FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS Under Section 12(b) or (g) of the Securities Exchange Act of 1934 Geo Petroleum, Inc. ------------------- (Name of Small Business Issuer in its charter) California ---------- (State or other jurisdiction of incorporation or organization) 25660 Crenshaw Boulevard, Suite 201 ----------------------------------- Torrance, California -------------------- (Address of principal executive offices) 33-0328958 ---------- (I.R.S. Employer Identification No.) 90505 ----- (Zip Code) Issuer's telephone number (310) 539-8191 -------------- Securities to be registered under Section 12(b) of the Act: Title of each class to be so registered Inapplicable Name of each exchange on which each class is to be registered Inapplicable Securities to be registered under Section 12(g) of the Act: Common shares ------------- (Title of Class) PART 1 ITEM 1. DESCRIPTION OF BUSINESS General Geo Petroleum, Inc. (herein "Geo" or the "Company") was organized as a California corporation in 1986 by Gerald T. Raydon, to engage in the exploration for and production of oil and gas, primarily in California. See "Directors, Executive Officers, Promoters and Control Persons." To date, Geo's activities have been limited to the acquisition of producing oil properties which Geo deems are underexploited and have additional potential, and to the subsequent enhancement of the production from those properties. Geo also owns acreage which it believes is suitable for exploratory drilling, but financial limitations have prevented Geo from exploring such properties to date. The Company has one industry segment, which is the acquisition, development, production and sale of crude oil and natural gas. The Company's offices are located at 25660 Crenshaw Boulevard, Torrance, California 90505; its telephone number is (310) 539-8191, and its fax number is (310) 539-0101. Geo has ten full time employees, three of whom are general or administrative; the remaining seven being field employees. Two of the employees are related to Gerald T. Raydon, the chief executive officer and principal shareholder of the Company. The Company intends to increase the number of its employees by the addition of both administrative and field personnel as soon as finances permit. The Company's primary business method is to acquire properties which have been in production for a number of years, but which, in the judgment of the Company, still have undeveloped potential for substantial increases in production and reserves. Geo seeks to acquire properties after conducting geological and engineering studies of them, and then attempts to enhance production by opening and producing previously bypassed oil and gas zones, by stimulating existing productive zones and by improving production techniques and equipment. To date, essentially all of GEO's activities have been concentrated in three geologic areas, the Los Angeles Basin, the Santa Maria Basin in Santa Barbara County and the Oxnard Field in Ventura County, all of which are in Southern California. At such time as GEO acquires the properties described herein, the Company will have established a substantial position in the San Joaquin Basin as well. See the discussion under "Description of Property" for information concerning Geo's principal oil and gas properties. 	GEO intends to continue remediation and development of its existing properties, to acquire additional properties suitable in GEO's judgment for enhancement of production, and to commence exploration of its prospects. GEO has no subsidiaries and presently holds interests in 7030 gross acres (6550 net) of oil and gas leases or mineral rights, of which 2,100 gross acres (1,940 net) are developed for oil and gas production and 4,930 gross acres (4,610 net) are undeveloped. Geo has negotiated to acquire, subject to financing, two additional properties for approximately $905,000. The proven, producing reserves are estimated to approximate a net 1,050,000 barrels of oil and equivalents. GEO believes that the reserves can be increased substantially and economically by the expenditure of less than one million dollars. The total net revenues provided by these properties should increase substantially as a result of the work contemplated by Geo. The Company presently lacks the funds necessary to acquire these properties, but is seeking to raise such funds. 	Geo owns no drilling rigs or equipment and engages the services of independent contractors to perform its drilling and remedial activities. All of Geo's production of oil and gas is sold to unaffiliated purchasers. See "Business - Principal Purchasers." The Company also operates two water disposal wells. See "Properties - Environmental Services." In addition, the Company is investigating the possibility of initiating a gas storage project. See "Properties - Natural Gas Storage Project." Financial Condition 	The financial statements of the Company contain a going concern qualification, largely as a result of the fact that the Company's bank loan, amounting to $1,460,000, was due April 15, 1996. The loan has been subsequently extended to June 15, 1996, while the bank is discussing an extension to June 15, 1997 with the Company and the pledgors of the loan collateral. The loan is collateralized by publicly traded equity securities in another corporation pledged to the bank by shareholders of the Company. Interest has been paid on a current basis by the Company. The shareholders who provided the collateral have brought suit against the bank claiming, among other things, that the bank deceived the shareholders. Geo is not a party to the litigation. See "Litigation." Acquisition of DIC 	Effective April 9, 1996, Geo acquired by merger an inactive California corporation, Drake Investment Corp. ("DIC"), primarily for the purpose of increasing its shareholder base as an initial step in establishing Geo as a public company. The acquisition was accounted for as a purchase, and while increasing the number of shareholders of Geo and contributing a minor amount of cash, had no appreciable effect on Geo, its operations or financial condition. See "Financial Statements." Regulation 	The Company's operations are regulated by certain federal and state agencies. In particular, oil and natural gas production and related operations are or have been subject to price controls, taxes and other laws relating to the oil and natural gas industry. The Company cannot predict how existing laws and regulation may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on its business or financial condition. 	The Company's operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling, and transportation of materials and their potential discharge into the environment. Permits are required for various of the Company's operations, and these permits are subject to revocation, modification and renewal by issuing authorities. 	Governmental authorities have the power to enforce compliance with their regulations, and violations are subject to fines, injunctions or both. It is possible that increasingly strict requirements will be imposed by environmental laws and enforcement policies thereunder. The Company does not anticipate that it will be required in the near future to expend amounts that are material to the Company's financial position or results of operations by reason of environmental laws and regulations, but because such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of such compliance. 	