstanding Stock Deficit Total ------------------------------------------------ Balance at December 31, 1993 3,063,597 $2,034,275 $ (813,606) $1,220,669 Net loss - - (558,466) (558,466) Issuance of stock 1,224,857 113,427 - 113,427 ----------------------------------------------- Balance at December 31, 1994 4,288,454 2,147,702 (1,372,072) 775,630 Net income - - 153,401 153,401 Issuance of stock 189,459 10,000 - 10,000 Preferred stock dividends - - (20,120) (20,120) ----------------------------------------------- Balance at December 31, 1995 4,477,913 $2,157,702 $(1,238,791) $ 918,911 =============================================== SEE ACCOMPANYING NOTES.
Geo Petroleum, Inc. Statements of Cash Flows
YEAR ENDED DECEMBER 31 1995 1994 ------------------------ OPERATING ACTIVITIES Net income (loss) $ 153,401 $(558,466) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depletion and depreciation 196,484 222,453 Amortization of deferred loan costs 45,000 60,000 Fees paid in stock 10,000 4,000 Changes in operating assets and liabilities: Accounts receivable (107,626) (114,683) Prepaid expenses and other (46,619) 22,543 Accounts payable (77,920) 88,138 Accrued expenses 29,124 73,830 ----------- ------------ Net cash provided by (used in) operating activities 201,844 (202,185) INVESTING ACTIVITIES Additions to property and equipment (451,551) (613,611) ----------- ------------ Net cash used in investing activities (451,551) (613,611) FINANCING ACTIVITIES Proceeds from notes payable 307,000 776,813 Payments on notes payable (121,000) - Bank overdraft (26,002) 26,002 Preferred stock issued 50,400 - ----------- ------------ Net cash provided by financing activities 210,398 802,815 ----------- ------------ Net decrease in cash and cash equivalents (39,309) (12,981) Cash and cash equivalents at beginning of year 139,874 152,855 ----------- ------------ Cash and cash equivalents at end of year $ 100,565 $ 139,874 =========== ============
Geo Petroleum, Inc. Statements of Cash Flows (CONTINUED)
YEAR ENDED DECEMBER 31 1995 1994 ------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 414,821 $ 188,816 =========== ============ Cash paid during the year for income taxes $ 800 $ - =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1995, the Company issued 454.75 shares of the Company's redeemable convertible preferred stock in exchange for the retirement of certain notes payable aggregating $454,750. Additionally, the Company issued 2.4 shares of the Company's redeemable convertible preferred stock to an individual as a finder's fee payment for services rendered in 1995. In connection with the issuance of the Company's redeemable convertible preferred stock, fourth quarter dividends amounting to $20,120 were declared and payable as of December 31, 1995. Also, the Company issued 185,498 shares of common stock to a consulting company as payment for services that were performed in 1994 and 1995. During 1994, the Company issued 1,214,655 shares of common stock and forgave accounts receivable in the amounts of $32,358 in exchange for certain oil and gas property interests valued at $141,785. SEE ACCOMPANYING NOTES. 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Geo Petroleum, Inc. (the Company) is a private oil and gas production company that was founded in 1986 in the state of California. The Company engages in the development, production and management of oil and gas properties located in California. On April 9, 1996, the Company's Board of Directors approved the proposed merger with Drake Investment Corp. (Drake). The terms and conditions of the merger are further described in Note 8. BASIS OF PRESENTATION The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, as of December 31, 1995, the Company's accumulated deficit totaled $1,238,791, and current liabilities exceeded current assets by $2,303,360. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its current obligations on a timely basis, to obtain additional financing, and ultimately to obtain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations. These potential alternatives include, among other things, a private and public placement of debt or equity, extending or refinancing the bank loan using oil and gas properties as collateral, sale of oil and gas properties and obtaining an advance on future production from an end user. As a first step in a potential public or private offering, the Company has signed an agreement to merge with Drake (see Note 8). There can be no assurance that any of these potential alternatives will materialize. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. CASH AND CASH EQUIVALENTS Cash equivalents include certificates of deposit with original maturity dates of less than three months. The Company maintains a $100,000 certificate of deposit for state of California authorization purposes to perform additional oil and gas well recompletions. These funds are subject to certain withdrawal restrictions until completion of the work. DEFERRED CHARGE The deferred charge consists of unamortized loan costs, which were amortized over five years through September 1995 (see Note 2). Amortization expense was $45,000 in 1995 and $60,000 in 1994. INVESTMENT IN PARTNERSHIP Included in oil and gas properties is an investment in a general partnership that was created in 1991 to produce oil at a well located on one of the Company's oil and gas properties. The Company is the managing partner in this general partnership, and this investment is accounted for under the pro rata consolidation method. PROPERTY AND EQUIPMENT The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas reserves are capitalized as incurred. The costs of oil and gas properties are accumulated in a cost center and are subject to a cost center ceiling which such costs do not exceed. The Company has not capitalized any internal costs in oil and gas properties. