-----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, CJzJaS0xY6u9xw+V0j8w9iF0EkCc6sMCEyhacwd8ODHkyufDdeSjMgK7z5TeD0kd 1s8RBhQ3q2/AcAS3uc0Ftg== 0001110550-02-000053.txt : 20020418 0001110550-02-000053.hdr.sgml : 20020418 ACCESSION NUMBER: 0001110550-02-000053 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020418 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20915 FILM NUMBER: 02614018 BUSINESS ADDRESS: STREET 1: 2 APPALOOSA LANE CITY: ROLLING HILLS STATE: CA ZIP: 90274 BUSINESS PHONE: 3102650721 MAIL ADDRESS: STREET 1: 2 APPALOOSA LANE CITY: ROLLING HILLS STATE: CA ZIP: 20274 10KSB 1 tenksb.txt 10-KSB ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-KSB -------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ 0-20915 (Commission file number) -------------- GEO PETROLEUM, INC. (Name of small business issuer in its charter) -------------- California 33-0328958 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 18281 Lemon Drive, Yorba Linda, California 92886 (Address of principal executive offices) (Zip Code) (714) 779-9897 (Issuer's telephone number) Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No| | Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. | | The registrant's revenues for its fiscal year ended December 31, 2001 were $294,407.. At April 1, 2002, 19,471,128 shares of common stock (the registrants only class of voting stock) were outstanding. The aggregate market value of the common stock on that date (based upon the closing price on the over-the-counter market on April 2, 2002 ($0.21) held by non-affiliates was approximately $4,088,936.80. (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS) Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes |X| No | | (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: --------- shares as of April 1, 2002. DOCUMENTS INCORPORATED BY REFERENCE None. Transitional Small Business Disclosure Format (check one): Yes | | No |X| ================================================================================ GEO PETROLEUM, INC. Index
Page --------- PART I. BUSINESS INFORMATION Item 1. Description of Business................................................................... Item 2. Description of Property................................................................... Item 3. Legal Proceedings......................................................................... Item 4. Submission of Matters to a Vote of Security Holders....................................... PART II. OTHER INFORMATION Item 5. Market For Common Equity and Related Stockholder Matters.................................. Item 6. Management's Discussion and Analysis or Plan of Operation................................. Item 7. Financial Statements...................................................................... Item 8. hanges in and Disagreements with Accountants on C Accounting and Financial Disclosure..................................................... PART III. OTHER INFORMATION Item 9. irectors, Executive Officers, Promoters and Control Persons; Compliance with D Section 16(a) of the Exchange Act....................................................... Item 10. Executive Compensation.................................................................... Item 11. Security Ownership of Certain Beneficial Owners and Management............................ Item 12. Certain Relationships and Related Transactions............................................ Item 13. Exhibits and Reports Form 8-K............................................................. SIGNATURES.................................................................................................
PART I ITEM 1. DESCRIPTION OF BUSINESS (A) BUSINESS DEVELOPMENT Geo Petroleum, Inc. is a California corporation formed in 1986 by Gerald T. Raydon, who, until December 15, 1999, was our chief executive officer and majority shareholder. We were originally organized to develop and operate oil and gas wells on leased properties and to take advantage of the "non-conventional fuels credit", which is a tax credit allowed under Section 29 of the Internal Revenue Code to producers of non-conventional fuels. Our oil and gas leases are operated pursuant to a 1987 pooling agreement by which the lessors jointly reserve an average royalty of 12% gross revenues. One 230 acre parcel is subject to a 12.5% royalty. We hold a 100% working interest and a related average 88% net revenue interest in these properties, subject to a 5% net profit interest retained by an individual. In 1998, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In December, 1999 we emerged from bankruptcy under a plan which, among other things, provided for the issuance of approximately 1,900,000 shares of our common stock to our creditors, relinquishment by Mr. Raydon and certain affiliates of claims to 1.39 million shares of common stock in favor of our creditors, and a change in our management. On November 29, 2001, having completed all the requirements of our Plan of Reorganization, we were released from the jurisdiction of the U.S. Bankruptcy Court. Shortly before filing the petition for reorganization in the bankruptcy court, we sold for cash, and relief of indebtedness and other obligations, all of our interests in our Bandini and East Los Angeles oil and gas properties. Such properties had produced approximately 89% of our oil production and 95% of our production of natural gas during the calendar year 1998 (the year during which such properties were sold). We also reduced the carrying cost of our remaining oil and gas properties. In our reorganization, we settled some lessors' claims by increasing the royalty on some properties to 15.6% and by making certain cash payments. In late 1999, we released one of our leases covering approximately 170 acres, reducing our Vaca Tar Sands (a large tar sand deposit in Ventura County, California) acreage to approximately 465 acres. We also operate "disposal" properties, which means we have a permit to dispose of liquids found in the bottom of storage tanks down disposal wells. Oil operators pay us to dispose of these waste liquids. We are currently operating a waste disposal well and we have two conditional use permits from Ventura County, California allowing us to drill up to 120 wells on part of our leased property, and additional wells on the balance of our leased property. We also purchased 30 wells in the Rosecrans Oil Field in Los Angeles County in 1994. These wells are not currently producing, but we intend to return some of these wells to production by bleeding down excessive casing pressure on the idle wells and upsizing the pumping equipment capacity, using existing or reconditioned pumping equipment wherever possible. RECENT EVENTS. Beginning in the first quarter of 2001, we began preparations to bring approximately 12 formerly revenue producing wells in the Rosecrans Oil Field back on line. This will require, among other things, that we conduct idle well mechanical integrity testing, repair and upgrade pumping units on the wells, pay permit fees, pressure test existing pipelines and pipelines we acquire for feeding into an oil/gas/water separation system consisting of a gas separator, a wash tank, a stock tank and a water separator (we have applied to permit a new oil and gas production facility located at 552 West 127th Street, Los Angeles, California known as the Marmac tank farm), and pay surface clean-up costs. In December, 2001, we entered into a lease extension and amendment with the Thomas O. Hunsucker Trust by which we extended the primary term of our oil and gas lease in Ventura County until December 26, 2006. In January, 2002, we agreed to purchase a 50% working interest in the J.H. Brooks #1 oil and gas lease (with an existing oil well on the lease) located in Hart County, Kentucky. With our partners, we have funded the completion of the first deep test well on the property, which is located in the southern part of the Illinois Basin. The J.H. Brooks No. 1 was drilled to a total depth of 8,250 feet. The well is on Geo-Petroleum's (Hammonville-Magnolia) lease block, which extends over a fifty thousand acre area of interest. Geo has earned a 40% Net Revenue Interest in the lease block and expects to participate in another deep location in mid-year 2002. Geo has also taken an option on an additional fifty thousand acres, which joins its present position to the west. Similar Kentucky wells drilled to test the deeper zones in the Rome and pre-Knox formations have been successful and are producing 5-10 MCF of natural gas per day with estimated reserves of 5-bcf to 10-bcf. Our principal place of business is located at 18281 Lemon Drive, Yorba Linda, California 92886. Our telephone number is (714) 779-9897 and our facsimile number is (714) 779-0814. Since we emerged from bankruptcy, our income from operations has not been sufficient to maintain the Company. Our president does not receive cash compensation. Were it not for the fact that we have sold equity during the year 2001, the Company would not be able to continue operating. At year-end 2001, only our waste disposal facility was producing significant revenues. GLOSSARY OF TERMS USED IN THIS REPORT The terms below are used in this document and have specific SEC definitions as follows: Proved oil and gas reserves. 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, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Proved developed oil and gas reserves. Proven developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. Proved undeveloped reserves. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. As used in this Form 10-KSB: "Mcf" means thousand cubic feet, "MMcf" means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel, "MBbls" means thousand barrels, "MMBbls" means million barrels, "BOE" means equivalent barrels of oil, "MBOE" means thousand equivalent barrels of oil . Unless otherwise indicated in this Form 10-KSB, gas volumes are stated at the legal pressure base of the state or area in which the reserves are located and at 60 degrees Fahrenheit. Equivalent barrels of oil are determined using the ratio of 5.56 Mcf of gas to 1 Bbl of oil. The term "gross" refers to the total acres or wells in which we have a working interest, and "net" refers to gross acres or wells multiplied by the percentage working interest owned by us. "Net production" means production that is owned by us less royalties and production due others. CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical facts, included in or incorporated by reference into this Form 10-KSB which address activities, events or developments, which we expect, believe, or anticipate will or may occur in the future are forward-looking statements. The words "believes," "intends," "expects," "anticipates," "projects," "estimates," "predicts" and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements concerning: o the benefits expected to result from implementation of our proposed development of our Vaca Tar Sands property, discussed below, including increased revenues and oil production, other statements of: o expectations, o anticipations, o beliefs, o estimations, o projections, and other similar matters that are not historical facts, including such matters as: o future capital, o development and exploration expenditures (including the timing, amount and nature thereof), o drilling and reworking of wells, reserve estimates (including estimates of future net revenues associated with such reserves and the present value of such future net revenues), o future production of oil and gas, o repayment of debt, o business strategies, o oil and gas prices and demand, o exploitation and exploration prospects, o expansion and other development trends of the oil and gas industry, and o expansion and growth of business operations. These statements are based on certain assumptions and analyses made by the management of Geo in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. These forward-looking statements are subject to risks and uncertainties, including those associated with: o the financial environment, o general economic, market and business conditions, o the regulatory environment, o business opportunities that may be presented to and pursued by Geo, o changes in laws or regulations o exploitation and exploration successes, o availability of additional financing on favorable conditions, o trend projections, and o other factors, many of which are beyond our control that could cause actual events or results to differ materially from those expressed or implied by the statements. Such risks and uncertainties include those risks and uncertainties identified in the Description of the Business and Management's Discussion and Analysis sections of this document and risk factors discussed from time to time in our filings with the Securities and Exchange Commission. In addition, the reserve estimates contained herein are based upon assumptions as to prices, timing of operations and other factors. To the extent that any of such assumptions prove to be inaccurate, the quantities of oil and gas and the timing of production may vary from those contained in this report. See "Description of Properties--Cautionary Note." Significant factors that could prevent us from achieving our stated goals include: o the inability of Geo to obtain financing for capital expenditures and acquisitions, o declines in the market prices for oil, gas and asphalt, and o adverse changes in the regulatory environment affecting us. The cautionary statements contained or referred to in this document should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. (B) BUSINESS OF ISSUER BACKGROUND OF THE COMPANY We were originally organized to develop and operate oil and gas wells on leased properties and to take advantage of the "non-conventional fuels credit", which is a tax credit allowed under Section 29 of the Internal Revenue Code to producers of non-conventional fuels. Our oil and gas leases are operated pursuant to a 1987 pooling agreement by which the lessors jointly reserve an average royalty of 12% gross revenues. One 230 acre parcel is subject to a 12.5% royalty. We hold a 100% working interest and a related average 88% net revenue interest in these properties, subject to a 5% net profit interest retained by an individual. In our reorganization, we settled some lessors' claims by increasing the royalty on some properties to 15.6% and by making certain cash payments. In late 1999, we released one of our leases covering approximately 170 acres, reducing our Vaca Tar Sands acreage to approximately 465 acres. We also operate "disposal" properties, which means we have a permit to dispose of liquids found in the bottom of storage tanks down disposal wells. Oil operators pay us to dispose of these waste liquids. COMPETITION AND POSITION IN THE INDUSTRY. We are a minor factor in the California oil and gas industry and face competition from numerous companies, which have considerably more financial resources, property and manpower, than do we. We are in a weak financial condition and must rely upon third party sources of funds to conduct our proposed operations. Essentially, our only revenue producing operations are expected to be our Vaca Tar Sands, Rosecrans and Waste Disposal properties, each of which require significant cash expenditures to operate and develop 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 ours. 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. REGULATION Our operations are regulated by certain federal and state agencies. In particular, oil and natural gas production and related operations are or have been subject to price controls, taxes and other laws relating to the oil and natural gas industry. We cannot predict how existing laws and regulation may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on our business or financial condition. All of our operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling, and transportation of materials and their potential discharge into the environment. Permits are required for all of our operations, and these permits are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violators are subject to fines, injunctions or both. It is possible that increasingly strict requirements will be imposed by environmental laws and enforcement policies thereunder. We do not anticipate that we will be required in the near future to expend amounts that are material to the Company's financial position or results of operations by reason of environmental laws and regulations, but because such laws and regulations are frequently changed, we are unable to predict the ultimate cost of such compliance. It is our belief that the oil and gas industry may experience increasing liabilities and risks under the Comprehensive Environmental Response, Compensation and Liability Act, as well as other federal, state and local environmental laws, as a result of increased enforcement of environmental laws by various regulatory agencies. As an "owner" or "operator" of property where hazardous materials may exist or be present, we, like all others engaged in the oil and gas industry, could be liable for the release or remediation of any hazardous substances. Under previous management, we have been subject to imposition of "clean-up" orders by the government for accidental spillage of oil, but have not been subject to hazardous waste removal orders, but the potential for sudden and unpredictable liability for environmental problems is a consideration of increasing importance to us and to the oil and gas industry as a whole. We have suffered some oil spills, in amounts which we consider to have been minor and have cleaned up such spills. At times we have been supervised in so doing by governmental agencies. During 1997, regulatory agencies of the State of California and Los Angeles County cited us for an accidental oil spill at a property which we no longer own. We complied with the citation requirements and were required to pay fines and fees (approximately $28,000) that were discharged in bankruptcy. As a result of the citation, we were placed on a probationary status. In 1999, while we were in bankruptcy, local agencies alleged that we had violated various environmental and other regulatory requirements in failing to clean up a small oil spill and to maintain our Rosecrans properties in compliance with applicable regulations. During and after our bankruptcy, we were able to obtain funds enabling us to remedy the asserted violations. In addition, on November 22, 1999, the District Attorney of Los Angeles County, California filed information accusing us and certain of our former officers of violating certain provisions of the County Health Code and various provisions of the fire protection ordinances as a result of the allegations described above. All proceedings and our probationary status were terminated without fines being assessed on October 24, 2000, and we were not subjected to any additional penalties; however, a former officer was compelled to accept performance of 100 hours of community service. The Company estimates that costs of compliance with environmental laws and regulations in 1999 was negligible; was approximately $23,800 during the year 2000; and approximately $29,000 during 2001. We are required to comply with various federal and state regulations regarding plugging and abandonment of oil and gas wells. We provide a reserve for the estimated cost of plugging and abandoning our wells on a unit of production basis. We maintain a $160,000 certificate of deposit for State of California authorization purposes to perform additional oil and gas well recompletions and a $50,000 certificate of deposit covering our disposal well. These funds are subject to withdrawal restrictions. We also have $50,000 with the City of Los Angeles and $10,000 with Ventura County, for the purposes of paying for any future environmental liabilities that could arise. In addition, we carry $3,000,000 in pollution insurance, which covers many, but not all, sources of pollution. PRINCIPAL PURCHASERS AND MARKETING OF PRODUCTION During the calendar year 2000 we produced and sold insignificant amounts of oil and no gas. The principal purchaser of our oil and gas during such period was Equiva Trading Co. We produced very small amounts of oil and gas during the first three quarters of the year 2000. Commencing in the third quarter 2000 and continuing through 2001, we produced and sold oil from our Vaca Tar Sands Property using steam injection recovery techniques to Equiva Trading Co. We also sold waste water disposal services at our Vaca Tar Sands properties. Due to inordinately high natural gas costs for the steam injection process, the Company curtailed its oil production efforts. Despite our current sale to only one purchaser, we believe that multiple purchasers of any oil produced by us exist and that the loss of any one purchaser would not have a material effect on our ability to sell our oil and gas. Alternative purchasers are available for all of our production, except for gas production at the Rosecrans field where there is currently only one purchaser who has completed a gas processing facility that is now connected by pipeline to our wells. Essentially all of the oil that may be produced from our properties is currently transported to the purchaser by truck, which reduces the net price we receive for our oil. However, we intend to connect some wells directly to a pipeline system. We are in the process of bringing approximately 12 formerly revenue producing wells in the Rosecrans Oil Field back on line. This will require, among other things, that we conduct idle well mechanical integrity testing, repair and upgrade pumping units on the wells, pay permit fees, pressure test existing pipelines and pipelines we acquire for feeding into an oil/gas/water separation system consisting of a gas separator, a wash tank, a stock tank and a water separator (we have applied to permit a new oil and gas production facility located at 552 West 127th Street, Los Angeles, California known as the Marmac tank farm), and pay surface clean-up costs. VOLATILITY OF COMMODITY PRICES AND MARKETS Oil and gas prices have been and are likely to continue to be volatile and subject to wide fluctuations in response to the following and other factors: o changes in the supply of and demand for oil and gas; o market uncertainty; o political conditions in international oil producing regions; o the extent of domestic production and importation of oil in certain relevant markets; o the level of consumer demand; o weather conditions; o the competitive position of oil or gas as a source of energy as compared with other energy sources; o the refining capacity of oil purchasers; o the effect of regulation on the production, transportation and sale of oil and natural gas, and other factors beyond our control. Through the first nine months of 2001, increased customer spending contributed to higher levels of worldwide drilling activity, especially gas drilling in the United States. In the latter part of the third quarter of 2001 and continuing into early 2002, drilling activity levels in the United States declined as prices for oil and natural gas decreased due to decreased economic activity. Softening industrial use and reduced power generation over the summer months resulted in higher gas storage levels which placed downward pressure on natural gas prices. Internationally, crude oil prices have remained at levels satisfactory to provide increasing levels of capital spending and drilling, primarily by major oil and gas companies, including national oil companies. Generally, international oil and gas field development projects have longer lead times, economics based on longer-term commodity prices and are less likely to be delayed due to fluctuating short-term prices. EMPLOYEES AND CONSULTANTS We have 5 full time employees, 3 of whom are professional or technical and 2 who are management. 