The Company believes that the oil and gas industry may experience increasing liabilities and risks under the Comprehensive Environmental Response, Compensation and Liability Act, as well as other federal, state and local environmental laws, as a result of increased enforcement of environmental laws by various regulatory agencies. As an "owner" or "operator" of property where hazardous materials may exist or be present, the Company, like all others engaged in the oil and gas industry, could be liable for the release of any hazardous substances. Although the Company has not been subject to the imposition of "clean-up" orders by the government, the potential for sudden and unpredictable liability for environmental problems is a consideration of increasing importance to the Company and the oil and gas industry as a whole. During the three preceding years, the Company has been subjected to administrative penalties on two occasions, each resulting from minor vapor leaks resulting from the failure of sealing devices on oil storage tanks at the Company's East Los Angeles/Bandini property. See "Business - Principal Properties." The penalties consisted of monetary fines which were of negotiated amounts and aggregated $1,200. 	The Company is required to comply with various federal and state regulations regarding plugging and abandonment of oil and gas wells. The Company provides reserves for the estimated cost of plugging and abandoning its wells on a unit of production basis. In addition, as required by state law, the Company maintains a $100,000 cash bond covering its obligation to abandon wells; the bond does not limit the Company's abandonment liability. ITEM 2. MANAGEMENT DISCUSSION 	The following discussion and analysis for the years ended December 31, 1995, and 1994, should be read in combination with the Financial Statements presented elsewhere herein. Results of Operations 	1995 Compared with 1994. During the year ended December 31, 1995, GEO had net income of $153,401 and cash provided by operations of $201,844, compared to a net loss of $558,466 and cash used in operations of $202,185 for 1994. Oil and gas revenues increased 48% to $1,563,206 for 1995, compared to $1,053,036 for 1994. This was attributable mostly to increased production as a result of a well improvement and recompletion program. A 7% increase in average oil prices, to $16.23 per barrel, also contributed to the increase in revenues, but was partly offset by a 47% decrease in gas prices, to $1.48 per mcf. During the year ended December 31, 1994, oil prices averaged $15.08 per barrel and gas prices averaged $2.17 per Mcf, respectively. 	Average production costs per barrel of oil and equivalents decreased 29% to $7.06 for 1995, compared to $10.00 for 1994. 	Lease operating expenses for 1995 amounted to $943,283, as compared to $907,713 for 1994, a 4% increase over the previous year, reflecting the additional number of wells on production. In addition to the normal operating expenses of existing wells, expenses were incurred in repairing and recompleting wells to bring them on production, performing repairs on wells and facilities damaged by contractor negligence and by two major storms and a fire, and constructing automated custody transfer facilities necessary for the delivery of oil into a refiner's pipeline. 	General and administrative expenses for 1995 were $402,978, as compared to $256,519 for 1994, an increase of 57%. Legal costs and fees of approximately $77,000 were incurred in 1995 for prosecuting a lawsuit that resulted in a settlement payment of $250,000 to the Company. Substantial legal, auditing, engineering and investment banking costs were incurred in connection with the preparation, offering, and negotiating of equity offerings and of joint ventures. Additional administrative costs were incurred due to the increased number of wells and properties operated during 1995. 	Interest expense for 1995 was $377,706, as compared to $307,333 for 1994, an increase of 23%. This increase was due to additional short-term loans and to higher interest rates. The Company's provision for depletion and depreciation decreased to $196,484 for 1995, as compared to $222,453 for 1994, a decrease of 12%. Capital Resources and Liquidity 	Financial Position. At December 31, 1995, the Company's total assets increased by approximately $325,000 over December 31, 1994, primarily as a result of additions to oil and gas properties due to the recompletion and equipping of idle wells on its East Los Angeles and Bandini properties to bring them on production, installation of gas processing and automated oil shipping equipment, and purchase of two wells on the Orcutt property. At December 31, 1995, the Company had a working capital deficiency of $2,303,360, which deficiency is greater by $162,449 over such deficiency at December 31, 1994. The Company has requested a one year extension of its bank loan of $1,460,000 due June 15, 1996, and its bank expects to respond to the request by June 30, 1996. 	Historically, the net cash flow from the properties of the Company has been sufficient to fund its costs of operations but insufficient to fund such costs and its debt servicing requirements. 	The Company's primary sources of liquidity and capital resources in the near term will consist of working capital derived from its oil and gas production and water disposal operations, augmented by any such funds as may be derived from the sale of equity in the Company and of participating interest in its operations. The Company's net revenues from oil and gas sales in excess of production and operating expenses during 1995 and 1994 were $619,923 and $145,323 respectively. 	Cash provided by operations for the year ended December 31, 1995, was $201,844 compared to cash used in operations of $202,185 for the year ended December 31, 1994. This increase in cash provided by operations of $404,029 is primarily a result of increased oil and gas production and revenues and the recovery in a lawsuit of a net $183,000 for damages to a Company well. 	GEO is seeking long-term equity financing. The first step in obtaining it was a merger with Drake Investment Corporation, which closed on April 9, 1996. This was for the purpose of increased access to capital sources. The Company plans now to sell additional shares of its common or preferred stock in equity offerings, which, if successfully completed, will permit it to eliminate its working capital deficiency, debt and interest obligations, to perform improvement and remedial work on its existing properties, to acquire additional properties, and to drill a large number of wells on its properties. All of these activities are expected to substantially increase the revenues of the Company and permit it to continue to operate on a positive cash flow basis. 	