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are depleted over the estimated useful lives of the properties by application of the unit-of-production method using only proved oil and gas reserves, excluding future estimated costs and related proved undeveloped oil reserves at the Vaca Oil Sands property, which relate to a major development project involving an enhanced recovery process as more fully discussed in Note 9. The evaluations of the oil and gas reserves were prepared by Sherwin D. Yoelin, a petroleum engineer. Depletion expense recorded for the years ended December 31, 1995 and 1994 was $196,484 and $218,723, respectively. Substantially all additions to oil and gas properties in 1995 and 1994 relate to recompletions of existing producing or previously producing wells. Because the Company oil and gas producing properties are estimated by the Company's independent petroleum engineer to have remaining producing lives in excess of 17 years, the present value of future site restoration and environmental exit liabilities related to its oil and gas production to date are insignificant. Depreciation of office equipment and furniture is computed using the straight-line method, with depreciation rates based upon their estimated useful lives, which range between five and seven years. Depreciation expense was $5,198 and $3,730 for the years ended December 31, 1995 and 1994, respectively. REVENUE Revenue from oil and gas sales is recognized upon delivery of the oil and gas to the Company's customer. Such revenue is recorded net of royalties and certain other costs that the Company incurs to bring the oil and gas into salable condition. The Company had one significant customer in 1995 and 1994 which comprised approximately 53% and 33% of gross oil and gas sales, respectively. Included in other revenues for 1995 is $250,000 received from the settlement of a lawsuit against a contractor for damages incurred while performing services on one of the Company's oil and gas properties. EARNINGS PER COMMON SHARE Net income (loss) per common share is based upon average outstanding common shares, adjusted for the stock split described in Note 8, during each year (4,383,183 shares in 1995 and 3,676,025 shares in 1994). Such calculations do not assume any conversion of the redeemable convertible preferred stock into common stock because determination of the conversion price is subject to future events. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts in the financial statements have been reclassified to conform to current year presentation. 2. NOTES PAYABLE Notes payable consisted of the following:
DECEMBER 31 1995 1994 ------------------------- Note payable to bank $ 1,460,000 $ 1,460,000 Notes payable to investors 508,063 776,813 ------------ ------------ 1,968,063 2,236,813 Less current portion 1,968,063 1,636,000 ------------ ------------ Total long-term debt $ - $ 600,813 ============ ============
The Company has issued notes payable to various investors bearing an interest rate of 10% and a guaranteed oil and gas production payment equal to 20% of the outstanding principal amount per annum. The holders of the notes have extended the maturities of the notes to various dates in 1996, and all of the notes are secured by interests in the Company's oil and gas properties. The note payable to bank bears interest at prime plus 2.0%. At December 31, 1995 and 1994, the prime rate was 8.5%. Interest payments are due monthly, and the outstanding principal amount and all unpaid interest was due on October 15, 1995. In October 1995, the bank extended the maturity date of the note payable to April 15, 1996, which was also not paid and is currently delinquent. The Company was not in compliance with certain loan covenants at and subsequent to December 31, 1995, including restrictions on incurring additional debt and failure to make certain payments to outside vendors on a timely basis. While the bank has not taken any action regarding such noncompliance, the covenants have not been waived through the extended maturity date. As a result, the note is classified as current at December 31, 1995. The Company is engaged in discussions with the bank to further extend the maturity of the note. In 1990, the Company issued 273,669 shares of common stock, an option to purchase 180,660 additional shares of common stock at $6 per share and a recorded deed of trust on 20% of the Company's interest in its Vaca Tar Sands property to certain parties in exchange for those parties providing the collateral, 35,000 shares of Union Pacific Corp. common stock, for the Company's note payable to a bank. The consideration issued was valued at $300,000, its estimated fair market value, and was amortized as additional loan costs over five years. The 35,000 shares of Union Pacific Corp. common stock is held in a trust and had an approximate value of $2,310,000 at December 31, 1995. In the event of default on the bank note payable, the parties providing the collateral may take steps to recover from the Company the value of any collateral taken by the bank. The collateral agreements and the stock purchase option expired on September 11, 1995. In connection with the extension of the maturity date of the bank note payable, the collateral agreement was extended to April 15, 1996. No additional consideration was given for this extension. 3. RELATED PARTY TRANSACTIONS The Company has entered into agreements with another entity to sell gas and offer water disposal services at certain locations. The principal officer/shareholder of the Company is also the principal officer/shareholder of the other entity. Total revenue to the Company from these agreements was $257,024 and $174,294 in 1995 and 1994, respectively. At December 31, 1995 and 1994, the Company had a net receivable balance of $155,686 and $81,312, respectively, from the other entity. The Company's principal officer/shareholder previously held a net profit interest of 25% in the East Los Angeles and Vaca Tar Sands oil and gas properties. In 1994, the Company acquired the 25% net profit interest in the East Los Angeles property and 20% of the net profit interest in the Vaca Tar Sands property from the principal officer/shareholder. In exchange for these interests, the Company issued 1,148,054 shares of common stock valued at $103,421, which was the approximate cost of the properties to the principal officer/shareholder. At the date of the acquisition in 1994, the principal officer/shareholder owed the Company $31,516, which amount was forgiven as part of the purchase consideration. In 1987, the Company acquired certain interests in oil and gas properties from its principal officer/shareholder in exchange for 2,125,587 shares of the Company's common stock valued at $781,400, which was the approximate cost of the properties to the principal officer/shareholder. At December 31, 1995 and 1994, the Company had notes payable to relatives of the principal officer/shareholder totaling $53,563 and $86,819, respectively. At December 31, 1994, relatives of the principal officer/shareholder owed the Company $6,471 relating to the net revenue interests in certain oil and gas properties. No such amounts were owed at December 31, 1995. In December 1995, notes payable by the Company to a relative of the principal officer/shareholder totaling $30,000 were converted into 30.0 shares of the Company's redeemable convertible preferred stock aggregating $30,000 (see Note 4). The principal officer/shareholder of the Company has not taken a salary since inception of the Company. 