2 of our employees are located at our executive offices at Yorba Linda, California, 2 are engaged full time at our Vaca facility and 1, our Vice President in charge of disposal operations, typically works in the field. In addition, we retain two engineering consultants at our Vaca facility on an almost full time basis. ITEM 2. DESCRIPTION OF PROPERTY CAUTIONARY NOTE Reserve information presented herein is based upon reports prepared by our independent petroleum reservoir engineers, Krummrich Engineering and Stan Brown, P.E. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. Although we believe that our expectations are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements contained in this report include, but are not limited to: the time and extent of changes in commodity prices for oil and gas; increases in the cost of conducting operations, including remedial operations; the extent of our success in discovering, developing and producing reserves; political conditions; condition of capital and equity markets; changes in environmental laws and other laws affecting our ability to explore for and produce oil and gas and the cost of so doing; and other factors which are beyond our control. The proved developed and undeveloped oil and gas reserve figures presented in this report are estimates based on reserve reports prepared by independent petroleum engineers. The estimation of reserves requires substantial judgment on the part of the petroleum engineers, resulting in imprecise determinations, particularly with respect to new discoveries. Estimates of reserves and of future net revenues prepared by different petroleum engineers may vary substantially, depending, in part, on the assumptions made, and may be subject to material adjustment. Estimates of proved undeveloped reserves are, by their nature, much less certain than proved developed reserves. According to the most recent reserves estimate at our Vaca Tar Sand Reservoir, under current oil price and fuel cost conditions, development and production of the proved undeveloped reserves in the Vaca Tar Sand Reservoir results in a positive Net Present Value. The accuracy of any reserve estimate depends on the quality of available data as well as engineering and geological interpretation and judgment. Results of drilling, testing and production or price changes subsequent to the date of the estimate may result in changes to such estimates. The estimates of future net revenues in this report reflect oil and gas prices and production costs as of the date of estimation, without escalation, except where changes in prices were fixed under existing contracts. There can be no assurance that such prices will be realized or that the estimated production volumes will be produced during the periods specified in such reports. Proven reserves are estimates of hydrocarbons to be recovered in the future. Reservoir engineering is a subjective process of estimating the sizes of underground accumulations of oil and gas that cannot be measured in an exact way. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Reserve reports of other engineers might differ from the reports contained herein. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimate. Future prices received for the sale of oil and gas may be different from those used in preparing these reports. The amounts and timing of future operating and development costs may also differ from those used. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. OXNARD FIELD General Geo and Gerald T. Raydon (as to a 25% interest), former president and a major shareholder of Geo, purchased the Vaca property from Sun Oil Company in 1990, for a total cost of $150,000. Mr. Raydon subsequently transferred the property to us in two transactions for consideration consisting solely of the common stock of the Company. In addition, Mr. Raydon retained a five percent net profits interest in the income or sales proceeds from the property. We believe that at December 31, 2000 and 2001, Mr.Raydon's net profits account was negative approximately $14,037.00 . During October, 2000, we released one parcel of approximately 160 acres of land to settle a dispute with the lessor of such parcel. We have been informed that Sun Oil Company purchased the property in 1984 for $14 million and had invested some $3.9 million in attempting to establish economic production before selling the property to us. We produced the Vaca using conventional methods, including cyclic steaming operations, in the wells drilled by Sun Oil Company and its predecessor, and achieved a production rate of 275 barrels of oil per day from a total of eleven vertically drilled wells. Production steadily declined from its maximum to a point at which the wells were non-producing at year-end 1999. We attribute the decline in production to a combination of factors existing at that time, including relatively low prices for the high gravity oil these wells were producing and the high cost of natural gas, which was needed to steam treat the wells. Our Vaca property is fully equipped for the transportation, processing, storage, and sale of oil, the separation and disposal of wastewater, and for the injection of high pressure steam into the wells. The equipment, in general, consists of: heated and insulated oil flow lines; gas and water pipelines; an automatic well tester; 9,600 barrels of oil storage capacity in three insulated, heated tanks; waste water disposal tanks; two steam generators capable of producing high quality steam at rates of 24,000,000 BTU per hour; tank heaters; a water treatment plant; a vapor recovery system; oil shipping equipment; a fresh water well to provide what appears to be sufficient amounts of good quality water for steam generation; and an injection well to dispose of all wastewater produced with the oil. The property is also in close proximity to several oil pipelines and a rail line. At year-end 1999, a substantial portion of the equipment was in a deteriorated state because of a lack of maintenance. We commenced the repair and maintenance of this equipment during 2000. The production in this field is from the prolific and massive Vaca Tar Sands that are found at depths of between 1,950 and 2,400 feet. In 325 acres of the leases, the thickness of the oil-saturated sand averages 225 feet. The reservoir is highly porous and permeable. The oil is heavy, approximately 6 - 8 degrees specific gravity measured in degrees on the American Petroleum Institute scale, of high sulfur content (6-7% by weight) and is highly viscous. Consequently, steam injection is necessary to heat the oil and reduce its viscosity, permitting it to flow readily through the well bores and pipelines into storage tanks. In previous operations, we generated steam at the surface and injected it into the producing formation through vertical wells. The heat permeates that portion of the formation adjacent to the well bore, rendering it more mobile than in its natural state. To increase mobility and lower the gravity and viscosity of the crude, we inject diluent (a light crude oil) into the well bore, after which the oil is pumped in a conventional manner. Because of the use of steam and diluent, operations are comparatively expensive while the price received for the oil is relatively low compared to better grades of crude. Increasing costs for natural gas, which is used to fire the steam generators, which are an integral element of producing oil from this property, have increased the operating costs of producing the Vaca. At year-end 2000, we essentially curtailed our Vaca operations, since the combination of very high natural gas prices, with a concomitant high operating cost, and reduced oil sales prices, rendered operation of the property uneconomic. Development of the Vaca Property carries with it the risk that removal of the tar may create a void, which will result in subsidence of the surface of the property. Presently, the surface is used for agricultural purposes. We do not believe that subsidence is a high risk, since the reservoir is 1,500 to 2,000 feet below the surface. Additionally, we have not seen any evidence of subsidence either in our leased area or in adjacent areas, which have been developed for oil and gas purposes. We do not carry insurance, which would protect us from claims resulting from subsidence. Saba Agreement In 1996 and 1997, we entered into a series of agreements with Saba Petroleum Company for the joint development of the Vaca Tar Sands. As last amended, the agreements provide that we, as operator with a 2/3 interest, and Saba, as a non-operating farm-in participant with the right to earn a 1/3 interest, will commence development of the Vaca Tar Sand with a "SAGD" well by 1999. SAGD is a process which consists of drilling two parallel horizontal wells, with one spaced approximately 15 feet above the other, with the lower well located at the bottom of the producing zone. The wells extend horizontally for as far as 2,600 feet. Steam is injected into the upper well at a temperature of approximately 500 degrees Fahrenheit. The steam lowers the viscosity of the oil so that it becomes substantially more mobile than in its natural state. The oil then gravitates to the lower horizontal well, and then flows with high temperatures (above 400 degrees Fahrenheit) and pressures to the surface through the lower well. The well production rates are assumed to increase each year until the tenth year, and then gradually decline after achieving a productive life of approximately 17 years. We understand that the SAGD process has been used with success in Canada on accumulations, which are similar to the Vaca Tar Sand, but such process has not been widely accepted in the United States. An alternative SAGD method employs a single horizontal well bore into which steam is cyclically injected and from which production is obtained through gravity drainage much as is described above. The agreement provides that Saba and we will share equally in the cost of operations and development until Saba has invested $5,000,000. Thereafter, Saba is to pay one-third of the costs and receive one-third of the revenues, and we are to pay two-thirds of the costs and receive two-thirds of the revenues. As to the wells for which Saba pays a disproportionately higher share of the costs, Saba can recover its costs out of one-half of production revenues, after which its interest in these wells will be reduced to one-third. Since we do not believe that Saba has earned its interest in the property, our reserves as reported herein do not take into account Saba's potential interest. The agreement provides that the first well to be drilled on the property shall be a SAGD well. However, because of the deteriorated economics of drilling oil wells, neither Saba nor we attempted to commence operations for such a well. It is our interpretation that Saba is responsible for payment of fifty percent of all costs properly chargeable under an Operating Agreement, which is in effect between the parties. Non-Conventional Fuels Credit Under Sec. 29 of the Internal Revenue Code, a tax credit is allowed to producers of "Non-Conventional Fuels." The tax credit for 1999 was $6 per barrel and is subject to annual increases with inflation. The tax credit is applicable to production from all redrilled Vaca Tar Sands wells. The previous owners of our property, and the owners of offsetting leases, have taken the tax credit on production from the Vaca Tar Sands since 1980, the first year of the credit. The tax credit expires at the end of 2002. We treat 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. At this time, we do not pay federal income taxes and the credit is not currently available for use by us. We have, 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. We intend to continue seeking such funding on an ad hoc basis. Funding from such sources would not, however, be sufficient to develop the property to any material extent. Status of Leases and Current Permits Except for one 230-acre lease, our leases have no current drilling obligations nor do they require the payment of rentals to keep the leases in good standing. All of our leases, however, require continuous production or producing operations to maintain the leases in effect. We ceased producing operations on our Vaca Property in December 2000, because of economic conditions. We resumed operations during March 2001. A significant portion of the leases are subject to a Pooling Agreement executed in 1987, which created the Vaca Tar Sands Unit and essentially combined the leases for operating and royalty purposes, which reserve an average royalty of 12% of gross revenues to the lessors. One 230-acre parcel is outside the Vaca Tar Sands Unit and is subject to a 12.5% royalty and an annual delay rental in the amount of $5,225. We hold a 100% working interest and a related average 80.557% net revenue interest in these properties, subject to any right that Saba may have to acquire a portion of our interest and to the five percent net profits interest held by Mr. Raydon. Vertical wells cost approximately $265,000 to drill and complete for production. In connection with our Reorganization Proceedings, certain lessors asserted claims to the effect that our leases had terminated because production had ceased for extended periods of time. Rather than litigating the issue, we settled the matter by agreeing to an increase of the royalty on certain of our leases to an average of 15.6% and by agreeing to make an annual minimum royalty payment to the lessor. The property covers some 635 acres of land. In addition, subsequent to year-end 1999, we released one of our leases, which had covered approximately 160 acres of land and lay on the periphery of our holdings, reducing our holdings to approximately 465 acres. We have two conditional use permits from Ventura County, allowing us to drill up to120 wells on part of our property and a sufficient number of wells to develop the balance of our property. Steaming operations require compliance with various environmental regimes, including those designed to protect air quality. The Ventura Air Pollution Control District has permitted our operations and has found them to be in compliance with relevant requirements. Emission limits under existing permits are sufficient to allow the drilling and steaming of a number of wells on the property, but are not sufficient to permit a full development of the property. We intend to apply for amendments to existing or additional permits to allow full-scale development when economic conditions justify that action. There is no assurance that such operations will remain in compliance or that necessary amendments or additional permits will be obtained. During the calendar year 2000, we produced approximately 1,200 barrels of oil from our Vaca Property.. In the third quarter of 2000, we restored two vertical wells to production on our Vaca Tar Sands property. We used two different methods to see which method would produce the more favorable results. We restored one well using conventional steaming and diluent infusion. We steam soaked the well for a period of ten days, pumped diluent down the well bore and then began pumping the well. Results of this procedure were that the well produced approximately 1,200 barrels of oil over a period of 75 days. We intend to stimulate this well again by steam injection in the hopes that increased production will result. The well cost approximately $10,000 to restore to production, and our income from the operation was approximately $34,000 over a period of two and one-half months. We believe that continued steaming will stimulate production. The second well, which we restored to production, employed the same process described above with the addition of a purchased chemical (which was contributed by the manufacturer as a test) to the reservoir through the well bore. The addition of the chemical would have increased the cost of the operation had we been charged for the chemical, but resulted in better well performance than was experienced in the untreated well. We will be evaluating the use of the chemical additive during the coming months and may employ it on our horizontal well operations which we hope to institute in the future, assuming financing and moderating natural gas prices. The well cost approximately $10,000 to restore to production and our income from the operations should approximate that of the other well over the same period of time. We ceased production on the two wells during December, 2000 and resumed production in March, 2001 .Should we permit production to cease for a period of time which a court would feel is unreasonable, we might suffer the loss of our Vaca leases. However, we believe that we have satisfied all of the minimum production requirements provided in our Vaca leases. Wells drilled into the Vaca Tar Sand have relatively high operating costs because of a number of factors, which include the viscosity and low gravity of the oil, the fact that the oil must be pumped, higher gravity oil must be mixed down-hole with native oil to produce the wells, and the fact that the wells must be periodically steamed to produce the oil. Purchasing natural gas to fire the steam generator boilers is an integral element of producing the Vaca wells. In recent months the cost of natural gas has increased significantly, which has had a negative economic affect on the Vaca wells. Operating costs will vary directly with the cost of natural gas. The increased cost of natural gas, reduces the profitability of Vaca wells. When sales prices for native oil are relatively high wells drilled into the Vaca Tar Sand may be profitably operated; however, when oil prices are low, as they were during early in 1999 and for several years prior thereto, the Vaca Tar Sands wells may be uneconomical to operate. There are 22 inactive vertically drilled wells on that property, some of which are capable of being redrilled horizontally, which we believe can be operated lower per unit production cost than vertical wells. However, although we presently we lack sufficient funds to drill such horizontal wells, we are investigating possible sources of funding for such redrillings. Rosecrans Field There are 18 wells in the Rosecrans Oil Field located in Los Angeles County, California, which we are planning to rework. 