Sources of Capital Resources. During the year ended December 31, 1995, the Company was able to extend the maturity date of its bank credit facility in the amount of $1,460,000 from January 15, 1995, to April 15, 1996 (later extended to June 15, 1996). This facility is secured by collateral pledged by minority shareholders of the Company and is not secured by any of the assets of the Company. A portion of the proceeds from the planned equity offering will be dedicated to the repayment of such indebtedness. 	At December 31, 1995, the increase in the Company's working capital deficiency from December 31, 1994, was primarily due to the classification of a portion of its debt due to investors as short-term, and to costs incurred in connection with the Company's planned acquisitions and a proposed financing of equity. Historically, the net cash flow from the properties of the Company has been insufficient to fund its costs of operations and its debt servicing requirements. 	The Company's cash used in investing activities, primarily additions to its oil and gas properties, was $451,551 in 1995 and $613,611 in 1994. This was financed in 1995 by cash provided by operations and the proceeds from the issuance of additional notes payable and, in 1994, solely from the latter source. 	Cash provided by financing activities amounted to $210,398 in 1995 and $802,815 in 1994. This cash was primarily the net proceeds from the issuance of notes payable in both years. During 1995, holders of $454,750 of notes payable exchanged such notes for $454,750 of redeemable convertible preferred stock. 	Trends. Although there is no assurance that the Company will be able to successfully complete its planned equity offering, the Company believes that if it is successful, the Company will be able to increase its revenues by investing a portion of the anticipated proceeds in remedial and recompletion operations, development and exploratory drilling and planned acquisitions. As a result of any increase in activities, the Company anticipates that its general and administrative expenses will measurably increase, since the Company is contemplating hiring additional personnel, expanding its administrative offices and increasing compensation to its existing staff, including its president. Legislation has been enacted which permits the export of Alaskan North Slope crude oil, primarily to the Far East. Previously, large quantities of such crude were shipped to California for refining and sale, which depressed prices paid for crude oil produced in California. The major producer of Alaskan oil has announced plans to deliver a large portion of its oil production from Alaska to the Far East in 1996. As such reduction of Alaskan supplies to the West Coast occurs, it is expected to have a positive effect upon the price paid for California crude oil. During the first five months of 1996, crude oil prices have increased by an average of $2.20 per barrel. 	GEO anticipates that there will be a gradual strengthening in the prices for both its oil and gas production, but that periods of unstable pricing may occur. The Company will be subject to variations in cash flow depending upon changes in prices paid for oil and gas. Based upon historical swings in prices, the Company does not envision a situation where reductions in prices will create an operating loss from its properties at the field level. Severe drops in prices would, however, strain the Company's ability to conduct remedial work using it revenues. Inflation 	In recent years inflation has not had a significant impact on the Company, its operations or financial condition. ITEM 3. DESCRIPTION OF PROPERTY 	All of the Company's properties are located in California, primarily in the southern portion of the State. Geo's most significant producing properties are described in this item. East Los Angeles / Bandini Fields 	At December 31, 1995, these two separate, but adjacent accumulations which are located in an industrial area of the City of Los Angeles, produced a daily average (averaged over the year 1995) of 210 barrels (172 net) of high gravity (33 degree AP1) oil and 306 MCf. of 1200 BTU gas from a total of 10 wells.Estimated total net proven developed reserves amounted to 2,039,114 barrels of oil and 5,530,765 MCF. of natural gas, of which 594,148 barrels and 865,143 MCF, respectively, were classified as proved producing 	The properties are located approximately one-half mile apart and are operated together by the same employees. In the aggregate, approximately 570 surface acres are covered by GEO's leases. GEO's rights in both fields are held by production. The Company owns the mineral rights in the East Los Angeles Field and in a portion of the Bandini Field, subject to overriding royalties of 16% of gross revenues. The Bandini interests are comprised of town-lot leases and of Company-owned mineral rights; the Bandini interests are subject to royalties varying from 16% to 30.5% of gross revenues. Production comes from multiple sand zones in the Pliocene Repetto formation at depths of 2800 to 8000 feet at Bandini and in the Miocene Puente formation at depths of between 7200 to 11200 feet at East Los Angeles. 	GEO acquired these fields in 1990, when they were producing less than 40 net barrels of oil per day, and had remaining economic reserves of less than 90,000 barrels. Since that time GEO has invested approximately $1,200,000 in reworking and remedial efforts, and has achieved the increases in production and reserves stated above. GEO determined that the previous operators had not recognized several potentially productive oil and gas zones. By recompleting existing wells, GEO has discovered two shallower gas zones and extended one oil zone at Bandini. In the East Los Angeles Field, two shallower oil and gas zones have been discovered. In each case, the recompleted wells flowed with excellent pressures. Geo regards the results of the foregoing work as demonstrative of the economic feasibility of the continued recompletion of wells and of the drilling of extension, deeper test, and horizontal wells in the fields. 	The Company presently operates seven out of eighteen existing wells at the Bandini Field. At East Los Angeles, the Company operates three producing wells out of a total of fifteen wells. Subject to obtaining financing, GEO intends to spend approximately $2,165,000 for recompleting the remaining wells and restoring them to production. 	GEO's geologic studies have led the Company to conclude that there are also seven exploratory prospects in these fields, which, if productive when drilled, would extend the existing field limits, discover shallower and deeper zones, and develop production by horizontal drilling. Geo has no present schedule for drilling these prospects. Oxnard Field 	GEO and Gerald T. Raydon, President and principal shareholder of GEO, jointly acquired 26 oil wells and oil and gas leases covering approximately 625 acres of land in the area of Oxnard, Ventura County, California, from Oryx Energy in 1990, for a consideration of S150,000. See "Certain Relationships and Related Transactions." On April 1, 1994, GEO acquired all but five percent of the 25% interest held by Mr. Raydon in the Oxnard Field for a consideration consisting solely of Common Stock. 	 	