4. REDEEMABLE CONVERTIBLE PREFERRED STOCK During 1994, the Company authorized 100,000 shares of preferred stock with a par value of $1,000 per share. At December 31, 1994, no shares of preferred stock had been issued. In December 1995, the Company issued 48.0 shares of its redeemable convertible preferred stock to three investors for cash totaling $48,000. Additionally, the Company issued 2.4 shares to an individual as a finders fees payment for services performed in 1995. Also during December 1995, 17 holders of notes payable totaling $454,750 converted such notes into 454.75 shares of the Company's redeemable convertible preferred stock. In connection with the issuance of the Company's redeemable convertible preferred stock in 1995, fourth quarter dividends amounting to $20,120 were declared and are payable as of December 31, 1995. The series of preferred stock issued, carrying an annual dividend of 30%, is callable by the Company at par at any time on notice to the holder. If the Company has not called the preferred stock for redemption by January 1, 1997, the holder may require the Company to redeem the preferred stock. The preferred stock is convertible into common stock, at the option of the holder, at a price equal to 80% of the price at which the common stock may be sold in an initial public offering of the common stock of the Company. The Company believes that, at December 31, 1995, the fair value of its issued redeemable convertible preferred stock approximates its carrying value in the Company's balance sheet. 5. COMMON STOCK In June 1995, the Company issued 185,498 (72,730 pre-split) shares of common stock to a consulting company as payment for services that were performed in 1994 and 1995. The parties agreed that the stock issued had a value of $10,000 and that approximately 80% of the services were performed at December 31, 1994. Accordingly, at December 31, 1994, the Company had a payable balance of $8,000 relating to these services. 6. INCOME TAXES Deferred income taxes result from temporary differences in the recognition of revenues and expenses for financial accounting and tax reporting purposes. Net deferred income taxes were composed of the following:
DECEMBER 31 1995 1994 ------------------------- Deferred income tax asset - operating loss carryforwards $ 1,450,000 $ 1,100,000 Deferred income tax liability - differences between book and tax basis of property (1,050,000) (950,000) Valuation allowance (400,000) (150,000) ------------ ------------ Net deferred income taxes $ - $ - ============ ============
As of December 31, 1995 and 1994, the Company had net operating loss carryforwards available in future periods to reduce income taxes that may be payable at those dates. For federal income tax purposes, net operating loss carryforwards amounted to approximately $3,740,000 and $2,750,000 for 1995 and 1994, respectively, and expire during the years 2001 through 2009. For state income tax purposes, net operating loss carryforwards amounted to approximately $1,950,000 and $1,480,000 for 1995 and 1994, respectively, and expire during the years 2004 through 2010. The Company is delinquent in filing its 1994 income tax returns. 7. COMMITMENTS The Company leases office space under a noncancelable operating lease agreement expiring June 30, 1996. The Company also leases equipment under month-to-month leases. Future minimum lease payments under the noncancelable operating lease are $3,240 for the period from January 1, 1996 through June 30, 1996. Total rental expense incurred under all lease agreements was $31,346 for the years ended December 31, 1995 and 1994. 8. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 Effective April 9, 1996, the Company merged with Drake. The agreement provides that 10% of the Company's outstanding common stock after the merger will be issued to the Drake shareholders in exchange for the net assets of Drake. Subsequent to December 31, 1995, the Articles of Incorporation were amended to provide for an authorized capital of fifty million shares of common stock and, in connection with the merger with Drake, the outstanding shares, including those issued in connection with the acquisition, were split at the rate of 2.5505 to 1. 9. OIL AND GAS OPERATIONS (UNAUDITED) At December 31, 1995, the Company had interests in oil and gas properties that are principally located in Southern California. The Company does not own or lease any oil and gas properties outside the United States. COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES Costs incurred in oil and gas producing activities were as follows:
YEAR ENDED DECEMBER 31 1995 1994 ------------------------- (IN THOUSANDS) (UNAUDITED) Property acquisition costs: Proved properties $ 90,289 $ 141,785 Exploration costs - - Development costs 346,585 613,611 ------------ ----------- Total costs $ 436,874 $ 755,396 ============ ===========
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES Reserve information presented below is based upon reports prepared by the Company's independent petroleum reservoir engineer. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. Net quantities of crude oil and natural gas for the Company as of the beginning and the end of the years ended December 31, 1995 and 1994, as well as the changes in proved reserves during such years, are set forth in the tables below: OIL AND GAS RESERVE DATA