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. There are seven principal producing zones of Miocene and Pliocene age in the Field, ranging from depths of 4,500 to 8,400 feet. The wells have been drilled through these zones, but have not produced from all of them. This provides the opportunity to commence production from bypassed zones in the future. During 1999, the property produced no oil and an insignificant amount of gas. The property consists of five "community" oil and gas leases. The average royalty burden on the property is 16.67% and we have a 100% working interest and an 83.33% related net revenue interest. The property covers approximately 800 acres of land in a semi-industrialized and low-income residential area. At year-end 2000 and 2001, the property was not producing oil or gas. We intend to restore the property to production. We believe such restoration will require approximately $400,000, much of which will be used to replace and repair equipment sold or damaged since 1998. Since significant production has ceased for a considerable period of time, there is a considerable risk that the leases have terminated or are subject to termination by action of the lessors. We intend to attempt to secure appropriate documentation from as many of the lessors as is practicable in an effort to validate or confirm our title to the oil and gas leases. It is not certain that we will be able to obtain such documentation and in lieu thereof may assume a business risk and pursue restoration of production without all such documentation. Moreover, we have not been notified by any lessor that our leases have terminated. Environmental Services In September 1996, the California Division of Oil and Gas granted us a permit for the disposal of liquids containing various solids in suspension, including "tank bottoms", drilling mud, water softener wastes, and other oilfield waste materials in our wells, in addition to produced wastewater. Tank bottoms consist of the mud, paraffin and sand, which accumulate at the bottom of oil production tanks and must be periodically removed and disposed. The past primary method for handling such wastes is an expensive surface disposal process. We can offer substantial savings to oil operators by disposing of the waste in our disposal well. We own two commercial Class II (as designated by the Environmental Protection Agency) disposal facilities at which waste fluids and solids produced in oil field operations conducted by ourselves and by other operators are injected into the subsurface for disposal. Such facilities are located at our Oxnard property and cover approximately four acres of land. Lessors are compensated by sharing in ten percent or twelve and one-half percent of gross revenues from the operations depending on the type of substance disposed. In late 1999, we obtained a new contract with a lessor authorizing the use of a second disposal well, and settled a dispute with the lessor of the first disposal site. We commenced disposal operations in the second well in August, 2000 and intend to repair the first well. Until our financial condition and disputes with lessors resulted in a discontinuance of operations in 1999, the waste disposal operations were becoming an increasing source of revenues for Geo. Water and other wastes produced by other oil operators are hauled to our disposal sites, treated, stored, screened, and injected into our disposal wells The price received for Class II fluids averages about $0.60 per barrel for water and $6.50 for tank bottoms. In 1999 we had arrangements to dispose of wastes from, among others, AERA Energy L.L.C. (a consortium owned by Shell& Mobil), POPCO, Exxon Corporation, Chevron Corporation, Southern California Gas Company, Rincon Island L.P., Torch Operating Company, and several other independent oil companies. During the first half of 1999, our financial condition and regulatory compliance problems led to the curtailment of our waste disposal operations and disputes with our lessors. At year-end 1999, the facility was not operating. During late July 2000, we reinstituted operations at the facility. We currently receive and dispose of wastes from Beneco, Pacific Offshore Operations, Torch Operating Company, and other independent oil companies. Because there are few high-capacity waste disposal wells permitted by the California Division of Oil & Gas, and an expanding need by operators to dispose of their waste water and tank bottoms, we believe that operations of this type are capable of substantial growth. We believe that this operation is now marginally profitable and expect it to become increasingly profitable in the future. Estimated Oil and Gas Reserves At December 31, 2000, our net proved oil and gas reserves, as estimated by our independent petroleum engineers, Krummrich Engineering (as to the Oxnard Field Properties) and Stan W. Brown, Consulting Petroleum Engineer, (as to the Rosecrans properties) amounted to 1,346,000 barrels of oil and 1,338,000 Mcf of natural gas, of which 1,346,000 barrels and 1,338,000Mcf were classified as proved developed. Future cash flows attributable to such proved developed reserves (before income taxes) are estimated to be $9,713,000 at December 31, 2000 and the discounted value thereof, at 10% (before income taxes), is estimated to be $3,934,000. Essentially all of the proven developed reserves are not producing. On February 18, 2002, Stan W. Brown again evaluated the reserves and the revenue stream associated with the Rosecrans and Howard Townsite operations, located in Los Angeles County, California. The reserves and valuation were as of January 1, 2002. The analysis employed the methodology acceptable to the Securities and Exchange Commission and the Society of Petroleum Engineers. The total remaining Proved Developed Non-Producing, Shut-In Reserves to our net revenue interest were calculated by the production projection method to be 722,000 barrels of oil and 1,237,400 MCF of gas with a net undiscounted value of $4,896,800 and a net present value discounted at 10% of $1,468,600, over a project life in excess of 31 years. The estimated total investment required for such production was $572,000. On February 27, 2002, Stan W. Brown also re-evaluated the reserves and revenue stream associated with the Oxnard Field operations of the Company in Ventura County, California, specifically the Vaca Tar Sand Reservoir on the Vaca Tar San Unit and Hunsaker leases located in Oxnard, California. . The reserves and revenue stream valuation were as of January 1, 2002. The analysis employed the methodology acceptable to the Securities and Exchange Commission and the Society of Petroleum Engineers. The total remaining Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves to the Company's net revenue interest were calculated to be 32.6 million barrels of oil with a net undiscounted value of $41.43 million and a net present value discounted at 10% of $8.51 million, over a project life in excess of 14 years. The estimated total investment required for such production was $60.86 million. A major portion of our oil reserves is comprised of heavy crude. This portion is highly price sensitive, costs more to produce than lighter crudes, and receives a lower price in the market. Accordingly, a price at or above 1999 levels is needed in order to cover operating costs and yield a profit utilizing conventional completion and production techniques. Therefore, when discounted to net present value, these reserves are not economic to produce at our expected rate of return. The decline is attributable primarily to the significant increase in the price we must pay for natural gas (used to fire our steam generators) which has not been offset by the prices paid for heavier California crudes. Therefore, the viability of our Vaca Properties is in substantial doubt. In general, the volume of production from oil and gas properties declines as reserves are depleted. The SAGD process, which is described above, if successfully deployed, has an opposite effect until exhaustion of the reserves. Except to the extent we acquire properties containing proved reserves or conduct successful exploration and development activities, or both, our proven reserves will decline as reserves are produced. Our future oil and gas production is, therefore, highly dependent upon our level of success in acquiring or developing additional reserves. 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. Reservoir engineering is a subjective process of estimating the sizes of underground accumulations of oil and gas that cannot be measured in an exact way. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Reserve reports of other engineers might differ from the reports contained herein. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Future prices received for the sale of oil and gas may be different from those used in preparing these reports. The amounts and timing of future operating and development costs may also differ from those used. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. TITLE TO PROPERTIES Many of our oil and gas properties are held in the form of mineral leases, licenses and similar agreements. In general, these agreements do not convey a fee simple title to us, but rather create lesser interests. As is customary in the oil and gas industry, a preliminary investigation of title is made at the time of acquisition of undeveloped properties. Title investigations are generally completed, however, before commencement of drilling operations or the acquisition of producing properties. Because most of our oil and gas leases require continuous production beyond the primary term, it is always possible that a cessation of producing or operating activities could result in the loss of one or more leases. Prior to and during our bankruptcy proceedings, most of our properties did not produce oil or gas on a continuous basis. We have taken steps to cure deficiencies in our title at our Vaca facility, but have not yet done so with respect to any other property. Assignments of interest to and/or from us may not be publicly recorded. While we have been in possession of our two major properties (Oxnard--approximately 10 years, and Rosecrans--approximately 6 years) a number of years and have not received notice of a third-party adverse claim, we have not obtained title insurance or a title opinion covering such properties, but have relied upon title abstracts of the public records and the apparently unchallenged possession of our predecessors in interest. Consequently, while we believes that title to our properties is satisfactory, we would be unable to demonstrate such fact without obtaining title insurance or opinions that we believe is not cost-effective or otherwise warranted under the circumstances. Generally, once production has been established on an oil and gas lease, production must be maintained in quantities sufficient to pay the costs of operations, or the lease will terminate of its own accord. Because there have been interruptions in continuous production at various times in both of our significant oil properties, we cannot give any assurance that a claim will not be asserted that one or more of such leases have terminated. Title to our 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. We have not encumbered any of our properties to secure bank indebtedness. Our working interest in properties may be subject to liens for non-payment of labor or services provided to us. In the event of our non-payment or untimely payment of our obligations, we expect liens to be filed against our assets and to be subject to lawsuits. Oil and gas leases in which we have an interest may be deficient, require ratifications and be subject to action by us. We will be subject to variations in cash flow depending upon changes in prices paid for oil and gas. OFFICES We lease approximately 5,000 square feet of office space in Yorba Linda, California, on a month-to-month tenancy from an affiliate for a monthly rental of $5,000.00. DRILLING ACTIVITY The following tables set forth certain information for each of the years in the two-year period ended December 31, 2001, relating to our participation in the drilling of exploratory and development wells, all of which are located in California: Year Ended December 31, ------------------------------------- 2001 2000 ------------------ ----------------- Gross Net Gross Net (1) (2) (1) (2) --------- ------- --------- ------- Exploratory Wells: Oil...................... Gas...................... Dry (3).................. -- -- -- -- Development Wells: Oil...................... 0 0 Gas...................... -- -- -- -- Dry (3).................. -- -- -- -- Total Wells: Oil...................... 0 0 Gas...................... -- -- -- -- Dry (3).................. -- -- -- -- - -------------- (1) A gross well is a well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned. (2) A net well is deemed to exist when the sum of fractional ownership working interest in gross wells equals one. The number of net wells is the sum of fractional working interests owned in gross wells expressed as whole numbers and fractions thereof. (3) A dry hole is an exploratory or development well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well. A productive well is an exploratory or a development well that is not a dry well. PRODUCTIVE OIL AND GAS WELLS The following table sets forth information at December 31, 2001, relating to the number of productive oil and gas wells (producing wells and wells capable of production, including wells that are shut in or suspended) in which we owned a working interest: Oil Gas Total ----------------- ----------------- ---------------- Gross Net Gross Net Gross Net -------- -------- --------- ------- -------- ------ California.......... 57 57 0 0 57 57 At year-end 2000, none of the wells listed were producing oil or gas. At year end 2001, none of the wells listed were producing oil or gas. OIL AND GAS ACREAGE The following table sets forth certain information at December 31, 2001, relating to oil and gas acreage (all of which is located in California) in which Geo owned a working interest: Developed (1) Undeveloped --------------------- -------------------- Gross Net Gross Net --------- --------- ---------- ------- United States....... 1290 1070 600 600 - -------------- (1) Developed acreage is acreage assigned to productive wells. ITEM 3. LEGAL PROCEEDINGS From time to time, we may be involved in legal proceedings, including those arising from our operations and the amounts due suppliers or royalty owners. None of such proceedings are generally considered material to our operations or financial condition. During the course of our bankruptcy proceedings, entitled In re Geo Petroleum, Inc., Debtor, U. S. Bankruptcy Court for the Central District of California, Santa Barbara Division, number 98-15477-RR, we were involved in several adversary proceedings, all of which were settled as part of the bankruptcy proceedings, except for Bud Antle, Inc. v. Geo Petroleum, Inc. In that adversary proceeding, the lessor of a 160-acre tract assertedly not part of the Vaca Tar Sands Unit, claimed that our lease had terminated by reason of non-production of oil or gas. The lessor sought a declaration that the lease had terminated and an order requiring us to abandon three wells located on the lease. During the year 2000, we settled this dispute, which resulted in our quitclaiming the lease and agreeing to the abandonment of the three wells. In 2000, we settled a matter entitled People v. Geo Petroleum, Inc., et al, Inglewood Municipal Court No.W86529 in which an action was brought against us and several former officers and employees for violation of fire and environmental regulations. The matter was settled with a former officer agreeing to perform community service; the action was dismissed against the Company and no penalty was assessed. In 1996 and 1997, we entered into a series of agreements with Saba Petroleum Company for the joint development of the Vaca Tar Sands. As last amended, the agreements provide that we, as operator with a 2/3 interest, and Saba, as a non-operating farm-in participant with the right to earn a 1/3 interest, will commence development of the Vaca Tar Sand with a "SAGD" well by 1999. The agreement provides that Saba and we will share equally in the cost of operations and development until Saba has invested $5,000,000. Thereafter, Saba is to pay one-third of the costs and receive one-third of the revenues, and we are to pay two-thirds of the costs and receive two-thirds of the revenues. We may be required to sue Saba because it has refused to pay certain costs and expenses required by our Operating Agreement, which provides that should Saba fail to perform its material obligations, we may terminate Saba's interest in the joint property. During February 2001, we notified Saba that it had defaulted in its obligations under the agreement and that we had elected to terminate its interest in the joint property. Saba has been uncommunicative and we intend to sue Saba to clear title to the property. While litigation is always risk attendant, we believe that we will prevail in the litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 29, 2001, we held our annual meeting of shareholders. Matters submitted for a vote of our security holders were: the election of four (4) members to the Board of Directors of the Company; the approval and adoption of the Company's Stock Option Plan and the issuance of stock options to Dennis Timpe; the approval, adoption and ratification of the actions taken by the Company's officers and directors during the last fiscal year; the approval of the selection of Kelly & Company to audit the financial statements of the Company for the fiscal year ended December 31, 2000; and the approval of the selection of Kelly & Company to audit the financial statements of the Company for the fiscal year beginning January 1, 2001. Proxies for the meeting were solicited pursuant to Regulation 14A under the Exchange Act, there was no solicitation in opposition to the management's nominees as listed in the proxy statement, and all of such nominees were elected; specifically, Lori Timpe-Long, Dennis Timpe, Greg Tolleson and Christian Dillon. The number of votes cast for, against or withheld, and the number of abstentions and broker non-votes, for each matter, and for each director nominee individually, are as follows: Lori Timpe-Long FOR: 14,232,961 AGAINST: 0 WITHHELD: 49,230 ABSTENTIONS: N/A BROKER NON-VOTES: N/A Dennis Timpe FOR: 14,251,961 AGAINST: 0 WITHHELD: 30,230 ABSTENTIONS: N/A BROKER NON-VOTES: N/A Greg Tolleson FOR: 14,236,961 AGAINST: 0 WITHHELD: 45,230 ABSTENTIONS: N/A BROKER NON-VOTES: N/A Christian Dillon FOR: 14,236,961 AGAINST: 0 WITHHELD: 45,230 ABSTENTIONS: N/A BROKER NON-VOTES: N/A The approval and adoption of the Company's Stock Option Plan and the issuance of stock options to Dennis Timpe: FOR: 9,550,736 AGAINST: 980,468 WITHHELD: N/A ABSTENTIONS: 33,374 BROKER NON-VOTES: 3,717,613 The approval, adoption and ratification of the actions taken by the Company's officers and directors during the last fiscal year: FOR: 13,427,961 AGAINST: 694,230 WITHHELD: N/A ABSTENTIONS: 160,000 BROKER NON-VOTES: N/A The approval of the selection of Kelly & Company to audit the financial statements of the Company for the fiscal year ended December 31, 2000: FOR: 14,247,561 AGAINST: 19,630 WITHHELD: N/A ABSTENTIONS: 15,000 BROKER NON-VOTES: N/A The approval of the selection of Kelly & Company to audit the financial statements of the Company for the fiscal year beginning January 1, 2001: FOR: 14,261,061 AGAINST: 21,130 WITHHELD: N/A ABSTENTIONS: N/A BROKER NON-VOTES: N/A The total number of shares present in person and by proxy equaled 80% of the total shares issued and outstanding, thereby constituting quorum for purposes of the meeting. The total number of shares represented and voting in person or by proxy at the meeting was 14,282,191. The annual meeting of shareholders was held in Newport Beach, California. It was the first time we had convened an annual meeting of stockholders since 1997. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Since August 1996, the shares of our common stock have been quoted on the Over-The-Counter (OTC) Bulletin Board of the National Association of Securities Dealers, Inc under the trading symbol GOPL.OB. In December 1999, the common stock was removed from the Electronic Bulletin Board and began being quoted on the Pink Sheets. On November 30, 2,000 our shares were again quoted on the OTC Bulletin Board. We believe that at December 1, 2001, there were at least ten firms making a market in our common stock. The following table sets forth the high and low bid prices of the common stock for the monthly periods ended on specific dates (the first or second of each month) as indicated as reported on Yahoo!Finance. The prices set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
Date Open High Low Close Volume Adj. Close* ------------- ---------- ----------- -------------- ------------- -------------- ----------- Apr 02 0.22 0.27 0.20 0.22 2,000 0.22 Mar 02 0.18 0.23 0.17 0.22 3,500 0.22 Feb 02 0.18 0.26 0.15 0.18 37,900 0.18 Jan 02 0.14 0.29 0.13 0.20 16,000 0.20 Dec 01 0.31 0.31 0.13 0.14 500 0.14 Nov 01 0.19 0.34 0.18 0.28 10,000 0.28 Oct 01 0.17 0.19 0.11 0.19 1,000 0.19 Sep 01 0.25 0.27 0.14 0.17 1,000 0.17 Aug 01 0.33 0.43 0.16 0.21 26,000 0.21 Jul 01 0.44 0.44 0.26 0.38 500 0.38 Jun 01 0.52 0.53 0.35 0.44 500 0.44 May 01 0.48 0.52 0.34 0.52 500 0.52 Apr 01 0.48 0.55 0.26 0.48 1,000 0.48 Mar 01 0.52 0.63 0.44 0.48 1,500 0.48 Feb 01 0.55 0.75 0.41 0.50 55,500 0.50 Jan 01 0.42 0.73 0.28 0.66 8,000 0.66 Dec 00 0.91 0.91 0.33 0.52 20,900 0.52