The production in this field is from the prolific and massive Vaca Oil Sand which is found at depths of between 1950 and 2400 feet. In 325 acres of the leases, the thickness of the oil-saturated sand averages 225 feet. The reservoir is highly porous (32%) and permeable (1800 md.). The oil is heavy, approximately 6-8 degrees API, and is highly viscous. Consequently, cyclic steam injection is necessary to heat the oil and reduce its viscosity, permitting it to flow readily through the well bores. In existing operations, GEO generates steam at the surface and injects it into the producing formation. The heat permeates the formation, and GEO then pumps the oil in a conventional manner. Because of the use of steam, operations are comparatively expensive while the price received for the oil is relatively low. 	Geo treats the production from existing wells in the Oxnard Field as oil from "non-conventional" sources, which thus qualifies for tax credits provided under Section 29 of the Internal Revenue Code. For the year 1995, this credit amounted to approximately $5.95 per produced barrel, and is subject to annual increases with inflation. At such time as the Company has an obligation to pay federal income taxes, the accrued credits may be used to offset directly any taxes due. GEO has, in the past, secured funds for operations on this lease by entering into transactions designed to provide these credits to investors in exchange for payments. GEO intends to continue such funding on an ad hoc basis. Funding from such sources would not, however, be sufficient to develop the property to any material extent. GEO is examining project financing and other methods of providing funding for development of this accumulation, but has not determined the feasibility of any such method. 	Proved developed non-producing reserves in Geo's leases amount as of January 1, 1996, to 775,121 net barrels and proved undeveloped reserves are a net 27,613,000 barrels. In order to produce these total reserves, the Company would be required to obtain about $66,000,000 for the drilling of 250 conventional wells, or about $45,000,000 if horizontal wells should prove feasible. With full development, future net revenues of $169,977,000 would be achieved, having a present net worth, discounted at 10% per annum, of $69,879,000, according to the report of an independent petroleum engineer. 	The tax credit of approximately $6.00 (for 1996) for each barrel produced from this field available under Section 29 of the Internal Revenue Code adds substantially to the after-tax revenues per barrel. 	GEO presently produces approximately 40 barrels per day of oil from four wells in this field. Subject to the availability of financing, GEO anticipates spending about $415,000 for reworking and equipping fifteen existing wells. At December 31, 1995 and at March 31, 1996, the oil price was respectively, $13.16 and $17.15 per barrel. Operating costs have averaged approximately $7.45 per barrel during the one year period ended December 31, 1995. Operating costs for the first quarter appear to be consistent with the yearly average. GEO expects that per barrel operating costs will decline as production per well increases. No provision has been made for funding development drilling on the property. The Company is seeking ways in which to improve the economics of the field's production. Recently, the Company entered into a letter of intent with a manufacturing firm which will test its newly developed down-hole steam generator on the Oxnard wells. This device is designed to operate at a greatly reduced cost and much more efficiently than methods in use currently. By generating steam in the well rather than at the surface, much less fuel is required, the heat loss is avoided which occurs when steam travels through surface pipelines and down the wells to a depth of over 2000 feet, and higher temperatures can be delivered to the oil zone. Since electricity is used for fuel instead of gas, major environmental permitting and compliance costs will be avoided. If this process is successful, it is expected to substantially enhance the economics of the present wells and of the 250 development wells needed to recover the proven undeveloped reserves. 	Produced water is disposed of in wells on site owned and operated by GEO. See "Environmental Services." GEO has two steam generators, a large capacity (9300 barrels) tank farm, disposal wells, fresh water source wells and all other equipment needed for steam operations on this lease. 	GEO's leases have no current drilling obligations nor do they require the payment of rentals to keep the leases in good standing. The leases reserve a royalty of 17% of gross revenues to the lessor. Wells cost approximately $265,000 to drill and complete for production 	The Company in 1995 received a conditional use permit from Ventura County, allowing it to drill 120 wells on part of its property. Steaming operations require compliance with various environmental regimes, including those designed to protect air quality. GEO's operations have been permitted by the local air pollution control district and have been found to be in compliance with relevant requirements. There is no assurance that such operations will remain in compliance. Rosecrans Field 	GEO purchased 30 wells in the Rosecrans Oil Field located in Los Angeles County, California, in December, 1994, with the plan of improving the seven active wells and repairing or reworking an additional 19 wells in order to return them to production. Wells in this field were drilled during a period of between ten and fifty years ago. The royalty amounts to 16.67% of gross revenues. If the wells were to be produced under present conditions to depletion, future cumulative production would amount to 434,000 barrels of oil (360,000 net). There are seven principal producing zones of Miocene and Pliocene age in the Field, ranging from depths of 6500 to 8400 feet. The wells have been drilled through these zones, but have not produced from all of them. This provides the opportunity to commence production from bypassed zones in the future. Presently, the gas produced from this yields no revenues for the Company. The wells are expected to produce an estimated 896,000 MCf of gas. Geo in in the process of negotiating an agreement to market the gas through the existing pipeline system, which, if successfully negotiated, should result in the Company receiving payment for the gas it produces from this field. 	The Company's independent petroleum engineer estimates that by completing a program to improve equipment and facilities, change production methods, stimulate the producing zones, and bring proven bypassed zones on production at a cost of about $128,000, production could be increased to about 798,000 net barrels of oil and equivalents. Geo does not have the funds available to perform these operations and no assurance may be given that the results will be as estimated by the engineer. Orcutt Field 	GEO owns two oil and gas leases covering 3140 acres on the south flank of the giant Orcutt Field in Santa Barbara County, California. Royalty burdens on this lease are 21% of gross revenues. There are two producible formations which underlie the lease. The shallower formation is the massive, oil-saturated Diatomite Zone, which is between 250 and 500 feet thick and lies at depths of from 850 feet to 1500 feet. This formation has low permeability, which requires that it be hydraulically fractured in order to be productive. Although GEO's engineers have attributed possible reserves of approximately 8 million barrels of oil to this formation, drilling operations to date have not been consistently economic. 	