YEAR ENDED DECEMBER 31 1995 1994 ----------------------------- OIL GAS OIL GAS BBLS MCF BBLS MCF (IN THOUSANDS) (UNAUDITED) Proved developed and undeveloped reserves (excluding Vaca Oil Sands), net: Beginning of year 3,495 5,329 3,468 11,078 Revisions of previous estimates (193) 314 (291) (5,718) Purchase of reserves in place - - 400 - Production (102) (112) (82) (31) ------ ------ ------ ------- End of year 3,200 5,531 3,495 5,329 ======= ====== ====== ======= Proved undeveloped Vaca Oil Sands reserves, net: End of year 27,614 - ======= ======
The decrease in the quantity of gas reserves during the year ended December 31, 1994 pertains to proven undeveloped reserves and is attributable primarily to the experience of producing gas wells which indicated that due to the manner of completion of the existing wells and the discontinuance nature of the producing zones, rates of recovery and ultimate recovery from the existing wells would be less than estimated and that the recovery of all such reserves would require the drilling of new wells which, at this time, is not contemplated. Prior to 1995, the Company had made no expenditures toward developing its undeveloped Vaca Oil Sands reserves which were purchased in 1990. In 1995, the Company took steps toward the development of these reserves by obtaining a governmental permit allowing it to drill 120 wells on part of its acreage. A plan for the development of the property using the same enhanced recovery process presently in use on the producing Vaca Oil Sands wells has been deemed feasible by the Company's independent petroleum engineer. A significant uncertainty remains involving the financial ability of the Company to develop the reserves. The future costs for the complete development of the property are estimated by the independent petroleum engineer to be $66,650,000 with net cash flow before income taxes estimated to be $169,977,000 on an undiscounted basis or $69,879,000 discounted to present value at 10%. The cost allocated to the undeveloped Vaca Oil Sands reserves is insignificant at December 31, 1995 and 1994 and the estimated volume of such reserves described above have been excluded from the calculation of the Company's depletion expense through December 31, 1995. The costs related to the Vaca Oil Sands reserves, including future development costs, will be included in the Company's calculations of depletion expense when production of these reserves commences. No reserve report was filed with any federal authorities or agencies during 1995 and 1994. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES The following tables set forth the computation of the standardized measure of discounted future net cash flows relating to proved reserves at December 31, 1995 and 1994, respectively. The standardized measure is the estimated future cash inflows from proved reserves less estimated future production and development costs and estimated future income taxes. Future cash inflows represent expected revenues from the production of proved reserves based on prices and any fixed determinable future escalation provided by contractual arrangements in existence at fiscal year end. Escalation based on inflation, federal regulatory changes and supply and demand is not considered. Estimated future production and development costs related to future production of reserves are based on historical costs. Such costs include, but are not limited to drilling development wells and installation of production facilities. Inflation and other anticipatory costs are not considered until the actual cost change takes effect. Estimated future income tax expenses are computed using the appropriate year-end statutory tax rates. Consideration is given to the effects of permanent differences, tax credits and allowances. A discount rate of 10% is applied to the annual future net cash flows after income taxes. The methodology and assumptions used in calculating the standardized measure are those required by FASB Statement No. 69. It is not intended to be representative of the fair market value of proved reserves. The valuations of revenues and costs do not necessarily reflect the amounts to be received or expended by the Company. In addition to the valuations used, numerous other factors are considered in evaluating known and prospective oil and gas reserves. The standardized measure of discounted future net cash flows relating to proved developed oil and gas reserves, which excludes the Company's proved undeveloped Vaca Oil Sands reserves, follows:
DECEMBER 31 1995 1994 ---------------------- (IN THOUSANDS) (UNAUDITED) Future cash inflows $ 60,853 $ 63,719 Future production and development costs (29,699) (29,316) Future income tax expenses (8,727) (10,384) ------------------------- Future net cash flows 22,427 24,019 10% annual discount for estimated timing of cash flows (8,735) (9,062) ------------------------- Standardized measure of discounted future net cash flows $ 13,692 $ 14,957 =========================
For the calculations in the preceding table, estimated future cash inflows from estimated future production of proved developed reserves were computed using average year-end oil and gas prices. The average oil price, primarily based on posted prices, was $15.84 per barrel and $15.11 per barrel at December 31, 1995 and 1994, respectively, and the average gas price, a combination of spot gas prices and contract prices, was $1.84 per thousand cubic feet and $2.05 per thousand cubic feet at December 31, 1995 and 1994, respectively. CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS The changes in standardized measure for discounted future net cash flows relating to proved developed reserves, which excludes the Company's proved undeveloped Vaca Oil Sands reserves, follows:
YEAR ENDED DECEMBER 31 1995 1994 ------------------------- (IN THOUSANDS) (UNAUDITED) Sales of oil and gas produced, net of production costs $ (620) $ (145) Net changes in prices and production costs (763) 3,275 Changes in estimated future development costs (332) (131) Development costs incurred during the period 347 614 Revisions of previous quantity estimates (1,252) (8,778) Purchase of reserves in place - 291 Accretion of discount 1,496 1,624 Net change in income taxes 1,022 2,873 Other, principally changes in timing of estimated production (1,163) (905) ---------- ---------- Net decrease (1,265) (1,282) Beginning of year 14,957 16,239 ---------- ---------- End of year $ 13,692 $ 14,957 ========== ==========