HOLDERS OF COMMON EQUITY At December 31,2001, there were approximately 308 holders of record known to us of our common equity. Based on a broker count, we believe at least an additional 268 persons are shareholders with street name positions. DIVIDENDS Holders of our common stock are entitled to receive such dividends as may be declared by our board of directors. We have never paid dividends on our common equity and have no plans to do so in the foreseeable future. There are no agreements to which we are a party or by which our property is bound which restricts the payment of dividends. However, because our present operations are not profitable, our board of directors presently intends to pursue a policy of retaining earnings, if any, for use in our operations and to finance expansion of our business. SALES OF UNREGISTERED SECURITIES During the period February 15, 2001 through April 12, 2001, we sold 322,500 shares of our common stock at $0.50 per share to 8 investors from 7 different states in a series of transactions which were not registered under the federal securities laws nor qualified under any state securities laws. In each of these transactions, we were represented by our general counsel who advised us that the transaction was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, by reason of section 4(2) thereof or the provisions of Regulation D or by section 1145 of the Bankruptcy Code. In each sale, no underwriter was engaged by us to effect the sale and each sale was made by an officer of the company who was not compensated for effecting such sale. We received total proceeds of $161,250. During the period September 26, 2001 through January 25, 2002, we sold 1,014,666 shares of our common stock at $0.15 per share to 14 investors from 8 different states in a series of transactions which were not registered under the federal securities laws nor qualified under any state securities laws. In each of these transactions, we were represented by our general counsel who advised us that the transaction was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, by reason of section 4(2) thereof or the provisions of Regulation D or by section 1145 of the Bankruptcy Code. In each sale, no underwriter was engaged by us to effect the sale and each sale was made by an officer of the company who was not compensated for effecting such sale. We received total proceeds of $152,200. During the calendar year 2000, we sold shares of our common stock in a series of transactions which were not registered under the federal securities laws nor qualified under any state securities laws. In each of these transactions, we were represented by our general counsel who advised us that the transaction was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, by reason of section 4(2) thereof or the provisions of Regulation D or by section 1145 of the Bankruptcy Code. In each sale, no underwriter was engaged by us to effect the sale and each sale was made by an officer of the company who was not compensated for effecting such sale. No sales commissions or other compensation was paid in respect of any sale other than indicated below in the instance of the original issuance authorized by the Bankruptcy Court. Each sale was made to an individual or entity that the Company believes was an accredited investor, as that term is defined in Rule 501 promulgated pursuant to Regulation D or to an aggregate of not more than 35 persons who were not accredited investors. All certificates representing shares of stock sold in these transactions bear a restrictive legend prohibiting the transfer of such shares and stop transfer orders have been placed with the Company's transfer agent on such shares. Each sale was made for cash. During the first quarter of 2000, we sold 416,600 shares to 14 persons, eight of whom were purchasers in the Bankruptcy Court authorized sale described in the following paragraph and one of whom was an officer of the Company, for a total consideration of $124,980 or 30(cent) per share. During such quarter we also sold 300,000 shares of our common stock to our existing shareholders plus an additional two purchasers for an aggregate consideration of $210,000 or 70(cent) per share. Each of the foregoing sales initially involved the purchase of stock in an affiliate for the consideration stated, which was thereafter converted to stock of Geo Petroleum, Inc., which received the gross proceeds described above. No compensation was paid to the affiliate. During such quarter we also sold 833,400 shares to 20 individuals and affiliated trusts for a total consideration of $250,020 or 30(cent) per share of common stock. During the calendar year 2000, we issued 803,674 shares of our common stock to our creditors pursuant to our Plan of Reorganization and we will issue an additional 1,096,326 shares to our creditors pursuant to our Plan of Reorganization. Our Plan of Reorganization also provided for the issuance of an additional 4.5 million shares for a gross consideration of $500,000 to TD & Associates. Two million of the shares so issued were ultimately acquired by 27 persons introduced to the Company by Mr. Timpe or Mr. Raydon for a gross consideration of $400,000 (20(cent) per share), 1.5 million shares were acquired by Mr. Timpe as compensation for his services to TD & Associates, and 1 million shares were acquired by Ansbacher, Ltd, an Isle of Man corporation,, for a consideration of $150,000 (15(cent) per share). The shares issued pursuant to the plan were exempt from the registration and prospectus delivery requirements of the Securities Act by reason of section 1145 of the Bankruptcy Code; shares subsequently transferred were exempt by reason of Section 4(2) of the Securities Act and Regulation D thereunder. All certificates contained legends restricting the transfer thereof and stop orders were placed against the transfer of the certificates. Out of the proceeds, T.D. & Associates received $50,000. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis for the years ended December 31, 2001 and December 31, 2000 should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and the Selected Financial Data included elsewhere in this statement. During the year 2001, the Company was able to fully restore operations of its waste disposal operation resulting in significantly increased revenues exceeding $350,000 for the fiscal year. In addition, the Company continued progress toward restoration of operations of its Rosecrans property while shifting emphasis away from the Vaca Tar Sands Unit. Although the cost of natural gas decreased from its high in 2000, the overall operating costs of the Vaca property remained prohibitive. Currently, Management estimates that an additional $500,000 to $1,000,000 will be required to begin production on the Rosecrans property. Although some of this investment may be provided by future operations, Management expects that additional capital will be necessary. As a result of Managements' persistent efforts during 2001 to find other opportunities for Geo, a joint venture arrangement was entered in November allowing Geo to participate in the exploration and development of oil and gas properties located along the Rough Creek Graben in central Kentucky. Geo and its partners have funded the completion of a deep test well located in the southern part of the Illinois Basin. This test well, the J.H. Brooks No. 1, was drilled in 1998 to a total depth of 8,250 feet. Although completion of the well has been delayed by severe weather in the area, Management expects production to begin in May 2002. Geo owns a 25% carried working interest in the J.H. Brooks #1.The well is located on the Hammonville-Magnolia lease block, which extends over a fifty thousand acre area of interest. Geo has earned a 50% working interest (40% net revenue interest) in this lease block and expects to participate in another deep gas well later in 2002. Similar wells drilled to the deeper gas zones in the Rome and pre-Knox formations have been successful and are producing 5-10 MCF of natural gas with estimated reserves of 5-10 BCF. Cash flow from these wells combined with the continued successful operation of its waste disposal operations will provide Geo necessary operating capital during 2002. RESULTS OF OPERATIONS During the year ended December 31, 2001, the Company had a loss of $738,804 and negative cash flow of $382,826 compared to a loss of $743,257 and negative cash flow of $893,126 in 2000. Revenues from the sale of oil and gas in 2001 fell to $6,742 compared to oil and gas revenues of $40,901 in 2000. Oil and gas revenue in 2001 was primarily from limited production of the Rosecrans property with some minor sales of oil from Vaca required to hold the leases. Industrial waste disposal revenues increased from $40,899 in 2000 to $351,465 in 2001. This substantial increase was due primarily to the fact that the waste disposal property was operated for the full year in 2001. As consistent operations of the waste disposal property were maintained in 2001, Geo was able to regain some of its customers that had been lost due to the prior bankruptcy and several new customers were acquired. Management expects this property to continue operations at its current level with the possibility of additional increases in revenue during 2002. Lease operating expenses increased from $323,023 in 2000 to $422,065 in 2001. This increase is due primarily to the fact that the waste disposal property was operated for the full twelve months of 2001 compared to only four months of full operations in 2000. In addition, operating expenses on the Rosecrans property increased by approximately $70,000 as Management gave emphasis to restoration of this asset. Depreciation expense increased from $11,228 in 2000 to $22,336 in 2001. This increase is due to the fact that depreciable assets placed in service during 2000 were depreciated for the full year in 2001. Expenses incurred for environmental remediation were minimal in 2001. These expenses decreased from $6,607 in 2000 to $2,528 in 2001. Generally, such costs are incurred after a period of oil and gas production. However, since there was no significant production in 2001 or 2000, these costs were insignificant. Professional fees decreased from $292,443 in 2000 to $256,881 in 2001. Although this decrease was significant, the cost for accounting and legal services remained high due to the ongoing compliance requirements of the Securities and Exchange Commission regulations. Legal fees were incurred to comply with SEC documentation requirements. In the future, Management intends to continue efforts to minimize these compliance costs. General and administrative expenses increased from $195,228 in 2000 to $286,153 in 2001. This increase is due primarily to increases in the cost of corporate promotion and outside consulting services required to operate in the public market and comply with SEC regulations. Reorganization costs were incurred in 2001 to finalize the bankruptcy proceedings that began in 1999. The U.S. Bankruptcy Court granted the final decree on in November 2001. Management does not expect to incur significant reorganization costs in the future. Capital Resources and Liquidity As of December 31, 2001, the Company's total assets were $834,030. Total assets decreased from $996,641 at December 31, 2000. The decrease in assets is primarily the result of decreased cash and amortization of prepaid assets. No significant investments were made in 2001. Current assets decreased from $245,462 in 2000 to $120,557 at December 31, 2001. Cash was used to partially fund the 2001 operating loss. During 2001 Geo expended $382,826 to fund operations. The additional cash required was primarily provided from the issuance of stock totaling $308,889. Prepaid legal and consulting fees as of December 31, 2000 totaled $125,228. This amount was fully amortized in 2001. Near the end of 2001, Geo paid $45,000 on a contract to plug a well located on the Rosecrans property. Plugging was completed in 2002. Total liabilities increased from $425,237 at December 31, 2000 to $559,541 at December 31, 2001. This increase is primarily the result of deferring payment to vendors required to conserve cash resources. Additionally, Geo borrowed another $36,802 on its line of credit with a related party and paid off the balance of notes payable in the amount of $28,596. The Company's primary sources of liquidity and capital resources in the near term will consist of the working capital on hand and funds derived from oil and gas production and waste disposal operations. The Company intends to concentrate its efforts on maintaining and increasing the operations of the waste disposal facility along with restoration of selected oil and gas wells in order to increase cash flow. Further, Management intends to pursue development of its deep gas prospects in Kentucky. Capital resources will be augmented by the sale of equity in the Company and transfer of partial interests in its properties in exchange for development capital. INFLATION. In recent years inflation has not had a significant impact on the Company, its operations or financial condition. TRENDS During 2001, oil prices declined to a low of $17.48 per barrel (West Texas Intermediate spot price) in November 2001. Although recent spot prices for WTI have recovered to approximately $26 per barrel, they have not approached the high price of $34.12 experienced in March 2000. This decrease has affected the operational viability of Geo's existing oil properties. In addition, 2001 saw the average price of natural gas fall from $6.37 per MCF in the first quarter of 2001 to $2.51 by the end of the year. Despite these downward trends, prices seem to have stabilized and it is unlikely that they will fall to former lows seen in earlier years. Forecasts published by the DOE Energy Information Administration project prices for WTI to range between $25 and $29 per barrel while natural gas prices are projected to range between $2.37 and $3.06 per MCF during the next twelve months. ITEM 7. FINANCIAL STATEMENTS Please see accompanying Index to Financial Statements commencing on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE (a) On January 18, 2000, we engaged Kelly & Company to replace Ernst & Young, LLP, who declined to stand for reelection as our independent accountants on November 11, 1999. Such firm did not issue an opinion on our 1998 financial statements. Our Board of Directors approved the change in our independent accountant. The independent auditor's report of Ernst & Young, LLP for our financial statements for the year ended December 31, 1997 contained a going concern qualification but otherwise did not contain an adverse opinion or a disclaimer of opinion, and was not modified as to uncertainty, audit scope, or accounting principles. The report of Kelly & Company contains a similar going concern qualification. During our two most recent fiscal years and through the date of the resignation of Ernst & Young, LLP, We did not have any disagreements with Ernst & Young, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. (b) Inapplicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT EXECUTIVE OFFICERS AND DIRECTORS. The Company is dependent on the efforts and abilities of certain of its senior management. The interruption of the services of key management could have a material adverse effect on our operations, profits and future development, if suitable replacements are not promptly obtained. We anticipate that the Company will enter into employment agreements with each of its key executives; however, no assurance can be given that each executive will remain with the Company during or after the term of his or her employment agreement. In addition, our success depends, in part, upon our ability to attract and retain other talented personnel. Although we believe that our relations with our personnel are good and that we will continue to be successful in attracting and retaining qualified personnel, there can be no assurance that the Company will be able to continue to do so. All officers and directors of the Company will hold office until their resignation or removal. The following table sets forth information regarding the executive officers and directors of the Company as well as other key members of the Company's management. DIRECTORS AND EXECUTIVE OFFICERS Our directors were elected at our annual meeting of shareholders. The following table lists the directors, executive officers and key employees of the Company.
Name of Age Position Held with Director Individual Company Since - ------------------ ------ -------------------------- -------------- Dennis Timpe (1)...................... 54 President and director 1999 Lori Timpe-Long (1)................... 33 Chief Financial Officer and director 1999 Christian M. Dillon (1)............... 56 director and general counsel 1999 Greg S. Tolleson 46 Director 2001
- -------------- (1) Messrs. Timpe and Dillon and Mrs. Timpe-Long were appointed to the Board and elected to their current positions in December 1999 in accordance with our Plan of Reorganization. The following is a brief description of the business experience during the preceding five years of each of our directors and executive officers indicating their principal occupation and employment during that period. DENNIS TIMPE joined the Company in December 1999, pursuant to our Plan of Reorganization. Mr. Timpe is the founder of TD & Associates and has been its chief executive officer since 1986. TD & Associates provides services to companies engaged in the exploration and development of oil and gas. Mr. Timpe and certain companies with which he was or is affiliated, including T.D. and Associates, Inc., a California corporation controlled by Mr. Timpe and affiliated with the Company, have been the subject of administrative orders issued by the securities administrators of the States of Pennsylvania, Indiana, Minnesota, Maine, Montana and Wisconsin, the effect of which is to require Mr. Timpe and such companies to refrain from selling securities or acting as a broker in such states. In addition, an order was entered against Mr. Timpe, among others, by the Indiana Securities Commissioner on May 6, 1999 prohibiting Mr. Timpe from transacting business in Indiana as a broker-dealer or agent for the offer or sale of securities, and imposing a civil penalty. In addition, an injunction is currently in force against Mr. Timpe in the Commonwealth Court of Pennsylvania restraining him from violating an order issued by the Pennsylvania Securities Commission on October 15, 1990 prohibiting him from selling unregistered securities in the State of Pennsylvania. Mr. Timpe is the father of Lori Timpe-Long, the Secretary--Treasurer of the Company who was appointed to such office pursuant to our Plan of Reorganization. LORI TIMPE-LONG. Mrs. Long has been the Treasurer of TD & Associates since 1986 and is presently a director of the Company. Mrs. Long has a Bachelor of Arts degree from California State University, Long Beach and a Master of Arts degree in Psychology from California Graduate Institute. Mrs. Long was appointed as the Secretary and confirmed as the Treasurer of the Company pursuant to our Plan of Reorganization. CHRISTIAN M. DILLON. Mr. Dillon is a director of the Company. He is an attorney in private practice and acts as counsel to the Company and to TD & Associates. Mr. Dillon received his J.D. degree from Western State University, College of Law in 1979; he is a member of the State Bar of California and is admitted to practice in various federal courts. GREG S. TOLLESON is a director of the Company. He is a Certified Public Accountant with over 22 years' experience in public accounting, including eleven years with the firm Deloitte & Touche. He is currently a partner in the Orange County accounting firm of Tolleson & Associates, LLP. During his tenure with Deloitte & Touche, he served a variety of clients and was designated by the firm as a specialist in the areas of oil and gas operations, partnerships and joint ventures, closely-held corporations, real estate and oil and gas syndications, and international income tax matters. He was the lead specialist in Southern California in income taxation of oil and gas operations. He was also responsible for leading the international tax practice in the Orange County office of Deloitte & Touche. Approximately one-third of Mr. Tolleson's current practice concerns independent oil and gas companies. He is a member of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants, the California Independent Petroleum Association (where he was formerly co-chairman of the Tax and Accounting Practices Committee), and the Council of Petroleum Services. Directors of the Company are elected annually and hold office until the next annual meeting of stockholders of the Company or until their respective successors are elected and qualified. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT No member of our Board of Directors nor any of our executive officers timely filed a report with the Securities and Exchange Commission on Form 3, initial statement of beneficial ownership of securities; on Form 4, statement of changes of beneficial ownership of securities; or on Form 5, annual statement of beneficial ownership of securities, for the calendar year 2000. ITEM 10. EXECUTIVE COMPENSATION Except for the stock options issued to Dennis Timpe, none of our officers received compensation, including salary and bonus, in excess of $100,000 during either of the two preceding years. The following tables contain information concerning our Chief Executive Officer and any other executive officer whose aggregate cash compensation exceeds $100,000 per year.