Production of the existing wells to depletion is projected by the Company to provide a net 126,000 BOE. GEO subleased shallow rights in the Diatomite Zone to Santa Fe Energy Resources, Inc. In 1991, Santa Fe drilled, hydraulically fractured and completed two wells at a depth of 1,400 feet in the Diatomite, confirming the Zone's productive potential. However, the high costs of completing the wells on an experimental basis made it unlikely that Santa Fe would recover its costs, and it sold the two wells to GEO in June, 1995. 	GEO owns ten wells which have been completed in the Diatomite Zone, of which four are presently producing an aggregate of 25 barrels of oil and 20 MCf of gas per day. At December 31, 1995 and March 31, 1996, respectively, GEO was receiving $13.60 and $17.60 per barrel for Orcutt oil. Because gas is produced in association with the oil, it is necessary to market or otherwise dispose of the gas. The plant which had been purchasing the gas has been closed. Since it is impermissible to vent the gas to the atmosphere, GEO has been delivering gas for only a nominal payment. The Company is exploring other methods for dealing with the gas, including co-generation, re-injection, and construction of a pipeline to a nearby utility pipeline. More production will be needed before the latter alternative will be economically feasible. 	The second formation underlying GEO leasehold interests is the Monterey formation, found at depths of 3500 to 5500 feet. GEO owns seven wells which are bottomed in the Monterey formation, of which two wells are presently producing. At December 31, 1995, such wells produced daily an aggregate of 12 barrels of oil and 150 MCf of gas. The oil is 30 gravity and was sold for $14.80 per barrel in December, 1995, and in April, 1996, sold for approximately $18.80 per barrel. Payment for gas has not been received for the reasons described above. Environmental Services 	The Company owns two commercial water disposal facilities at which water produced in oil field operations conducted by GEO and by other operators is reinjected into the subsurface for disposal. Such facilities are located at GEO's Oxnard and Orcutt properties. Historically, these operations did not contribute significantly either to gross revenues or earnings, but GEO has recently increased its efforts to attract non-affiliates to dispose of oil field waste water in GEO's facilities for a per- barrel fee. These efforts have resulted in a significant increase in revenues at the facilities. 	Water produced by other oil operators is hauled to GEO's disposal sites, cleaned, stored, and injected into wells operated in a joint venture with Capitan Resources, Inc., an affiliate, which provides the capital for disposal facilities and retains 25% of the revenues. See "Certain Transactions." 	At Orcutt, GEO operates one disposal well which discharges waste water into a formation located approximately 3,300 feet from the surface. Waste water is received from trucks into holding tanks and then pumped under pressure into the well. At Oxnard, GEO operates one well which has the unusual characteristic of usually siphoning or receiving the water on a natural vacuum or at a low pressure, thereby allowing the water to be disposed of more inexpensively than in the usual case of wells requiring injection under high pump pressure. GEO has augmented its existing facilities by installing equipment which allows GEO to salvage oil from the waste water and sell it. 	The wells are currently injecting 20,000 to 30,000 barrels of water per month at charges averaging about $0.60 per barrel. The Company currently has contracts with two major oil companies and eight independents to dispose of their water. Because there are few high-capacity waste water wells permitted by the California Division of Oil & Gas, and an expanding need by operators to dispose of their waste water, GEO's operations of this type are capable of substantial growth. Natural Gas Storage Project 	GEO is conducting preliminary negotiations with a large California utility regarding the use of one of GEO's fields for the underground storage of up to thirty billion cubic feet (30 BCF) of natural gas. Preliminary studies have indicated the feasibility of the project. It is expected that construction of the project would result in payment of storage and injection fees to GEO. In addition, the injection of gas under pressure into the oil zones would increase production by driving the oil to the well bores. Estimated Oil and Gas Reserves 	At December 31, 1995, the Company's net proved oil and gas reserves, as estimated by its independent petroleum engineer, Sherwin D. Yoelin, Petroleum Engineer, Inc., amounted to 30,428,000 barrels of oil and 5,530,000 mcf. of natural gas, of which 2,824,000 barrels and 5,530,000 mcf. were classified as proved developed. Future cash flows attributable to such proved developed reserves (before income taxes) are estimated to be $30,594,000 at December 31, 1995, and the discounted value thereof, at 10%, is estimated to be $18,745,000. Much of the Company's reserve of oil is comprised of heavy crude. Consequently, a major portion of the Company's proved reserve of oil is highly price sensitive, the Company's heavy crude costs more to produce than the lighter crudes, and receives a lower price in the market. Accordingly, a price at or above 1995-1996 levels is needed in order to cover operating costs and yield profit. 	There are numerous uncertainties inherent in estimating oil and gas reserves and their values, including many factors beyond the control of the producer. The reserve data set forth above represent only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact amounts. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers may vary. In addition, estimates of reserves are subject to revision by the results of drilling, testing and production subsequent to the date of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they were based. 	In general, the volume of production from oil and gas properties declines as reserves are depleted. Except to the extent the Company acquires properties containing proved reserves or conducts successful exploration and development activities, or both, the proved reserves of the Company will decline as reserves are produced. The Company's future oil and gas production is, therefore, highly dependent upon its level of success in acquiring or developing additional reserves. 	For additional information concerning the discounted future net cash flows to be derived from these reserves see Note to the Financial Statements included elsewhere herein. 	