Unaudited Condensed Financial Statements Geo Petroleum, Inc. Quarter ended March 31, 1996 All common stock share amounts included in the filing are ========================================================= retroactively revised to reflect the following: 4,477,913 ========================================================== outstanding shares of common stock after the April 9, 1996 split ================================================================ at the rate of 2.5505 to 1. =========================== ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis for the quarters ended March 31, 1995 and March 31, 1996 should be read in combination with the Unaudited Financial Statements presented elsewhere herein. Results of Operations First quarter 1996 compared with first quarter 1995. ---------------------------------------------------- During the quarter ended March 31, 1996, GEO had a net loss of $52,785 and cash used in operations of $43,783, compared to net income of $39,955 and cash provided by operations of $155,978 for the comparable 1995 quarter. Oil and gas revenues declined to $226,150 for the 1996 period, compared to $437,698 for the first quarter 1995. This was attributable mostly to normal declines and to a reduction of the number of wells on production in the Rosecrans and East Los Angeles Fields as a result of temporary mechanical malfunctions. Average oil prices increased to $17.53 per barrel in the 1996 period, compared to $15.66 per barrel in the comparable 1995 period, while gas prices remained about unchanged at $1.45 per mcf. Lease operating expenses for the first quarter of 1996 declined to $247,174, as compared to $264,119 in the comparable 1995 period, a 7% decrease reflecting the fewer number of wells on production. However, average production costs per barrel of oil and equivalents increased to $13.97 in the 1996 period from $7.01 in the 1995 period, due to increased repair costs and due to allocating fixed operating costs to a smaller quantity of produced barrels. In addition to the normal operating expenses of existing wells, expenses were incurred in repairing and recompleting wells to bring them on production, performing repairs on wells and facilities damaged by a fire caused by contractor negligence, and putting into service automated custody transfer facilities necessary for the delivery of oil into a refiner's pipeline. General and administrative expenses for the 1996 quarter were $52,075, as compared to $112,834 for the 1995 period, a decrease of 54%. The decrease was largely due to a reduction in legal costs and fees after substantially resolving two lawsuits successfully, and due to lower accounting and consulting fees. Interest expense for the 1996 quarter was $56,314, as compared to $105,758 for the comparable 1995 period, a decrease of 47%. This decrease was due primarily to the exchange of short-term loans for the Company's preferred stock. The Company's provision for depletion and depreciation decreased to $49,121 for the first quarter of 1996, as compared to $55,016 for the 1995 period, a decrease of 11%. Capital Resources and Liquidity Financial Position. ------------------- At March 31, 1996, the Company had a working capital deficiency of $2,338,410, which deficiency is greater by $35,050 than such deficiency at December 31, 1995. The Company has requested a one year extension of its bank loan of $1,460,000 now due July 15, 1996. Negotiations are continuing and the Company expects its bank to respond to the request by July 15, 1996. Historically, the net cash flow from the properties of the Company has been sufficient to fund its costs of operations but insufficient to fund such costs and its debt servicing requirements. The Company's primary sources of liquidity and capital resources in the near term will consist of working capital derived from its oil and gas production and water disposal operations, augmented by any such funds as may be derived from the sale of equity in the Company and of participating interests in its operations. The Company's net revenues from oil and gas sales in excess of production and operating expenses during the first quarter of 1996 and 1995 were ($21,024) and $173,579, respectively. This decline is primarily attributable to the drop in revenues in the first quarter 1996 which was previously discussed. Cash used in operations for the quarter ended March 31, 1996, was $43,783 compared to cash provided by operations of $155,978 for the period ended March 31, 1995. This decrease in cash provided by operations of $199,761 is primarily a result of decreased oil and gas production and revenues, increased costs per unit of production, and costs of repair of fire damage. GEO is seeking long-term equity financing. The first step in obtaining it was a merger with Drake Investment Corporation, which closed on April 9, 1996. This was for the purpose of increased access to capital sources. The Company plans now to sell additional shares of its common or preferred stock in equity offerings, which, if successfully completed, will permit it to eliminate its working capital deficiency, debt, and interest obligations, to perform improvement and remedial work on its existing properties, to acquire additional properties, and to drill new wells. All of these activities are expected to substantially increase the revenues of the Company and permit it to continue to operate on a positive cash flow basis. Sources of Capital Resources. During 1996, the Company obtained agreements to extend the maturity date of its bank credit facility in the amount of $1,460,000 from April 15, 1996, to June 15, 1996, and a later extension to July 15, 1996. The Company, its bank and the pledgors of the loan collateral have been negotiating to obtain a one-year extension of the loan. These negotiations are expected to continue into July, 1996. This facility is secured by collateral pledged by minority shareholders of the Company and is not secured by any of the assets of the Company. A portion of the proceeds from the planned equity offering will be dedicated to the repayment of such indebtedness. The Company's cash used in investing activities, primarily additions to its oil and gas properties, net of any sales or disposals, was $30,173 in the first quarter of 1996 and $127,032 for the period ending December 31, 1995. PART F/S Geo Petroleum, Inc. Unaudited Condensed Balance Sheet