Summary Compensation Table Long-Term Compensation ------------------------------------------------ Annual Compensation Awards Payouts ---------------------------------- ----------------------- ----------------------- Name and Year Salary Bonus Other Restrict Securities LTIP All Other nnual Stock Underlying ayouts ompensation Comp. wards ptions/SARs ($) ($) Principal Position ($) ($) A ($) A ($) O (#) P C - --------------------------- ------ -------- ------- -------- -------- ------------- -------- ------------- Dennis Timpe, CEO......... 1999 0 Dennis Timpe, CEO 2000 0 4,000,000(2) (1)
- -------------- (1) Under its Plan of Reorganization as confirmed by the Bankruptcy Court, the Company was authorized to issue 4.5 million shares of its common stock for an aggregate consideration of $500,000 to TD & Associates, a company owned by Timpe. In January 2000, the Company issued such stock; the ultimate recipients of such stock were various persons (see "Recent Sales of Unregistered Securities"). Mr. Timpe received 1.5 million shares of the Company's common stock from TD & Associates as compensation for his services to TD & Associates. The compensation received by Mr. Timpe by reason thereof, if the price paid by other issuees is regarded as the purchase price, is between 20(cent)and 15(cent) per share or an aggregate of $300,000 or $225,000. If the closing price of the common stock in the over-the-counter market is employed as the value of the shares issued (47(cent) per share), the compensation is $705,000. In addition, TD & Associates received $50,000 more than the proceeds to the Company from such share issuance. All of such persons, save Ansbacher Ltd. and Mr. Timpe , paid 20(cent)per share. Ansbacher Ltd. paid 15(cent) per share for 1 million shares, an aggregate of $150,000. The aggregate price paid by all purchasers was $550,000, of which the Company received $500,000. To the extent that the purchase price is less than that paid by others or the market price, the difference may be regarded as compensation. On December 21, 1999, the issuance date, the closing price of the common stock was $0.47 per share. (2) In December 1999, the Board authorized the issuance to Mr. Timpe of an option to purchase four million shares of common stock at a price of 56(cent)per share. No issuance was effected at such time and in October 2000, the Board adopted, subject to ratification by the shareholders, a Stock Option Plan. Pursuant to such plan, the Option Committee, consisting of all members of the Board with Mr. Timpe not acting, issued to Mr. Timpe an option to purchase four million shares of the common stock at a price of 56(cent)per share, payable in cash, notes or services, or any combination of the foregoing. The term of such options expires on September 30, 2005. The options are fully vested and may be exercised at any time during their term. Issuance of the options is subject to ratification by the shareholders of the Company's stock option plan at its 2001 annual meeting. (2) Except for the Company's stock option plan specified above, the Company has no option or other incentive compensation plans.
Option/SAR Grants In Last Fiscal Year (Individual Grants) Number of Percent of Exercise Expiration Securities Total or Date Underlying Options/SARs Ease Price Options/SARs Granted to ($/share) Granted Employees in Name (#) 2000 - -------------------------------- -------------------- --------------- ----------- ----------- Dennis Timpe 1.................................... 4,000,000 100% 0.56 9/30/05
1 Subject to ratification by the shareholders of the Company's Option Plan. The Company intends to seek such ratification at its next shareholders' meeting. See footnote (2) above.
Aggregated Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End Option/SAR Values No. of Unexercised Value of Securities Unexercised Nnderlying Options In-the-Money Shares Acquired Value SARs Options/SARs on Exercise Realized at FY-End at FY-End Name (#) ($) (#) ($) - ------------------------------------ ---------------- -------------- -------------------- --------------- (Exerciseable/Unexerciseable) Dennis Timpe.................... 0 4,000,000 1 0
LONG TERM INCENTIVE PLANS The Company has no long-term incentive plans. COMPENSATION OF DIRECTORS Directors currently receive an annual issuance of 1,000 shares of common shares as compensation. Directors do not receive reimbursement for their out of pocket costs in attending board meetings. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN CONTROL ARRANGEMENTS Except for the stock option plan which has not yet been approved by our shareholders, we have no benefit plans and no employment agreements, other than at will agreements, with any of our 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 were executed in August 1997 and provided for annual compensation of $120,000, $39,000 and $52,000, respectively, all subject to escalation on an annual basis as approved by the Board. The agreements did not contain provisions restricting a change of control in the Company. As a consequence of our Plan of Reorganization, all such contracts were terminated without payment of accrued but unpaid portions of salaries in December 1999, other than an allowance to each of Mr. and Mrs. Raydon of $4,300 as priority wage claims. During the pendancy of the bankruptcy proceedings, Mr. Raydon received $5,000 per month and Mrs. Raydon received $3,250 per monthly. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information, as of December 31, 2001, with respect to the beneficial ownership of our Common Stock by: (i) each stockholder known to us to be the beneficial owner of more than 5% of our Common Stock; and (ii) each officer and director. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission ("Commission") and generally includes voting or investment power with respect to securities. In accordance with Commission rules, shares of Common Stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of this Proxy Statement are deemed beneficially owned by the optionees. The Stock Option Plan pursuant to which Mr. Timpe's options were granted was approved by the shareholders at the 2001 annual meeting.
Title of Name and Address of Amount and Percent of Class Beneficial Owner Nature of Class Beneficial Ownership - ------------- ---------------------------------- -------------- ----------- Ansbacher, Ltd. (1) 3,395,725 19.0% 36568 Mojave Sage Street Common Stock Palm Desert, California 92211 Lori Timpe-Long(2) 18281 Lemon Drive Common Stock Yorba Linda, California 92886 40,000 0.2% Christian Dillon 18281 Lemon Drive Common Stock Yorba Linda, California 92886 100,000 0.6% Dennis Timpe (2)(3) 18281 Lemon Drive Common Stock Yorba Linda, California 92886 5,232,600 28.6% Greg Tolleson 18281 Lemon Drive Common Stock Yorba Linda, California 92886 90,000 0.5%
- -------------- (1) In December 1999, Mr. Raydon resigned as an officer and director of the Company. In November and December 1999, most of Mr. Raydon's shares were transferred to Ansbacher, Ltd. (2) Includes 1,232,600 shares of common stock and options to purchase an additional 4,000,000 shares of our common stock. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATED PARTY TRANSACTIONS. NON-ARM'S LENGTH AGREEMENTS. Certain contemplated agreements and arrangements, including those relating to indemnification, compensation and payments between the Company and the officers and directors of the Company, will not be the result of arm's length negotiations. OUR BANKRUPTCY PROCEEDINGS. In 1998, we filed a voluntary petition for Reorganization under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court, Central District of California, Santa Barbara Division (No. ND 98-15477-RR). In December 1999, our Third Amended Plan of Reorganization was confirmed by the Court. Until December 1999, Capitan Resources, Inc. owned an undivided 25% interest in the waste disposal facilities owned and operated by us at our Oxnard properties. Gerald T. Raydon and his family own all of the stock of Capitan Resources, Inc. As part of our Reorganization, we acquired all of the interests of Capitan Resources in the jointly owned properties and terminated the agreement pursuant to which Capitan operated such properties. Relations between the Company and Capitan Resources were governed by an agreement, which provides for a proportionate sharing of costs and revenues. During 1996, affiliates of Drake Investment Securities, Inc. invested $50,000 in Capitan in exchange for an undivided 25% share of profits in the disposal of solid wastes by Capitan. This interest was subsequently acquired by the Company. Capitan Resources, Inc. was the purchaser of natural gas from our Bandini-East Los Angeles properties, which were sold during 1998. Capitan purchased the natural gas under a contract dated June 30, 1991, which provides for a payment to Capitan of 30% of gross sales in exchange for advancing capital and other costs of gas processing and transportation. Capitan then resold the natural gas to other purchasers. This contract was terminated as part of our reorganization. From time to time there were outstanding balances and credits between Capitan and us pursuant to the agreements above mentioned. 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 1999, the largest balance receivable from Capitan was approximately $1 million and on December 31, 1999, the receivable balance was $0 as a consequence of our Plan of Reorganization which provided for the release of all claims of Capitan against us and all of our claims against Capitan in exchange for the conveyance to us of Capitan's interest in the waste disposal project and termination of its operating contract. The Harriman affiliated group currently owns approximately 365,576 shares or 2.27% of our outstanding common stock. In 1992, members of the group provided collateral to a bank for a loan to us in the principal amount of $1,200,000 ($650,000 as of June 30, 1997). The group received 273,669 shares of our common stock as partial consideration for providing such collateral. The loan was extended to January 15, 1998 on the condition that it be reduced by one-half, which we did by making a $750,000 payment in December, 1996. We paid the Harriman group 51,010 shares of the common stock in 1996 as consideration for retaining the use of their collateral for the loan through the period of extension. In 1998, a further extension was granted in exchange for an additional 25,000 shares of common stock. The indebtedness was discharged in our reorganization and the Harriman affiliated group received $664,990 in allowed claims as a creditor. In 1998, Drake Energy Company, an affiliate of Drake Securities Corporation, loaned us $16,500 and purchased 33,000 shares of common stock for $16,500. The note was discharged in the bankruptcy and Drake Energy received an allowed unsecured claim for $16,500. Under our Plan of Reorganization, which was confirmed on December 15, 1999, the following transactions, among others, occurred: 1. TD & Associates, a company owned by Mr.Dennis Timpe received 1,500,000 shares of our common stock out of our sale of 4,500,000 common shares in exchange for $550,000, of which TD & Associates retained $50,000. Those shares were thereafter transferred to Mr. Timpe as compensation for services which he provided to TD & Associates. 2. Capitan Resources, Inc., a company owned by Mr. G. T. Raydon, relinquished all of its rights under agreements with us by which Capitan operated certain of our properties, acted as natural gas reseller for us, and released any claims it may have had against us. We released Capitan and Mr. Raydon from any claims we may have had against either. We asserted claims of approximately $1 million against Capitan. 3. Mr. Raydon released claims for 1,390,000 shares of our common stock as replacement for shares owned by him lost through sale by a third party, which were provided by Mr. Raydon as collateral for an indirect loan to us. 4. Mr. Raydon released certain collateral and claims secured thereby on certain of our properties. 5. The Harriman affiliated group released its claims against us, including that for repayment of $652,000, in exchange for the payment of $25,000, a two year installment ($2,487.50 monthly) note bearing 8% interest, principal amount of $55,000, and a general unsecured claim of $584,990 for which they have received 210,595 shares of common stock and will receive a maximum of 497,978 additional shares. 6. Unsecured notes in the amount of $185,000 held by Mr. and Mrs. Raydon are to be discharged and various liens of the Raydons on our properties were released. 7. Advances in the amounts of $33,000 from Mr. Eric Raydon, son of Mr. and Mrs. G. T. Raydon and a former employee of Geo, were discharged in exchange for an allowed claim of $33,919 for which he received shares of the Common Stock on the same basis as other creditors of his class. As a condition to investing in our common stock, Mr. Timpe required that Mr. G. T. Raydon grant Mr. Timpe a proxy covering all of the shares owned of record by Mr. Raydon. Such proxy was granted in December 1999, and permits Mr. Timpe and his nominees to vote the shares subject thereto for a period ending December 20, 2001. During December 1999, our Board of Directors authorized the grant of options to purchase 4 million shares of our common stock to Mr. Timpe, such options being exercisable at $.56 per share and expiring on September 30, 2005. The options are exercisable in whole or in part at any time and are fully vested. In October 2000, the Company adopted a stock option plan (which was later approved by the shareholders), and granted such options to Mr. Timpe. In September, 2000, TD & Associates, a company owned by Dennis Timpe, entered into an agreement with Geo Petroleum, Inc. pursuant to which the former agreed to loan to the latter a maximum of $100,000 on an unsecured essentially demand basis at an interest rate which is two percentage points over prime. At December 31, 2000, approximately $85,000 principal and interest of $1,471 had accrued. In June, 2001, TD & Associates agreed to increase the loan, which was characterized as a line of credit, to $150,000. In September, 2001, Geo and TD & Associates agreed to extend the date that the balance of the loan is due from September 1, 2001 to September 7, 2002. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------ ----------- 2.1 Agreement of Merger and Plan of Reorganization between Drake Investment Corp. and Geo Petroleum, Inc. dated November 1, 1995.* 2.2 Certificate of Approval of Agreement of Merger between Drake Investment Corp. and Geo Petroleum, Inc., dated April 9, 1996.* 2.3 Permit to issue stock in merger, dated March 26,1996.* 2.4 Plan of Reorganization of Geo Petroleum, Inc. dated October 12, 1999, and confirmed by the U. S. Bankruptcy Court for the Central District of California, Santa Barbara Division, on December 15,1999.** 3.1 Articles of Incorporation of Geo Petroleum, Inc., filed November 6, 1986.* 3.1(a) First Amendment to Articles of Incorporation of Geo Petroleum, Inc. filed June 1, 1994.* 3.1(b) Second Amendment to Articles of Incorporation of Geo Petroleum, Inc. filed November 7, 1995.* 3.1(c) Third Amendment to Articles of Incorporation of Geo Petroleum, Inc. filed December 5, 1995.* 3.2 By-laws of Geo Petroleum, Inc., dated November 30, 1986.* 4.1 Corporate Resolution establishing Rights, Preferences and Privileges of Preferred Stock, Series A, dated August 23, 1994.* 4.1(a) Form of Preferred Stock Certificate.* 4.2 Form of Common Stock Certificate.* 4.3 Form of Promissory Note, Deed of Trust, and Assignment of Oil Payment of Geo Petroleum, Inc.* 10.3(a) Form of Oil and Gas lease covering various lands in Oxnard Field (Vaca Tar Sands Unit) (exemplar), dated January 1, 1987.* 10.3(b) Pooling Agreement, Vaca Tar Sands Unit, Ventura County, California.* 10.4 Form of Oil and Gas lease covering various lands in the Rosecrans Oil Field, Los Angeles County, CA. (exemplar), dated October 15, 1956.* 10.5 Gas Sales Contract dated August 31, 1991, between Geo Petroleum Inc. and Capitan Resources, Inc. (East Los Angeles/Bandini fields).* 10.6(a) Gas Sales Contract dated August 9, 1991 between Pacific Tube Company and Geo Petroleum, Inc.* 10.6(b) Assignment of Gas Sales Contract, Geo Petroleum, Inc. To Capitan Resources, Inc.* 10.7 Settlement Agreement between Geo Petroleum, Inc. and William Lennox, dated February 28, 2000 (Vaca Properties)** 10.8(a) Oil Sales Contract dated November 22, 1994 between Geo Petroleum, Inc. and Texaco Trading and Transportation Inc. (Oxnard).*. 10.8(b) Oil Sales Contract dated July 5, 1995 between Geo Petroleum, Inc. and Unocal Corp. (Rosecrans field).* 10.9 Oil Sales Contract between Geo Petroleum, Inc. and Kern Oil & Refining Co., dated July 10th, 1995 (Orcutt field).* 10.10 Oil and Gas Lease between Gene Careaga, et al and Central California Oil Co., (our predecessor in interest) (Orcutt Field) dated October 3, 1972.* Exhibit Number Description ------ ----------- 10.11 Letter Agreement dated December 22, 1989 between Geo Petroleum, Inc. and Gerald T. Raydon and Notice of Conversion pursuant thereto dated January 2, 1990 (Vaca Tar Sand net profits interest)** 10.12 Agreement and Assignment among Gerald T. Raydon and Alyda L. Raydon, as assignors, and Geo Petroleum, Inc., as assignee, dated April 1, 1994, conveyance of interests in East Los Angeles and Vaca Tar Sands properties, retaining a 5% net profits interest in Vaca properties.** 10.13 Water Disposal Agreement between J.W. Hansen and Geo Petroleum, Inc. dated May 14, 1992.*. 10.14 Water Disposal Agreement between Geo Petroleum, Inc. and Capitan Resources, Inc. dated June 1, 1990.* 10.15 Services and Drilling Master Contract (water disposal) between Unocal Corporation and Geo Petroleum, Inc. dated February 3, 1993.* 10.16 Term Loan Agreement, as amended and extended to June 15, 1996, dated June 6, 1994, between First Los Angeles Bank (now City National Bank) and Geo Petroleum, Inc.*. 10.17 Letter Agreement between Geo Petroleum, Inc. and William Rich III, as attorney in fact, (Harriman interests) dated September 6, 1990.*. 10.18 Assignment and Bill of Sale, Rosecrans Area Leases, by and between Kelt California, Inc., and Geo Petroleum, Inc., dated December 1, 1994.* 10.19 Consulting Agreement between Geo Petroleum, Inc. and Gerald T. Raydon, dated October 1999.** 10.20 Office Lease between TD & Associates and Geo Petroleum, Inc. dated January 1, 2000** 10.21 Agreement between Geo Petroleum, Inc. and Bud Antle, dated October 24, 2000, releasing certain lands in the Oxnard Field and order of the Bankruptcy Court authorizing execution thereof.** 10.22 Credit Agreement and related form of promissory note between Geo Petroleum, Inc. and T.D. Associates, Inc., dated September 7, 2000 10.23 Agreement for Assignment of Leases dated December 31, 1996 by and between Geo Petroleum, Inc. as Assignor and Saba Petroleum, Inc. as Assignee with respect to our oil properties in the Oxnard Field, Ventura County, California ** 10.24 Agreement and Assignment of Leases dated November 1, 1997, between Geo Petroleum, Inc. and Saba Petroleum, Inc. covering a reassignment of the former's interest in the Oxnard Field, California. ** 10.25 Amendment to Water Disposal Lease dated February 28, 2000 between Geo Petroleum, Inc. and William Lennox (Water disposal facility lease)** 16.1 Letter from Ernst & Young L.L.P. regarding no disagreement.** 23.1 Consent of Stan Brown, Petroleum Engineer. 23.2 Consent of Krummrich Engineering. - -------------- * Filed as an exhibit to Registrant's Form 10 Registration Statement dated June 6, 1996 and incorporated herein by reference thereto. ** Filed as an exhibit to Registrant's report on form 10KSB for the year ended December 31, 1999 and incorporated herein by reference thereto. Unless followed by one or two asterisks, documents listed above are filed herewith. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GEO PETROLEUM INC. Dated: April 15, 2002 By:/s/ Dennis Timpe ----------------------------------- Dennis Timpe Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signatures and dates of directors. April 15, 2002 /s/ Dennis Timpe ----------------------------------------------- Dennis Timpe Chairman of the Board of Directors/C.E.O. April 15, 2002 /s/ Lori Timpe-Long ----------------------------------------------- Lori Timpe-Long Secretary/Treasurer/Director Principal Financial and Accounting Officer April 15, 2002 /s/ Christian M. Dillon Christian M. Dillon Director ----------------------------------------------- April 15, 2002 /s/ Gregory Tolleson Gregory Tolleson Director GEO PETROLEUM, INC. INDEX TO THE FINANCIAL STATEMENTS As of December 31, 2001 and 2000 Richard Reincke \\DS1\Corp\Clients\Geo Petroleum\Annual Form 10-KSB.doc 04/17/02 12:08 PM Page 35 of 34 Richard Reincke \\DS1\Corp\Clients\Geo Petroleum\Annual Form 10-KSB.doc 04/17/02 12:08 PM Page 35 of 34 Richard Reincke \\DS1\Corp\Clients\Geo Petroleum\Annual Form 10-KSB.doc 04/17/02 12:08 PM Page 35 of 34 Richard Reincke \\DS1\Corp\Clients\Geo Petroleum\Annual Form 10-KSB.doc 04/17/02 12:08 PM Page 35 of 32 Richard Reincke \\DS1\Corp\Clients\Geo Petroleum\Annual Form 10-KSB.doc 04/17/02 12:08 PM Page 35 of 34 Richard Reincke \\DS1\Corp\Clients\Geo Petroleum\Annual Form 10-KSB.doc 04/17/02 12:08 PM Page 35 of 34 GEO PETROLEUM, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000 AND FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2001