The Company's estimates of reserves have not been filed with or included in reports to any federal agency other than the Securities and Exchange Commission. Title to Properties 	While GEO has been in possession of its major properties, Bandini-East Los Angeles, Orcutt and Oxnard, for at least six years and has not received notice of an adverse claim, GEO has not obtained title insurance or a title opinion covering such properties, but has relied upon title abstracts of the public records and the apparently unchallenged possession of its predecessors in interest. Consequently, while GEO believes that title to its properties is satisfactory, it would be unable to demonstrate such fact without obtaining title insurance or opinions. which GEO believes is not warranted under the circumstances. 	Title to the Company's properties is, in addition, subject to royalty and overriding royalty interests and to contractual arrangements customary in the oil and gas industry, to liens for work and materials, current taxes not yet due and to other minor encumbrances. GEO has not encumbered any of its properties to secure bank indebtedness. See "Certain Transactions" for a description of a lien to a shareholder which will be released upon payment of GEO's existing bank indebtedness. Markets General. The market for oil and natural gas produced by the Company depends on factors beyond its control, including the extent of domestic production and imports of oil and natural gas, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for oil and natural gas, the marketing of competitive fuels and the effects of state and federal regulation of oil and natural gas production and sales. The oil and gas industry as a whole also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. 		Legislation has been enacted which permits the export of Alaskan North Slope crude oil primarily to the Far East. Previously, large quantities of such crude were shipped to California for refining and sale, which depressed prices paid for California crudes. The major producer of Alaskan oil has announced plans to deliver a large portion of its oil to the Far East in 1996. As such reduction of Alaskan supplies to the West Coast occurs. it is expected to have a positive effect upon the price paid for California crude oil. 	The Company, during 1996, experienced a substantial increase in the price paid for its oil and anticipates that there may be a further strengthening in the prices for both its oil and gas production, but that periods of unstable pricing may occur. The Company will be subject to variations in cash flow depending upon changes in prices paid for oil and gas. Based upon historical swings in prices, the Company does not envision a situation where reductions in prices will create an operating loss from its properties, taken as a whole, at the field level. Severe drops in prices would, however, strain the Company's ability to conduct remedial work using its revenues. Competition 	The oil and gas industry is highly competitive. Competitors include major oil companies, other independent oil and gas companies, and individual producers and operators, many of which have financial resources, staffs and facilities substantially greater than those of the Company. The Company faces intense competition for the acquisition of producing oil and gas properties that are being divested by major and independent oil and gas companies. Acreage The following table reports the Company's developed and undeveloped leasehold and mineral acreage at December 31, 1995. All of the Company's acreage is in California. Developed Developed Undeveloped Undeveloped --------- --------- ----------- ----------- Gross Net Gross	 Net 2100 	 1940 4930 4610 	As is customary in the oil and gas industry, the Company is generally able to retain its ownership interest in undeveloped acreage by production of existing wells, by drilling activity which establishes commercial reserves sufficient to maintain the lease, or by payment of delay rentals. All of the acreage listed above as "undeveloped" is acreage which is held by production, but upon which no wells have presently been drilled. Production 	The average sales prices received for and the related costs of the Company's production for the periods ended December 31, 1993, 1994 and 1995 are shown below. December 31 ----------- 1993 1994 1995 ---- ---- ---- Average Sales Price Received Oil $12.67 $15.08 $16.23 Gas 1.66 2.17 1.48 Average Production Cost per equivalent barrel (1) $ 7.48 $10.00 $ 7.06 <FN> (1) Since all of the Company's gas is produced in association with oil, it is not feasible to separately determine production costs. Consequently, production costs have been stated in equivalent barrels. Average cost includes the cost of producing oil attritutable to landowners royalty and overriding royalty and, thus, represents the cost of gross production. 	Volumes of production of oil and gas for the one year period ended December 31, 1995, were as follows: Gas 172,907 mcf Oil and liquids 110,560 bbls Producing Well Summary 	Set forth below is a tabulation of the number of producing wells in which the Company possessed an interest at December 31, 1993, 1994 and 1995. 	 December 31 ----------- 1993 1994 1995 ---- ---- ---- Gross 22 30 32 Net 20 26 29 Purchasers of Production 	Crude oil produced in the Los Angeles Basin is sold via pipeline to Kern Oil & Refining Company, and approximated 78% of the Company's crude oil sales for 1995. Production of crude from the Oxnard property is sold via truck to Texaco Trading and Refining Co. which, during 1994, purchased 14% and 10% during 1995 of the Company's oil production. Natural gas produced from the Los Angeles Basin properties is sold to Pacific Tube Company, an end user in Commerce, California, and accounted for approximately 75% of the Company's share of gas sold during 1995. Natural gas from the Company's Strain Ranches lease during 1995 was sold to Pacific Gas & Electric Co. and accounted for approximately 20% of the Company's share of gas sales during 1995. 	Alternative purchasers are available for all of the Company's production, except for natural gas produced from Orcutt where there is a single purchaser. The Company does not receive fair market value from its sales of Orcutt gas, but because of a single purchaser, the Company's present options are limited. The Company is seeking ways to develop an additional outlet for its gas, but has been unsuccessful to date in so doing. Loss of Pacific Tube Company as a purchaser would, in all probability, result in a reduction in the price received for gas from the Bandini-East Los Angeles properties, probably in the range of 20%, but would not result in a loss of market for such gas. Recent Drilling Activities 	During the three year period ended December 31, 1995, the Company drilled or participated in the drilling of development and exploratory wells as set forth in the table below: Year Ended December 31 ---------------------- 1993 1994 1995 ---- ---- ---- Gross Net Gross Net Gross Net Development Wells: Oil 8 8 0 0 0 0 Gas 0 0 0 0 0 0 Dry 8 8 0 0 0 0 Exploratory Wells: Oil 0 0 0 0 0 0 Gas 0 0 0 0 0 0 Dry 0 0 0 0 0 0 Total Wells: 8 0 0 0 0 0 	During the quarter ended March 31, 1996, the Company did not participate in or drill any wells. Offices 	The Company leases office space in Torrance, California, aggregating some 500 square feet. The Company has no long-term lease commitments and anticipates acquiring additional office facilities when finances permit the same. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 	The following table sets forth certain information regarding the beneficial ownership of the Company's common shares as of April 30, 1996, by: (1) each stockholder who is know by the Company to own beneficially more than five percent of the common shares; (2) each Named Executive Officer of the Company; (3) each director of the Company; and (4) all directors and executive officers of the Company as a group. The information set forth below gives effect to a 2.5505 for one stock split which occured subsequent to December 31, 1995. Directors, Executive Officers, and Five Shares Percent Shareholders Beneficially Owned Percent of Class - -------------------- ------------------ ---------------- Gerald T. Raydon(1)<F1> 3,647,225 73.30 Suite 201, 25660 Crenshaw Blvd. Torrance, CA 90505 Alyda Raydon(1)<F1> 3,647,225 73.30 Suite 201, 25660 Crenshaw Blvd. Torrance, CA 90505 William J. Corcoran (2)<F2> 10,202 0.21 Michael F. Moran(3)<F3> 10,202 0.21 Eric J. Raydon(4)<F4> 1,275 0.03 --------- ----- All executive officers and directors as a group (4 persons) 3,668,904 73.74 Harriman affiliated interests(5) 522,853 11.00 c/o Brown & Wood One World Trade Center New York, New York 10048 Drake Holding Corp.(6) 558,657 11.23 1250 Fourth Street Santa Monica, CA 90401 - ----------------------------------------------------------------- <FN> <F1> (1) Gerald T. and Alyda Raydon are husband and wife. Shares listed as beneficially owned by one spouse includes shares owned beneficially by the other. In the aggregate, Mr. and Mrs. Raydon own 3,647,225 shares or 73.30% of the common shares of the Company. Excludes, in all cases, the shares held by Eric J. Raydon and by Bryan T. Raydon (7,787), as to which each of Mr. and Mrs. Raydon disclaim beneficial interest. <F2> (2) William J. Corcoran was affiliated with certain of the Harriman family interests. The shares held by Mr. Corcoran were issued as directors' compensation. <F3> (3) Michael F. Moran was affiliated with certain of the Harriman family interests. The shares held by Mr. Moran were issued as directors' compensation. <F4> (4) Eric J. Raydon is the son of Mr. and Mrs. Raydon. The latter parties disclaim beneficial ownership of the shares held in the name of Eric J. Raydon. Shares indicated as being owned by Mr. and Mrs. Raydon do not include shares attributable to Eric J. Raydon. <F5> (5) Represents shares held by various descendants or affiliates of W. A. Harriman. Such shares are owned as follows: Associated Partners LTD- 245,613, Crispin Connery - 51,010, Mary Dixon 51,010, Thomas F. Dixon - 51,010, Pamela Harriman - 8,162, Hillside Syndicate - 14,028, Arden H. Mason - 51,010, Edward Northrop - 51,010. The appellation "Harriman Affiliated Interests" does not connote a legal relationship among the holders nor is it a title suggested by the persons designated as components. <F6> (6) Includes 122,546 shares held in the name of Drake Energy Corp., an affiliate, and 185,498 shares held in the name of Drake Capital Securities, Inc., an affiliate. Such shares represent 2.46% and 3.73%, respectively of the outstanding shares of the Company. </FN> ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. Directors and Executive Officers The directors, executive officers and key employees of Geo and their ages as of March 31, 1996 are as follows: Name Age - ---- --- Position with the Company - ------------------------- Gerald T. Raydon 65 President and Chief Executive Officer, Chairman of the Board of Directors Alyda L. Raydon 54 Secretary, Treasurer, Chief Financial Officer William J. Corcoran 65 Director Michael F. Moran 41 Director Charles F. Peters 37 Manager, East Los Angeles/Bandini field operations Eric J. Raydon 26 Assistant to the President and Assistant Secretary 	Gerald T. Raydon founded GEO in 1986. He has over 40 years of experience in the California oil business as a geologist, attorney, and oil company president, commencing his career with Chevron U.S.A., Inc. He was for 16 years the President of American Pacific International, Inc., a public oil company located in Los Angeles, California, which achieved a market capitalization of $55,000,000 before its 1984 merger into Worldwide Energy Corporation. Subsequently he served as a director of Worldwide and as President of its West Coast subsidiary until 1986. In March 1989, he was appointed as Receiver of Fountain Oil & Gas Company by the Chief Judge of the United States District Court, Central District of California, and served four years until the receivership was concluded. Mr. Raydon holds B.A. and M.A. degrees in Geological Sciences from the University of California, Berkeley, and the J.D. degree from the University of Southern California, School of Law. He is a member of the American Association of Petroleum Geologists and of the California State Bar. Mr. Raydon is the husband of Alyda L. Raydon and the father of Eric J. Raydon 	Alyda L. Raydon is Secretary/Treasurer and has been employed in such position since October, 1986. She has completed college courses in financial and investment management, accounting, computer science, and office procedures. Alyda L. Raydon is the wife of Gerald T. Raydon and the mother of Eric J. Raydon. 	William J. Corcoran was employed by an investment management firm representing the W. Averell Harriman family from 1963 until his retirement in 1995. He served as Secretary-Treasurer of the Mary A. H. Rumsey Foundation, the Gladys and Roland Harriman Foundation, and the W. Averell Harriman and Pamela C. Harriman Foundation. Mr. Corcoran graduated from Fordham University with B.A. and M.A. degrees in accounting. 	Michael F. Moran was employed in various capacities by a firm which made investments for members of the Harriman family from 1980 to 1995. He was the Treasurer of Middleburg Management Corporation and also served as Director and Chief Financial Officer of several Harriman family firms. He graduated from St. Peters College with a degree in accounting. Mr. Moran is currently employed in a financial capacity by affiliates of Carl Linder. 	Charles F. Peters has seventeen years of experience in oil and gas field operations. Mr. Peters has operated oil and gas wells and production facilities in California, including fourteen years experience in operations at the East Los Angeles-Bandini properties. Mr. Peters became manager of the properties in 1991. 	