March 31 1996 ----------- ASSETS Current assets: Cash and cash equivalents $ 141,802 Accounts receivable: Accrued oil and gas revenues 61,639 Joint interest and other 195,226 Prepaid expenses and other 52,413 ----------- Total current assets 451,080 Property and equipment: Oil and gas properties 4,765,050 Office furniture and equipment 65,948 ----------- 4,830,998 Accumulated depletion and depreciation (1,086,525) ----------- 3,744,473 Total assets $ 4,195,553 ============
Geo Petroleum, Inc. Unaudited Condensed Balance Sheet
March 31 1996 --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable: Accrued royalties $ 443,614 Trade and other 214,624 Dividends payable 7,126 Accrued expenses 75,657 Current portion of notes payable 2,048,469 ---------- Total current liabilities 2,789,490 Redeemable convertible preferred stock, $1,000 par value; authorized 100,000 shares; issued and outstanding 538.65 shares at March 31, 1996 578,945 Stockholders' equity Common stock, no par value; authorized 50,000,000 shares; issued and outstanding 4,477,913 at March 31, 1996 2,157,702 Accumulated deficit (1,330,584) ----------- Total stockholders' equity 827,118 ----------- Total liabilities and stockholders' equity $4,195,553 ===========
Geo Petroleum, Inc. Unaudited Condensed Statements of Operations
Three Months Ended March 31, 1996 1995 ------------------------- Revenues: Oil and gas sales $ 226,150 $ 437,698 Other revenue 124,131 154,712 Interest income 1,618 869 ---------- ----------- 351,899 593,279 Expenses: Lease operating expenses 247,174 264,119 Depletion and depreciation 49,121 55,613 Amortization of deferred loan costs - 15,000 General and administrative 52,075 112,834 Interest expense 56,314 105,758 ---------- ----------- Income (loss) before income taxes (52,785) 39,955 Provision for income taxes - - ---------- ----------- Net income (loss) (52,785) 39,955 Less preferred stock dividends (39,008) - ---------- ----------- Net income (loss) applicable to common stock $ (91,793) $ 39,955 ========== =========== Net income (loss) per share of common stock $ (0.02) $ 0.01 ========== =========== Weighted average number of common shares outstanding 4,477,913 4,288,454 ========== ===========
Geo Petroleum, Inc. Unaudited Condensed Statements of Cash Flows
Three Months Ended March 31, 1996 1995 ------------------------- OPERATING ACTIVITIES Net income (loss) $ (52,785) $ 39,955 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depletion and depreciation 49,121 55,613 Amortization of deferred loan costs - 30,000 Gain on sale of property and equipment (36,000) - Changes in operating assets and liabilities: Accounts receivable 104,469 57,125 Prepaid expenses and other - (13,053) Accounts payable (56,304) (21,817) Accrued expenses (52,284) 8,155 ----------- ----------- Net cash provided by (used in) operating activities (43,783) 155,978 INVESTING ACTIVITIES Additions to property and equipment (70,173) (127,032) Proceeds on sale of property and equipment 40,000 - ----------- ----------- Net cash used in investing activities (30,173) (127,032) FINANCING ACTIVITIES Proceeds from notes payable 96,693 - Payments on notes payable (5,000) (70,695) Bank overdraft - (26,002) Preferred stock issued 23,500 - ----------- ----------- Net cash provided by financing activities 115,193 (96,697) ----------- -----------
Geo Petroleum, Inc. Unaudited Condensed Statements of Cash Flows (CONTINUED)
Three Months Ended March 31, 1996 1995 ------------------------- Net increase (decrease) in cash and cash equivalents 41,237 (67,751) Cash and cash equivalents at beginning of period 100,565 139,874 ----------- ----------- Cash and cash equivalents at end of period 141,802 72,123 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest 18,299 103,705 =========== =========== Cash paid during the period for income taxes $ - $ - =========== ===========
Geo Petroleum, Inc. Statements of Cash Flows March 31, 1996 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the quarter ended March 31, 1996, the Company issued 10 shares of the Company's redeemable convertible preferred stock in exchange for the retirement of a certain note payable aggregating $10,000, and the Company sold an additional 23.5 shares of the Company's redeemable convertible preferred stock for $23,500. Dividends on the Company's redeemable convertible preferred stock, amounting to $32,354, were declared during the quarter ended March 31, 1996. However, $25,422 of said dividends were automatically reinvested into additional shares of preferred stock. Additionally, $14,872 of dividends payable at December 31, 1995 were automatically reinvested into additional shares of preferred stock during the quarter ended March 31, 1996. 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Geo Petroleum, Inc. (the Company) is a private oil and gas production company that was founded in 1986 in the state of California. The Company engages in the development, production and management of oil and gas properties located in California. On April 9, 1996, a proposed merger with Drake Investment Corp. (Drake) became effective after approval by the Company's Board of Directors and by Shareholders. On June 20, 1996, the Company filed a Form 10-SB General Form for Registration of Securities of Small Business Issuers with the Securities and Exchange Commission, under Section 12 (b) or (g) of the Securities Exchange Act of 1934. BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with Item 310 of Regulation S-B and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the financial statements and notes thereto included in Form 10-SB filed June 21, 1996, which is available without cost from Geo Petroleum, Inc. upon request. The accompanying unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, as of March 31, 1996, the Company's accumulated deficit totaled $1,330,584, and current liabilities exceeded current assets by $2,338,410. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its current obligations on a timely basis, to obtain additional financing, and ultimately to obtain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations. These potential alternatives include, among other things, a private and public placement of debt or equity, extending or refinancing the bank loan using oil and gas properties as collateral, sale of oil and gas properties, and obtaining an advance on future production from an end user. As a first step in a potential public or private offering, the Company has signed an agreement to merge with Drake. There can be no assurance that any of these potential alternatives will materialize. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. CASH AND CASH EQUIVALENTS Cash equivalents include certificates of deposit with original maturity dates of less than three months. The Company maintains a $100,000 certificate of deposit for state of California authorization purposes to perform additional oil and gas well recompletions. These funds are subject to certain withdrawal restrictions until completion of the work. INVESTMENT IN PARTNERSHIP Included in oil and gas properties is an investment in a general partnership that was created in 1991 to produce oil at a well located on one of the Company's oil and gas properties. The Company is the managing partner in this general partnership, and this investment is accounted for under the pro rata consolidation method. PROPERTY AND EQUIPMENT The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas reserves are capitalized as incurred. The costs of oil and gas properties are accumulated in a cost center and are subject to a cost center ceiling which such costs do not exceed. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are depleted over the estimated useful lives of the properties by application of the unit-of-production method using only proved oil and gas reserves, excluding future estimated costs and related proved undeveloped oil reserves at the Vaca Oil Sands property, which relate to a major development project involving an enhanced recovery process. The evaluations of the oil and gas reserves were prepared by Sherwin D. Yoelin, a petroleum engineer. Substantially all additions to oil and gas properties during the quarter ended March 31, 1996, relate to recompletions of existing producing or previously producing wells. Depreciation of office equipment and furniture is computed using the straight-line method, with depreciation rates based upon their estimated useful lives, which range between five and seven years. REVENUE Revenue is recorded net of royalties and certain other costs that the Company incurs to bring the oil and gas into salable condition. The Company had two significant customers during the quarters ended March 31, 1996 and 1995, which comprised approximately 75% and 52% of gross oil and gas sales, respectively. Included in other revenues during the quarter ended March 31, 1996, is $45,000 received from the settlement of a lawsuit against an adjacent property owner for damages to Company property incurred while trespassing on a Company easement. EARNINGS PER COMMON SHARE Net income (loss) per common share for all periods presented is based upon average outstanding common shares, adjusted for the stock split described in Note 5. Such calculations do not assume any conversion of the redeemable convertible preferred stock into common stock because determination of the conversion price is subject to future events. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts in the financial statements have been reclassified to conform to current year presentation. 2. NOTES PAYABLE Notes payable consisted of the following:
March 31 1996 ----------- Note payable to bank $ 1,460,000 Notes payable to investors 588,469 ----------- 2,048,469 Less current portion 2,048,469 ----------- Total long-term debt $ - ===========
The Company has issued notes payable to various investors bearing an interest rate of 10% and a guaranteed oil and gas production payment equal to 20% of the outstanding principal amount per annum. The holders of the notes have extended the maturities of the notes to various dates in 1996, and all of the notes are secured by interests in the Company's oil and gas properties. The note payable to bank bears interest at prime plus 2.0%. At March 31, 1996, the prime rate was 8.25%. Interest payments are due monthly, and the outstanding principal amount and all unpaid interest was due on October 15, 1995. In October 1995, the bank extended the maturity date of the note payable to April 15, 1996. In June 1996, the bank further extended the maturity date of the note payable to July 15, 1996. The bank has indicated that it will not foreclose on the note, so long as negotiations for a further extension continue on a good faith basis. The Company was not in compliance with certain loan covenants at and subsequent to March 31, 1996, including restrictions on incurring additional debt and failure to make certain payments to outside vendors on a timely basis. While the bank has not taken any action regarding such noncompliance, the covenants have not been waived through the extended maturity date. As a result, the note is classified as current at March 31, 1996. The Company is engaged in discussions with the bank to further extend the maturity of the note for up to one year from June 15, 1996. In 1990, the Company issued 273,669 shares of common stock, an option to purchase 180,660 additional shares of common stock, at $6 per share and a recorded deed of trust on 20% of the Company's interest in its Vaca Oil Sands property to certain parties in exchange for those parties providing the collateral, 35,000 Shares of Union Pacific Corp. common stock, for the Company's note payable to a bank. The consideration issued was valued at $300,000, its estimated fair market value, and was amortized as additional loan costs over five years. The 35,000 shares of Union Pacific Corp. common stock are held in a trust and had an approximate value of $2,401,875 at March 31, 1996. In the event of default on the bank note payable, the parties providing the collateral may take steps to recover from the Company the value of any collateral taken by the bank. The collateral agreements and the stock purchase option expired on September 11, 1995. In connection with the extension of the maturity date of the bank note payable, the collateral agreement was extended to July 15, 1996. However, the parties providing the collateral have indicated that they will not foreclose on the collateral, so long as negotiations continue on a good faith basis. No additional consideration was given for this extension. 