GEO PETROLEUM, INC. INDEX TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000 AND FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2001 - ---------------------------------------------------------------------------------------------------------------- Report of Independent Auditors ....................................................................1 Financial Statements of Geo Petroleum, Inc.: Balance Sheets, December 31, 2001 and 2000................................................2 Statements of Operations For Each of the Two Years in the Period Ended December 31, 2001.....................................................................4 Statements of Shareholders' Equity For Each of the Two Years in the Period Ended December 31, 2001...............................................................5 Statements of Cash Flows For Each of the Two Years in the Period Ended December 31, 2001.....................................................................6 Notes to the Financial Statements..................................................................8
REPORT OF INDEPENDENT AUDITORS To the Board of Directors Geo Petroleum, Inc. We have audited the accompanying balance sheets of Geo Petroleum, Inc. as of December 31, 2001 and 2000, and the related statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2001 and 2000 financial statements referred to above present fairly, in all material respects, the financial position of Geo Petroleum, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has negative working capital, filed for relief under the federal bankruptcy laws in November 1998 from which it emerged in December 1999, needs to attain positive cash flow from operations, and obtain additional funds to commence operations and development of its oil and gas properties. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are partially described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. Kelly & Company Newport Beach, California April ___, 2002
Geo Petroleum, Inc. Balance Sheets December 31, 2001 and 2000 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS 2001 2000 ------------------ ------------------- Current assets: Cash and equivalents $ 406 $ 70,173 Accounts receivable - trade 68,282 33,961 Prepaid expenses: Legal and consulting fees - 125,228 Advances on well plugging 45,000 9,000 Other 6,869 Note receivable - 7,100 ------------------ ------------------- Total current assets 120,557 245,462 ------------------ ------------------- Restoration and utility deposits 271,530 290,936 ------------------ ------------------- Property and equipment: Oil and gas properties 264,375 261,311 Vehicles 36,884 36,884 Facilities and equipment 185,447 184,475 ------------------ ------------------- 486,706 482,670 Less: accumulated depreciation and depletion (44,763) (22,427) ------------------ ------------------- 441,943 460,243 ------------------ ------------------- Total assets $ 834,030 $ 996,641 ================== ===================
The accompanying notes are an integral part of the financial statements. 2
Geo Petroleum, Inc. Balance Sheets December 31, 2001 and 2000 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ------------------ ------------------- Current liabilities: Accounts payable: Trade $ 273,400 $ 160,901 Related party 54,805 54,805 Accrued expenses: Bankruptcy settlement liability 40,000 40,000 Property taxes payable 38,409 31,661 Other accrued expenses 26,825 19,974 Line of credit - related party 121,802 85,000 Other liabilities 4,300 4,300 Note payable, current maturity - 28,596 ------------------ ------------------- Total current liabilities 559,541 425,237 Commitments and contingencies Shareholders' equity: Preferred stock; no par value; 100,000 shares authorized; no shares issued and outstanding at December 31,2001 and 2000, respectively - - Common stock; no par value; 50,000,000 shares authorized; 19,211,955 and 18,177,805 shares issued and outstanding at December 31, 2001 and 2000, respectively 11,667,182 11,225,293 Accumulated deficit (11,392,693) (10,653,889) ------------------ ------------------- Total shareholders' equity 274,489 571,404 ------------------ ------------------- Total liabilities and shareholders' equity $ 834,030 $ 996,641 ================== ===================
The accompanying notes are an integral part of the financial statements. 3
Geo Petroleum, Inc. Statements of Operations For Each of the Two Years in the Period Ended December 31, 2001 - ---------------------------------------------------------------------------------------------------------------------------- 2001 2000 -------------------- ---------------------- Revenues: Oil and gas sales $ 6,742 $ 40,901 Waste water disposal services 351,465 40,899 Less: royalties (63,800) - -------------------- ---------------------- Total revenues 294,407 81,800 Expenses: Lease operating expenses 422,065 323,023 Lease environmental remediation expenses 2,528 6,607 Depreciation 22,336 11,228 Professional fees 256,881 292,443 General and administrative 286,153 195,228 -------------------- ---------------------- Total expenses 989,963 828,529 -------------------- ---------------------- Loss from operations (695,556) (746,729) -------------------- ---------------------- Reorganization items: Trustee fees 4,675 - Legal fees 37,645 - -------------------- ---------------------- Total reorganization items 42,320 - -------------------- ---------------------- Other income (expense): Interest income 10,215 10,249 Interest expense (10,343) (5,977) -------------------- ---------------------- (128) 4,272 -------------------- ---------------------- Loss before provision for income taxes (738,004) (742,457) Provision for income taxes (800) (800) -------------------- ---------------------- Net loss $ (738,804) $ (743,257) ==================== ====================== Net loss per share, basic and diluted $ (0.05) $ (0.04) ==================== ======================
The accompanying notes are an integral part of the financial statements. 4
Geo Petroleum, Inc. Statements of Shareholders' Equity For Each of the Two Years in the Period Ended December 31, 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Common Common Accumulated Shares Stock Deficit Total -------------- --------------- ----------------- ---------------- Balance, December 31, 1999 15,215,995 $ 9,918,974 $(9,910,632) $ 8,342 Common shares issued in a private placement 1,916,202 584,723 - 584,723 Common shares issued in a private placement 492,641 344,850 - 344,850 Common shares issued for services 402,967 169,246 - 169,246 Common shares issued for services 100,000 90,000 90,000 Common shares and warrants issued for services 50,000 117,500 - 117,500 Net loss - - (743,257) (743,257) -------------- --------------- ----------------- ---------------- Balance, December 31, 2000 18,177,805 11,225,293 (10,653,889) 571,404 Common shares issued in a private placement 322,500 161,250 - 161,250 Common shares issued in a private placement 984,259 147,639 - 147,639 Common shares issued for services 399,000 133,000 133,000 Common shares retired that were originally issued pursuant to the confirmed plan of reorganization but that were not required. (671,609) - - - Net loss - - (738,804) (738,804) -------------- --------------- ----------------- ---------------- Balance, December 31, 2001 19,211,955 $ 11,667,182 $(11,392,693) $ 274,489 ============== =============== ================= ================
The accompanying notes are an integral part of the financial statements. 5
Geo Petroleum, Inc. Statements of Cash Flows For Each of the Two Years in the Period Ended December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------- 2001 2000 ---------------------- ----------------------- Cash flows from operating activities: Net loss $ (738,804) $ (743,257) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 22,336 11,228 Issuance of common stock and warrants for services - 81,875 Amortization of prepaid legal expense 37,500 - Amortization of prepaid consulting services 88,125 - Issuance of common stock for services 133,000 - Decrease (increase) in assets: Accounts receivable trade (34,321) 40,108 Due from a related party 7,100 37,900 Prepaid expenses: Legal and consulting fee (397) (1,335) Advances on well plugging (36,000) - Other (6,869) (3,634) Restoration and utility deposits 19,406 (130,344) Increase (decrease) in liabilities: Accounts payable, trade 112,499 130,989 Accounts payable, related party 40,656 Accrued expenses: Bankruptcy settlement liaiblity - 40,000 Property taxes payable 6,748 (3,746) Other 6,851 (165,026) Income tax payable - (3,039) Other liabilities - (160,746) Installment obligation - (64,755) ---------------------- ----------------------- Cash used in operating activities (382,826) (893,126) ---------------------- ----------------------- Cash flows used in investing activities Purchases of facilities and equipment (972) (184,475) Purchase of vehicles - (16,000) Capital expenditures on oil and gas properties (3,064) (261,311) ---------------------- ----------------------- Cash used in investing activities (4,036) (461,786) ---------------------- -----------------------
The accompanying notes are an integral part of the financial statements. 6
Geo Petroleum, Inc. Statements of Cash Flows For Each of the Two Years in the Period Ended December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------- 2001 2000 ---------------------- ----------------------- Cash flows provided by (used in) financing activities: Proceeds from line of credit, related party $ 40,000 $ 110,000 Payment on line of credit, related party (3,198) (25,000) Payment on note payable. (28,596) (26,404) Net proceeds from the issuance of common stock 308,889 929,573 ---------------------- ----------------------- Cash provided by financing activities 317,095 988,169 ---------------------- ----------------------- Net increase (decrease) in cash (69,767) (366,743) Cash and equivalents at beginning of year 70,173 436,916 ---------------------- ----------------------- Cash and equivalents at end of year $ 406 $ 70,173 ====================== ======================= Supplemental Disclosures of Cash Flow Information Interest paid $ 11,815 $ 3,446 Income taxes paid - $ 3,839 Supplemental Schedule of Non-Cash Investing and Financing Activities Issuance of common stock for prepaid legal and consulting fees: Prepaid legal and consulting fees - $ 125,625 Issuance of common stock - $(125,625) Issuance of common stock to pay federal bankruptcy proceeding expenses: Accrued legal fees - $ 90,000 Professional fees - $ 79,246 Issuance of common stock - $ (169,246)
The accompanying notes are an integral part of the financial statements. 7 GEO PETROLEUM, INC. NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000 AND FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2001 - -------------------------------------------------------------------------------- 1. DESCRIPTION OF THE COMPANY'S BUSINESS ------------------------------------- Geo Petroleum, Inc. (the "Company") is an oil and gas production company founded in 1986 and incorporated in the State of California. The Company engages in the development, production and management of oil and gas properties. All of the Company's properties are located in California. Certain of the wells on one of the Company's properties are used for wastewater disposal services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ 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. The Company incurred net losses of $738,804 and $743,257 and negative cash flows from operations of $382,826 and $893,126 for the years ended December 31, 2001 and 2000, respectively. At December 31, 2001 the Company had an accumulated deficit of $11,392,693 and, and its current liabilities exceed its current assets by $438,984. In June 1998, the Company decided to shut-in its oil and gas production at all of its property locations except certain of the oil wells and the wastewater disposal wells on the Vaca Tar Sands property, and the Rosecrans Field gas production. It planned to focus its resources on the development of the Vaca Tar Sands property. In November 1998, the Company filed for protection under the federal bankruptcy laws. Effectively, the Company curtailed its oil and gas production in 1999, and substantially reduced its wastewater disposal operations. In December 1999, the bankruptcy court confirmed the Plan and the Company received $500,000 from the sale of 4,500,000 shares of its common stock and emerged from bankruptcy. In the fourth quarter of 2000, the Company began limited oil production and wastewater disposal services at its Vaca Tar Sands properties. The production requires steam injection recovery techniques. This process uses substantial quantities of natural gas. Due to ongoing inordinately high natural gas costs, the Company has curtailed its oil production efforts. The Company's continuation as a going concern is dependent upon its ability to obtain additional debt or equity financing, to acquire, repair and modify equipment and commence production from its oil and gas properties, generate sufficient cash flow to meet its current obligations on a timely basis, and ultimately to attain profitable oil and gas and waste water disposal operations. In 2001, management obtained approximately $309,000 in additional equity financing through private placements of its common stock and is continuing its efforts to obtain additional funds so that the Company can meet its obligations, commence oil and gas operations, and develop its oil and gas properties. Potential capital funding alternatives include, among other things, private placement of debt and/or equity securities, bank loans using oil and gas properties as collateral and/or the sale of the interests in its oil and gas properties. There can be no 8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ----------------------------------------------------- BASIS OF PRESENTATION, CONTINUED assurance that any of these potential alternatives will materialize. These matters and the Company's ability to meet it plan raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. - USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the financial statements. PROPERTY AND EQUIPMENT OIL AND GAS PROPERTIES ---------------------- 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 Company has not capitalized any interest or any of its internal costs related to its oil and gas properties. In addition, the capitalized costs are subject to a "ceiling test," which basically limits such costs to the aggregate of the "estimated present value" of future net revenues from proved reserves, discounted at a 10-percent interest rate, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. Any unamortized costs capitalized in the cost center in excess of the cost center ceiling are charged to expense in the period in which the excess occurs. Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the determination of income or loss. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized over the estimated useful lives of the properties by application of the unit-of-production method using only estimated proved oil and gas reserves, excluding future 9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ----------------------------------------------------- PROPERTY AND EQUIPMENT, CONTINUED OIL AND GAS PROPERTIES, CONTINUED --------------------------------- estimated costs and related oil reserves at the Vaca Tar Sands property, which relate to a significant development project involving an enhanced recovery process. Evaluations of the oil and gas reserves for the Company's Rosecrans and Vaca Tar Sands properties were prepared by independent petroleum engineers. Such estimates of oil and gas reserves are inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. As a result, these estimates are expected to change as future information becomes available, and such change can be significant. Substantially all additions to oil and gas properties in 2001 and 2000 relate to improvements to waste water disposal wells, facilities and equipment and development costs associated with its Vaca Tar Sands properties. The Company's oil and gas producing properties are estimated by the Company's independent petroleum engineers to have remaining producing lives ranging from five to 31 years. The Company's policy for accruing site restoration and environmental exit costs related to its oil and gas production is that such costs are accounted for in the Company's calculation of depletion expense. OTHER ----- Property and equipment are recorded at cost and are depreciated using the straight-line method over the expected lives as described below. Expenditures for normal maintenance and repairs are charged to income, and significant improvements are capitalized. The cost and related accumulated depreciation of assets are removed from the accounts upon retirement or other disposition, and resulting profit or loss is reflected in the statement of operations. Depreciation of office furniture and equipment, and vehicles, is computed using the straight-line method, with depreciation rates based upon estimated useful lives of five years. Depreciation of plant and equipment is computed using the straight-line method, with depreciation rates based upon estimated useful lives of fourteen years. Depreciation of office furniture and equipment, and vehicles, is computed using the straight-line method, with depreciation rates based upon estimated useful lives of five years. 