3. RELATED PARTY TRANSACTIONS The Company has entered into agreements with another entity to sell gas and offer water disposal services at certain locations. The principal officer/shareholder of the Company is also the principal officer/shareholder of the other entity. Total revenue to the Company from these agreements was $29,683 during the quarter ended March 31, 1996. At March 31, 1996, the Company had a net receivable balance of $139,219 from the other entity. At March 31, 1996, the Company had notes payable to relatives of the principal officer/shareholder totaling $118,469. The principal officer/shareholder of the Company has not taken a salary since inception of the Company. 4. REDEEMABLE CONVERTIBLE PREFERRED STOCK During the quarter ended March 31, 1996, the Company issued 10 shares of the Company's redeemable convertible preferred stock in exchange for the retirement of a certain note payable aggregating $10,000, and sold an additional 23.5 shares of the Company's redeemable convertible preferred stock for $23,500. During the quarter ended March 31, 1996, dividends on the Company's redeemable convertible preferred stock amounting to $32,354 were declared. However, $25,422 of said dividends were automatically reinvested into additional shares of the preferred stock. Therefore, $6,931 in dividends were payable at March 31, 1996. Additionally, $14,872 of dividends payable at December 31, 1995 were automatically reinvested into additional shares of preferred stock during the quarter ended March 31, 1996. The series of preferred stock issued, carrying an annual dividend of 30%, is callable by the Company at par at any time on notice to the holder. If the Company has not called the preferred stock for redemption by January 1, 1997, the holder may require the Company to redeem the preferred stock. The preferred stock is convertible into common stock, at the option of the holder, at a price equal to 80% of the price at which the common stock may be sold in an initial public offering of the common stock of the Company. 5. COMMON STOCK In June 1995, the Company issued 185,498 shares of common stock, to a consulting company as payment for services that were performed in 1994 and 1995. The parties agreed that the stock issued had a value of $10,000 and that approximately 80% of the services were performed at December 31, 1994. Accordingly, at December 31, 1994, the Company had a payable balance of $8,000 relating to these services. On November 17, 1995, the Company's Articles of Incorporation were amended to provide for an authorized capital of fifty million shares of common stock. In connection with the merger with Drake (Note 8), the outstanding shares, including those issued in connection with the acquisition, were split at the rate of 2.5505 to 1. 6. INCOME TAXES Deferred income taxes result from temporary differences in the recognition of revenues and expenses for financial accounting and tax reporting purposes. Net deferred income taxes were composed of the following:
March 31 1996 ------------ Deferred income tax asset - operating loss carryforwards $ 1,470,000 Deferred income tax liability - differences between book and tax basis of property (1,050,000) Valuation allowance (420,000) ------------ Net deferred income taxes $ - ============
As of March 31, 1996, the Company had net operating loss carryforwards available in future periods to reduce income taxes that may be payable at those dates. For federal income tax purposes, net operating loss carryforwards at March 31, 1996 amounted to approximately $3,800,000, and expire during the years 2001 through 2010. For state income tax purposes, net operating loss carryforwards at March 31, 1996 amounted to approximately $2,000,000, and expire during the years 2004 through 2011. The Company is delinquent in filing its 1994 income tax returns. 7. COMMITMENTS The Company leases office space under a noncancelable operating lease agreement expiring June 30, 1996. The Company also leases equipment under month-to-month leases. 8. EVENTS SUBSEQUENT TO MARCH 31, 1996 Effective April 9, 1996, the Company merged with Drake. The agreement provides that 10% of the Company's outstanding common stock after the merger will be issued to the Drake shareholders in exchange for the net assets of Drake. Subsequent to the April 9, 1996 merger with Drake, there are now 4,477,913 outstanding shares of common stock after the April 9, 1996 split at the rate of 2.5505 to 1. PART III ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF EXHIBIT LOCATION NO. - ------- ---------------------- ------------ 16.1 Consent of Ernst & Young LLP to use 276 of their opinion in this document, dated July 31, 1996. 16.2 Consent of Deloitte & Touche LLP to 277 use of their opinion in this document, dated July 31, 1996. 16.4 Changes in Accountants -- Deloitte & Touche LLP
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this second amendment to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
GEO PETROLEUM, INC. ------------------- (Registrant) Date: JULY 31, 1996 ------------- GERALD T. RAYDON By --------------------------------- GERALD T. RAYDON (PRESIDENT)
CONSENT OF INDEPENDENT AUDITORS We agree to the inclusion in this offering circular on Form 10-SB Amendment No. 1 of our report dated April 30, 1996, with respect to the financial statements of Geo Petroleum, Inc. and consent to the reference to our firm under the caption "Changes In and Disagreements With Accountants". Ernst & Young LLP July 31, 1996 Los Angeles, California INDEPENDENT AUDITORS' CONSENT We consent to the use in this Form 10-SB/A/2 of GEO Petroleum, Inc. of our report dated June 28, 1995, except for Notes 2 and 8 for which the date is November 29, 1995 (which expressed an unqualified opinion and included an explanatory paragraph relating to the Company's ability to continue as a going concern). Deloitte & Touche LLP Los Angeles, California July 31, 1996 July 31, 1996 Securities and Exchange Commission Mail Stop 9-5 450 5th Street, N.W. Washington, D.C. 20549 We have read and agree with the comments in Part II, Item 3 of Form 10-SB/A/2 of GEO Petroleum, Inc. dated July 31, 1996 except for the third sentence of the second paragraph of such Item, as to which we have no basis to agree or disagree. Yours truly, Deloitte & Touche LLP Los Angeles, California -----END PRIVACY-ENHANCED MESSAGE-----