10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ----------------------------------------------------- OTHER, CONTINUED Depreciation of plant and equipment is computed using the straight-line method, with depreciation rates based upon estimated useful lives of fourteen years. REVENUE RECOGNITION Revenue from oil and gas sales is recognized upon delivery of the oil and gas to the Company's customer. Royalties and certain other costs that the Company incurs to bring the oil and gas into salable condition are recorded as a reduction of sales. Revenue from wastewater disposal is recognized when the services are performed. Royalties related to water disposal services are recorded as a reduction of revenues. LONG-LIVED ASSETS Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When circumstances indicate that the carrying amount of a long-lived asset, other than oil and gas properties, is not recoverable, as demonstrated by the projected undiscounted cash flows, an impairment loss is recognized. The Company accounts for its oil and gas properties under the full cost method and evaluates these assets separately in accordance with applicable cost ceiling limitations. The Company's management has determined that there was no impairment of long-lived assets at December 31, 2001 and 2000, respectively. INCOME TAXES The Company uses the asset and liability method to account for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities for accounting purposes, and their respective tax bases. Deferred income tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in statutory tax rates is recognized in net income in the year of change. A valuation allowance is recorded for those deferred income tax assets whose recoverability is not sufficiently likely. 11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ----------------------------------------------------- LOSS PER COMMON SHARE Basic loss per common share is computed by dividing net loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. In periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. STOCK-BASED COMPENSATION Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation, ("SFAS No. 123") encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and related interpretations and to provide additional disclosures with respect to the pro forma effects of adoption had the Company recorded compensation expense as provided in SFAS No. 123. In accordance with APB No. 25, compensation cost for stock options is recognized in the statement of operations based on the excess, if any, of the quoted market price of the stock at the grant date of the award or other measurement date over the amount an employee must pay to acquire the stock. Generally, the exercise price for stock options granted to employees equals or exceeds the fair market value of the Company's common stock at the date of grant, thereby resulting in no recognition of compensation expense by the Company. ENVIRONMENTAL COSTS Costs related to environmental remediation are charged to expense. Other environmental costs are also charged to expense unless they increase the value of the property and/or provide future economic benefits, in which event they are capitalized. Liabilities are recognized when the expenditures are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology, and undiscounted site-specific costs. Generally, such recognition coincides with the Company's commitment to a formal plan of action. 12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ----------------------------------------------------- ENVIRONMENTAL COSTS, CONTINUED Accruals for environmental matters are recorded when it is probable that a liability has been incurred, and the amount of the liability can be reasonably estimated; or if an amount is likely to fall within a Range, and no amount within that range can be determined to be the better estimate, the minimum amount of the range is recorded. Accruals for environmental matters exclude claims for recoveries from insurance carriers and other third parties until it is probable that such recoveries will be realized. NEW PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, Business Combinations, which requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. As a result, use of the pooling-of-interests method is prohibited for business combinations initiated thereafter. SFAS 141 also established criteria for the separate recognition of intangible assets acquired in a business combination. SFAS No. 141 supercedes Accounting Principles Board ("APB") Opinion No. 16, Business Combinations and amends or supercedes a number of interpretations of that opinion. It also amends SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. The Company adopted this Statement, which did not have a material impact on the Company's results of operations, financial position or cash flows. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles, which requires that goodwill and other intangible assets having indefinite lives no longer be amortized to earnings, but instead be subject to periodic testing for impairment. Intangible assets, other than goodwill, determined to have definitive lives will continue to be amortized over their useful lives. SFAS No. 142 supercedes APB No. 17, Intangible Assets. Provisions of SFAS No. 142 will be effective for all fiscal years beginning after December 15, 2001. This statement is effective for the Company's 2002 fiscal year. The Company is currently evaluating the effect that implementation of the new standard will have on its results of operations and financial position. However, adoption of SFAS No. 142 is not expected to have a significant effect on the Company's balance sheets, statements of operations, or statements of cash flows. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses the accounting requirements for retirement obligations associated with tangible long-lived assets. This Statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. This Statement is effective for the Company's 2003 fiscal year, and early adoption is permitted. The Company is currently evaluating 13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ----------------------------------------------------- NEW PRONOUNCEMENTS, CONTINUED the impact of SFAS No. 143 to determine the effect, if any, it may have on the Company's results of operations, financial position or cash flows. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which excludes from the definition of long-lived assets goodwill and other intangibles that are not amortized in accordance with SFAS No. 142. SFAS No. 144 requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also expands the reporting of discontinued operations to include components of an entity that have been or will be disposed of rather than limiting such discontinuance to a segment of a business. This Statement is effective for the Company's 2003 fiscal year, and early adoption is permitted. The Company is currently evaluating the impact of SFAS No. 144 to determine the effect, if any, it may have on the Company's results of operations, financial position or cash flows. 3. RESTORATION AND UTILITY DEPOSITS -------------------------------- The Company has deposits with the State of California, the County of Ventura and the City of Los Angeles that are required by these governmental agencies in connection with the Company's oil and gas operations. In 2000, the Company had a deposit with a utility that supplied natural gas, which, during 2001, was applied to an amount owed. The deposits with the State of California and Ventura County are in certificates of deposit that are subject to withdrawal restrictions imposed by these agencies. The deposit with the City of Los Angeles is in the form of a noninterest bearing cash deposit. The amounts of these deposits at December 31, 2001 and 2000 are as follows:
2001 2000 --------------- --------------- Utility - $ 18,800 State of California $ 210,358 211,495 County of Ventura 11,172 10,641 City of Los Angeles 50,000 50,000 --------------- --------------- TOTAL RESTORATION AND UTILITY DEPOSITS $ 271,530 $ 290,936 =============== ===============
14
4. LINE OF CREDIT AND NOTE PAYABLE ------------------------------- December 31, ------------------------------------- 2001 2000 --------------- --------------- LINE OF CREDIT Line of credit payable to TD & Associates, Inc., a related party with a maximum credit of $150,000 and $100,000 as of December 31, 2001 and 2000, respectively, for working capital needs. Borrowings under the line bear interest at prime plus 2%, payable monthly, with the principal and unpaid interest due in full on September 7, 2002. The line of credit is not collateralized and had an effective weighted average interest rate of 9.1% and 11.5% for the years ended December 31, 2001 and 2000, respectively. $ 121,802 $ 85,000 =============== =============== NOTE PAYABLE Note payable to shareholders, with an interest rate of 8% per annum, payable in monthly principal and interest installments of $2,487, and collateralized by 33% net revenue interest in the Company's Vaca Tar Sands oil and gas properties. This note was paid in full in December 2001. - $ 28,596 --------------- --------------- Total note payable - 28,596 Less: current maturities - (28,596) --------------- --------------- Long-term portion of note payable - - =============== ===============
Interest expense incurred during the years ended December 31, 2001 and 2000 was $10,344 and $5,977, respectively. 5. REORGANIZATION -------------- On November 16, 1998, Geo Petroleum, Inc. (the "Debtor") filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Central District of California, Santa Barbara Division (the "bankruptcy court"). During 1999, the Debtor received approval from the bankruptcy court to pay or otherwise honor certain of its prepetition obligations, including employee wages when the Company's Third Amended Plan of Reorganization (the "Plan") was approved and the Company emerged from bankruptcy. During fiscal 15 5. REORGANIZATION, CONTINUED ------------------------- year 2000, the Company resolved the remaining claims objected to in the bankruptcy and in 2001 incurred legal and other expense associated with the finalization of the Plan and issued the necessary common stock described by the Plan. 6. INCOME TAXES ------------
The components of the provision for income taxes are as follows: December 31, ------------------------------------- 2001 2000 --------------- --------------- Current tax expense: Federal - - State $ 800 $ 800 --------------- --------------- 800 800 --------------- --------------- Deferred tax expense: Federal - - State - - --------------- --------------- - - --------------- --------------- TOTAL PROVISION $ 800 $ 800 =============== ===============
16 6. INCOME TAXES, CONTINUED ----------------------- Significant components of the Company's deferred income tax assets and liabilities at December 31, 2001 and 2000 are as follows:
December 31, ------------------------------------- 2001 2000 --------------- --------------- Deferred income tax assets: Net operating loss carryforward $ 3,258,139 $ 2,970,630 Differences between book and tax basis of property - 35,831 Other 272 272 --------------- --------------- Net deferred income tax asset 3,258,411 3,006,733 --------------- --------------- Deferred income tax liability: Differences between book and tax basis of property 22,405 - --------------- --------------- Total deferred income tax liability 22,405 - --------------- --------------- Net 3,236,006 3,006,733 Valuation allowance (3,236,006) (3,006,733) --------------- --------------- Net deferred income taxes - - =============== ===============
The Company, based upon its recent history of losses and management's assessment of when operations are anticipated to generate taxable income, has concluded that it is more likely than not that none of the net deferred income tax assets will be realized through future taxable earnings and has established a valuation allowance for them. Reconciliation of the effective tax rate to the U.S. statutory rate is as follows:
December 31, ------------------------------------- 2001 2000 --------------- --------------- Tax expense at U.S. statutory rate (34.0)% (34.0)% State tax provision 0.1 0.1 Change in valuation allowance 34.0 34.0 --------------- --------------- Effective income tax rate 0.1% 0.1% =============== ==============
17 6. INCOME TAXES, CONTINUED ----------------------- At December 31, 2001, the Company has available unused net operating loss carryforwards that expire as follows:
Federal Net State Net Year of Operating Loss Operating Loss Expiration Carryforwards Carryforwards ---------- ------------- ------------- 2002 - $ 523,848 2003 - 826,296 2004 - 524,454 2005 - 1,005,177 2006 - 772,534 Thereafter up to 2020 $ 8,633,161 - --------------- ----------------- Total $ 8,633,161 $ 3,652,309 =============== =================
The Company has determined that there will be significant limitations on the future utilization of the net operating loss carryforwards due to ownership changes in the Company. 7. COMMITMENTS AND CONTINGENCIES ----------------------------- CONCENTRATIONS Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable-trade. The Company places its cash and cash equivalents with high quality financial institutions. Exposure to losses on accounts receivable-trade is principally dependent on the individual customer's financial condition, as credit sales are not collateralized. The Company monitors its exposure to credit loss and reserves those accounts receivable that it deems to be uncollectible. The Company had one customer for its oil and gas production in 2001 that accounted for approximately 98% of gross oil and gas sales. There were no amounts due from this customer at December 31, 2001. The Company had two customers for its wastewater disposal services in 2001 that accounted for approximately 32% and 16% of gross wastewater disposal services revenue, respectively. At December 31, 2001, the Company had accounts receivable due from these customers totaling $19,956. 18 7. COMMITMENTS AND CONTINGENCIES, CONTINUED ---------------------------------------- CASH IN EXCESS OF FEDERAL DEPOSIT INSURANCE CORPORATION INSURED LIMITS The Company maintains its cash in bank depository accounts, which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 2001, the Company had approximately $31,950 in excess of FDIC insured limits. The Company has not experienced any losses in such accounts. RISKS OF THE INDUSTRY IN WHICH THE COMPANY OPERATES The Company participates in an industry that is characterized by competitive pressure, changes in the prices of oil and gas on a world-wide basis, federal, state, and local regulations governing production and development of its oil and gas reserves, and compliance with various environmental laws and regulations. The Company's results of operations are affected by a wide variety of factors, including world events, general economic conditions, changes in average selling prices over the productive life of oil and gas reserves, the timing of production from new and existing proved developed and undeveloped reserves by the Company, its competitors, and others, the ability to produce sufficient quantities of oil and gas reserves in a timely manner, and the timely implementation of new and alternative reserve recovery process technologies. Based on the factors noted herein, the Company may experience substantial period-to-period fluctuations in future operating results. MINIMUM ROYALTIES The Company has commitments for minimum royalty payments on certain of its oil and gas properties, which total approximately $36,000 annually. PROPERTY LEASE RISKS The Company's oil and gas leases on its Vaca Tar Sands and Rosecrans properties contain provisions, which provide for minimum production requirements and periods. The Company's failure to meet those minimum requirements could result in a termination of the lease(s) and loss of all its rights thereunder. However, the Company believes it is in compliance with the lease(s) provisions and has not received notification from anyone to the contrary. 8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS ------------------------------------------------------ The Company's financial instruments are cash and cash equivalents, accounts receivable, accounts payable, a line of credit, and a note payable. The recorded values of cash and cash equivalents, 19 8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED ----------------------------------------------------------------- accounts receivable, accounts payable, the line of credit and the note payable approximate their fair values based on their short-term nature. 9. FARM-OUT OF VACA TAR SANDS PROPERTY ----------------------------------- In prior years, the Company entered into an agreement with Saba Petroleum, Inc. ("Saba") to farm-out for the development and operations of the Company's Vaca Tar Sands property. The agreement, as modified, requires Saba to pay for one-half (1/2) of the operating and development costs until they expend $5,000,000. At that point, Saba will have earned a one-third (1/3) interest and the Company will retain a two-thirds (2/3) interest in the property and these two parties will share in the costs and revenues based on their respective interests. This agreement was assumed as an executory contract under the bankruptcy reorganization plan. During 1999, the Company incurred certain costs and expenses in connection with its Vaca Tar Sands property that management believes are related to the Farm-Out agreement. However, at December 31, 2001, the portion of these expenditures that management believes are reimbursable by Saba under the Farm-Out agreement is in dispute. Management intends to pursue reimbursement of these amounts from Saba, but it is uncertain if any of these amounts will ultimately be recovered. Accordingly, the Company has not recorded any amounts due from Saba. 10. RELATED PARTY TRANSACTIONS -------------------------- The Company's former officer who is a major shareholder holds a 5% net profit interest in the Vaca Tar Sands oil and gas properties. Under the terms of the Agreement, the former officer and major shareholder does not share in the net profits of the properties until the Company has recovered his proportionate share of the cumulative losses previously incurred on the properties. At December 31, 2001, the former officer and major shareholder's proportionate share of the cumulative losses totaled approximately $14,000. The Company rents on a month-to-month basis its office facilities at $5,000 per month from an entity that is wholly owned by a company officer, who is also a major shareholder. Rental expense incurred in each of the years ending December 31, 2001 and 2000 was $60,000. The Company and another entity and its related partnerships are under common control. The common control results from a Company officer who is also a major shareholder being the sole shareholder of the other entity, which is involved in oil drilling syndications. The other entity also 20 10. RELATED PARTY TRANSACTIONS, CONTINUED ------------------------------------- serves as the managing partner or agent of the related partnerships whose business purpose is oil drilling. As of December 31, 2001 and 2000, there were 12 and 9 of these partnerships active, respectively. The Company in the past has not participated in any ventures with this entity or its partnerships. As of the report date, there are negotiations underway between the Company and the related entity for venture participation in a gas exploration project in Kentucky. 11. LOSS PER SHARE -------------- Basic and diluted loss per common share has been computed by dividing the loss available to common shareholders by the weighted-average number of common shares for the period. The computations of basic and diluted loss per common share are as follows:
For the Years Ended December 31, -------------------------------- 2001 2000 --------------- --------------- Numerator: Net loss and the numerator for basic and diluted loss per common share $ (738,804) $ (743,257) ================ ================ Denominator: Weighted-average shares basic and diluted 18,185,810 16,691,576 =============== ================ Basic and diluted loss per common share $ (0.05) $ (0.04) =============== ================
The potentially dilutive securities that were outstanding during 2001 and 2000 were not included in the computation of diluted loss per share, because to do so would have been antidilutive for the periods presented.
For the Years Ended December 31, ------------------------------------- 2001 2000 --------------- --------------- Shares of common stock issuable under: Warrants 455,151 756,821 Options 4,000,000 4,000,000 --------------- --------------- Total 4,456,151 4,756,821 =============== ===============
21 12. STOCK-BASED COMPENSATION ------------------------ During 2000, the Company adopted a Stock Option Plan (the "Option Plan") under which officers, key employees, and non-employee directors and others may be granted options to purchase shares of the Company's authorized but unissued common stock. The maximum number of shares of the Company's common stock available for issuance under the Option Plan is 4,000,000 shares. In the year 2000, the Company granted all of the options provided in the Option Plan to purchase common shares to its president at an exercise price of $.56. The options are exercisable at any time and expire in September 2005. As of December 31, 2001, there were no shares available for future grants under the Option Plan. Under the Option Plan, the option exercise price was equal to the fair market value of the Company's common stock at the date of grant. Options currently expire no later than 5 years from the grant date and are exercisable according to terms provided by the option committee at the date of grant. Proceeds received by the Company from exercises of stock options are credited to common stock. Additional information with respect to the Option Plan's stock option activity is as follows:
Weighted Average Number of Exercise Shares Price --------------- --------------- Outstanding at December 31, 1999 - Granted 4,000,000 $ 0.56 Exercised - - Cancelled - - --------------- --------------- Outstanding at December 31, 2000 4,000,000 0.56 Granted - - Exercised - - Cancelled - - --------------- --------------- Outstanding at December 31, 2001 4,000,000 $ 0.56 =============== =============== Options exercisable at December 31, 2000 4,000,000 $ 0.56 =============== ===============
22 12. STOCK-BASED COMPENSATION, CONTINUED ----------------------------------- The following tables summarize information about stock options outstanding and exercisable at December 31, 2001:
Stock Options Outstanding Stock Options Exercisable ------------------------------------------------------------- --------------------------------- Weighted Average Weighted Weighted Range of Number of Remaining Average Number of Average Exercise Shares Contractual Exercise Shares Exercise Prices Outstanding Life in Years Price Exercisable Price - ----------------- ------------- --------------- -------------- ------------------------ ------------ $ .56 4,000,000 3.75 years $ .56 4,000,000 $ .56 - ----------------- ------------- --------------- -------------- ------------------------ ------------ 4,000,000 3.75 years $ .56 4,000,000 $ .56 ============= =============== ============== ======================== ============
The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees in accounting for its employee stock options. Accordingly, no compensation expense is recognized in the Company's financial statements because the exercise price of the Company's employee stock options equals the market price of the Company's common stock on the date of grant. If under Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation the Company determined compensation costs based on the fair value at the grant date for its stock options, net loss and loss per share would have been increased to the following pro forma amounts:
2001 2000 --------------- --------------- Net loss: As reported $ (738,804) $ (743,257) =============== =============== Pro forma - $ (2,783,257) =============== =============== Basic and diluted loss per share: As reported $ (0.05) $ (0.04) =============== =============== Pro forma - $ (0.17) =============== ===============
The weighted average estimated fair value of stock options granted during 2000 was $.51 per share. This amount was determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the 23 12. STOCK-BASED COMPENSATION, CONTINUED ----------------------------------- option. The assumptions used in the Black-Scholes model were as follows for stock options granted in 2000 (There were no stock options granted in 2001): 2000 ------------- Risk-free interest rate 6.17% Expected volatility of common stock 5.918 Dividend yield 0 % Expected life of options 5 years The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options, and the Company's options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options. 13. STOCK AND WARRANT TRANSACTIONS ------------------------------ COMMON SHARES SOLD IN PRIVATE PLACEMENT TRANSACTION During March through August 2000, the Company sold 1,916,202 shares of its common stock in a private placement at $.30 per share and received proceeds of $584,723. In October 2000, the Company sold an additional 492,641 shares of its common stock in a private placement transaction at $.70 per share and received $344,850 in proceeds. During the period from February through April 2001, the Company sold 322,500 shares of its common stock in a private placement at $0.50 per share and received proceeds of $161,250. During the period from September through December 2001, the Company sold 984,259 shares of its common stock in a private placement at $0.15 per share and received proceeds of $147,639. COMMON SHARES ISSUED FOR SERVICES During 2000, the Company issued 402,967 common shares for $169,246 and the shares were valued based on the services received from its bankruptcy counsel during the Chapter 11 proceedings. 24 13. STOCK AND WARRANT TRANSACTIONS, CONTINUED ----------------------------------------- COMMON SHARES ISSUED FOR SERVICES, CONTINUED In August 2000, the Company issued 100,000 common shares for past and future legal services for the period June 1, 2000 through June 1, 2001 at $0.90 per share. The shares were valued at their market price at June 1, 2000, the date at which the services agreement was made. Accordingly, the Company recognized $37,500 and $52,500 in legal fees from this transaction in the years ended December 31, 2001 and 2000, respectively. In September 2000, the Company entered into a one-year agreement with an individual to provide investor relations consulting services to the Company. The Company issued the consultant 50,000 shares of its common stock and granted to him warrants to purchase 200,000 shares at $1.25 per share. The warrants were exercisable any time prior to their expiration on December 31, 2001. The Company recorded the transaction based on market price of the shares issued and the fair value of the warrants granted on the date the transaction was entered into. The market price per share at that date was $.83 and the fair value of the warrants was determined to be $.38 per share using the Black Scholes Option Pricing Model. Accordingly, the Company recognized $88,125 and $29,375 in investor relations consulting fees from this transaction during the years ended December 31, 2001 and 2000, respectively. In March 2001, the Company issued 100,000 and 25,000 shares of its common stock for legal and financial consulting services of $50,000 and $12,500, respectively, based on the value of the shares at the date of issuance. In April 2001, the Company issued 274,000 shares of its common stock for bookkeeping and internal accounting services of $70,500 and the shares were valued based on the services received. RETIREMENT OF COMMON SHARES During the year ended December 31, 2001, the Company determined that the final number of common shares needed to be issued pursuant to the Plan was 671,609 less than originally provided for and therefore retired those excess common shares. 25 13. STOCK AND WARRANT TRANSACTIONS, CONTINUED ----------------------------------------- COMMON STOCK RESERVED FOR FUTURE ISSUANCE At December 31, 2001 and 2000, the Company reserved the following numbers of shares of its authorized but unissued common stock for possible future issuance in connection with the following: 2001 2000 --------------- --------------- Exercise of stock purchase warrants 455,151 756,821 Exercise of stock options 4,000,000 4,000,000 ---------------- --------------- Total 4,455,151 4,756,821 ================ =============== WARRANTS ACTIVITY FOR THE PERIOD AND SUMMARY OF OUTSTANDING WARRANTS A summary of warrant activity for the years ending December 31, 2001 and 2000 is as follows:
Weighted Common Shares Weighted Average Issuable Average Number of Exercise Based On Exercise Warrants Price Warrants Price ------------ ------------ -------------- ------------ Outstanding, December 31, 1999 856,821 $ 2.52 856,821 $ 2.52 Granted 200,000 1.25 Exercised - Expired (300,000) $ 3.00 --------------- Outstanding, December 31, 2000 756,821 $ 2.26 756,821 $ 2.26 Granted - Exercised - Expired (301,670) $ 3.00 --------------- Outstanding, December 31, 2001 455,151 $ 2.53 455,1512 $ 2.53 ==============
At December 31, 2001, warrants had exercise prices ranging from $2.50 to $3.00 and a weighted average remaining contractual life of 0.44 years. 26 14. OIL AND GAS OPERATIONS (UNAUDITED) ---------------------------------- At December 31, 2001, the Company had all of its interests in oil and gas properties located in California. Costs incurred in oil and gas producing activities were as follows: For the Years Ended December 31, ------------------------------------- 2001 2000 --------------- --------------- (Unaudited) (Unaudited) --------------- --------------- Property acquisition costs: Proved properties - - Exploration costs - - Development costs $ 264,375 $ 261,311 --------------- --------------- Total costs $ 264,375 $ 261,311 =============== =============== ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES Reserve information presented herein is based upon reports prepared by the Company's independent petroleum engineers. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. Net quantities of crude oil and natural gas for the Company as of the beginning and the end of the years ended December 31, 2001 and 2000, as well as the changes in proved reserves during such years, are set forth in the following tables: 27 14. OIL AND GAS OPERATIONS (UNAUDITED), CONTINUED --------------------------------------------- ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES, CONTINUED
For the Year Ended December 31, 2001 (Unaudited) --------------------------------------- Oil Gas Bbls MCF ----------------- --------------- Proved developed reserves, net: ------------------------------- January 1, 2001 1,346,000 1,338,100 Revisions of previous estimates (226,000) (100,700) Purchase of reserves in place - - Production - - Sale of reserves in place - - ----------------- --------------- December 31, 2001 1,120,000 1,237,400 ================= =============== Proved undeveloped reserves, net: January 1, 2000 32,604,000 - Revisions of previous estimates - - Purchase of reserves in place - - Sale of reserves in place - - ----------------- --------------- December 31, 2001 32,604,000 - ================= =============== For the Year Ended December 31, 2000 (Unaudited) --------------------------------------- Oil Gas Bbls MCF ----------------- --------------- Proved developed reserves, net: January 1, 2000 827,000 464,000 Revisions of previous estimates 520,200 874,000 Purchase of reserves in place - - Production (1,200) - Sale of reserves in place - - ----------------- --------------- December 31, 2000 1,346,000 1,338,000 ================= ===============
28 14. OIL AND GAS OPERATIONS (UNAUDITED), CONTINUED --------------------------------------------- ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES, CONTINUED
For the Year Ended December 31, 2000 (Unaudited) --------------------------------------- Oil Gas Bbls MCF ----------------- --------------- Proved undeveloped reserves, net: January 1, 2000 25,513,000 - Revisions of previous estimates (25,513,000) - Purchase of reserves in place - - Sale of reserves in place - - ----------------- --------------- December 31, 2000 - - ================= ===============
The decrease in oil reserves December 31, 2000, is primarily due to the increase in natural gas costs. The proved undeveloped reserves consist principally of the Vaca Tar Sands property. The Company has permits for the drilling of 120 wells on two tracts of the Vaca Tar Sand Unit, and for sufficient wells to develop the remaining tracts. The Company entered into a farm-out agreement with Saba, which currently provides for Saba to pay for one-half of the operating costs until they expend $5 million. At that time, Saba will have a one-third interest in the property, and these two parties will share in the costs and revenues based on their respective interests (see Note 9). The development method envisioned by the Company provided for the drilling of one or more horizontal wells extending as much as 2,600 feet horizontally. Each well was to be twinned by a parallel borehole above it into which steam will be injected continuously. The heated, thinned oil was to flow from the lower borehole. Alternatively, one horizontal well would be drilled and used for both steam injection and oil production. The cost allocated to the Vaca Tar Sands undeveloped reserves was insignificant, and the estimated volume of reserves allocated to the property has been excluded from the calculation of the Company's depletion expense in the years ended December 31, 2001 and 2000. The costs related to the Vaca Tar Sands reserves, including future development costs that now are estimated to be approximately $60,860,000 for facilities and 212 wells will be included in the Company's calculations of depletion expense when production of those reserves commence. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES The following tables set forth the computation of the standardized measure of discounted future net cash flows relating to the Company's proved reserves at December 31, 2001 and 2000, respectively. 29 14. OIL AND GAS OPERATIONS (UNAUDITED), CONTINUED --------------------------------------------- STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES, CONTINUED 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 and undeveloped oil and gas reserves at December 31, 2001 and 2000 are summarized below:
For the Year Ended December 31, ------------------------------------- 2001 2000 --------------- --------------- Future cash inflows $ 329,364,000 $ 25,869,000 Future production and development costs (283,034,000) (16,156,000) Future income tax expenses (18,532,000) (3,886,000) ----------------- ---------------- Future net cash flows 27,798,000 5,827,000 10% annual discount for estimated timing of cash flows (21,814,000) (3,512,000) ----------------- ---------------- Standardized measure of discounted future net cash flows $ 5,984,000 $ 2,315,000 ================= ================
30 14. OIL AND GAS OPERATIONS (UNAUDITED), CONTINUED --------------------------------------------- STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES, CONTINUED For the calculations in the preceding table, estimated future cash inflows from estimated future production of proved reserves were computed using average year-end oil and gas prices. The average oil price, primarily based on posted prices, was $11.95 and $17.05 at December 31, 2001 and $23.50 per barrel at December 31, 2001. The average natural gas price, a combination of spot gas prices and contract prices, was $1.69 and $0.62 per thousand cubic feet at December 31, 2001 and 2000, 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 reserves for each of the two years ended December 31, 2001 and 2000 is set forth below:
For the Years Ended December 31, --------------------------------------- 2001 2000 ------------------- ----------------- Sales of oil and gas produced, net of production costs - Net changes in sales prices and production costs related to future production $ (63,678,000) $ (235,886,000) Changes in estimated future development costs (13,106,000) - Development costs incurred during the period, which were previously estimated - - Revisions of previous quantity estimates 83,213,000 980,000 Sale of reserves in place - - Accretion of discount 393,000 62,023,000 Net change in income taxes (3,153,000) 93,962,000 Other, principally changes in timing of estimated production - - ------------------- ----------------- Net (decrease) increase 3,669,000 (78,921,000) Beginning of year 2,315,000 81,236,000 ----------------- ----------------- End of year $ 5,984,000 $ 2,315,000 =================== =================
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