Eric J. Raydon joined the Company in June, 1995. He has over four years of experience in finance, real estate development, accounting, and management. Mr. Raydon received his Bachelor of Science degree in Business Administration/Real Property Development and Management from the University of Southern California in May, 1991. Eric J. Raydon is the son of Gerald and Alyda Raydon. ITEM 6. EXECUTIVE COMPENSATION. Director Compensation 	Directors currently receive an annual issuance of 1000 shares of common stock as compensation. Directors do not receive reimbursement for their out of pocket costs in attending board meetings. Executive Compensation 	No officer of the Company received compensation, including salary and bonus, in excess of $100,000 during any of the three preceding years. Gerald T. Raydon received no salary or bonus during any such years. The Board has authorized compensation to Mr. Raydon in the amount of $110,000 per year commencing January 1, 1996. Benefit Plans and Employment Agreements 	The Company has no benefit plans and no employment agreements, other than at will agreements, with any of its employees. In 1996, the Board authorized the Company to enter into employment contracts for periods of five years with each of Mr. Gerald T. Raydon, Mrs. Alyda Raydon and Mr. Eric J. Raydon. Such agreements when executed will provide for annual compensation of $110,000, $45,000 and $40,000, respectively, all subject to escalation on an annual basis as approved by the Board. The agreements will not contain provisions restricting a change of control in the Company. It is expected that formal contracts will be executed sometime during May, 1996. 	 ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 	At the time the Company acquired its interests in the East Los Angeles-Bandini and Oxnard properties, Mr. Gerald T. Raydon, president and major shareholder of the Company, acquired 25% of the joint interests in such properties. Such joint interests were acquired through Joint Venture Agreements pursuant to which the Company paid costs of operations and Mr. Raydon supplied the investment capital. Effective as of April 1, 1994, GEO acquired 20% of the 25% interest of Gerald T. Raydon in the Company's Oxnard properties and all of the 25% interest of Mr. Raydon in the Company's East Los Angeles-Bandini properties for shares of common stock valued at $103,421 which was the approximate cost of the properties to Mr. Raydon. 	Capitan Resources, Inc. owns an undivided 25% interest in the waste disposal facilities owned and operated by GEO at GEO's Orcutt and Oxnard properties. See "Properties - Environmental Services." Gerald T. Raydon and his family own all of the stock of Capitan Resources, Inc.. Relations between the Company and Capitan Resources are governed by an agreement which provides for a proportionate sharing of costs and revenues. 	Capitan Resources, Inc. is the purchaser of natural gas from the Company's Bandini-East Los Angeles properties. Capitan purchases the natural gas under a contract dated June 30, 1991, which provides for a payment to Capitan of 25% of gross sales in exchange for advancing capital and other costs of gas processing and transportation. Capitan then resells the natural gas to other purchasers. To date, resale transactions have not resulted in Capitan's recovery of its investment; however, it is expected that ultimately Capitan will achieve a significant profit on its investment. 	From time to time there are outstanding balances and credits between the Company and Capitan pursuant to the agreements above mentioned. At December 31, 1995 GEO had a receivable of $155,686 due from Capitan. Similar credits and balances were outstanding from time to time with respect to the Bandini-East Los Angeles properties and Vaca properties; during the two years ended December 31, 1995, the largest balance receivable from Mr. Raydon was $31,516 and at such date the receivable balance was 0. 	The Harriman affiliated group currently owns approximately 11% of the outstanding common stock of GEO. In 1992, members of the group provided collateral to a bank for a loan to GEO in the principal amount of $1,200,000 (now $1,460,000). The group received 273,669 shares of common stock as partial consideration for providing such collateral. Such loan remains unpaid as of the date hereof. In 1995, members of such group brought suit against the bank that made the loan to the Company, claiming, among other things, that the agent of the Harriman group that executed the collateral pledge agreement was not authorized so to do. The loan matured on April 15, 1996, was extended to June 15, 1996, and the bank, the pledgors, and the Company are negotiating for a one-year extension. Interest is being paid on a current basis by the Company. See "Litigation." 	In 1987 Gerald T. Raydon and Alyda L. Raydon conveyed to the Company their interests in various properties now held by the Company for an aggregate consideration of 2,125,587 shares of common stock. 	In 1988, the Company acquired certain minor properties and other assets from the Harriman group in exchange for 267,803 shares of common stock. 	In 1987, the Company acquired certain interests in oil and gas properties from Mr. and Mrs. Raydon in exchange for 833,400 shares of the Company's common stock valued at $718,400, which was the approximate cost of the properties to the principal officer/shareholder. 	On February 1, 1996 the Company issued in exchange for cash, promissory notes to relatives of Gerald T. Raydon totaling $57,813. On September 1, 1995, 30 shares of preferred stock were issued in exchange for a $30,000 portion of such promissory notes. 	At September 30, 1995, relatives of Gerald T. Raydon owed the Company $6,471 relating to net revenue interests in the Company's Vaca property. Such relatives acquired their interest in 1992 for a consideration of $3,500 which was the same price for which the interest was offered to third persons. The debt bears no interest. 	Drake Capital Securities, Inc., the shareholders of which were shareholders of DIC is the Company's investment banker. Drake Capital Securities, Inc. entered into an agreement with the Company dated December 20, 1995, by which Drake Capital Securities, Inc. agreed on a best efforts basis to manage a private placement of up to 2,500,000 shares of the common shares of the Company for an offering price of $2.50 per share. Drake Capital Securities, Inc. will be compensated by the Company with commissions of 7.5 - 10%. In addition, Drake Capital Securities, Inc. has acted as a financial advisor to the Company in the past. ITEM 8. DESCRIPTION OF SECURITIES. The following is qualified by reference to the Company's Articles of Incorporation and Bylaws, copies of which have been filed as exhibits to this registration statement. Description of the Common Equity. 	The Company's Articles authorize the issuance of 5 million shares of Common equity, of which 1.755,700 had been issued at December 31, 1995 Subsequent to such date, the Articles of Incorporation were amended to provide for an authorized capital of fifty million shares of common stock and, in connection with the acquisition of DIC, the outstanding shares, including those issued in connection with the acquisition, were split into 2.5505 shares, resulting in 4,975,460 shares of common stock being outstanding at April 30, 1996. See "Recent Sales of Unregistered Securities." Holders of the Common equity are entitled to dividends when and as declared by the Board of Directors from funds legally available therefor and upon liquidation are entitled to share ratably in any distribution to stockholders. All holders of Common equity are entitled to one vote per share on any matter coming before the stockholders for a vote. Shareholders are entitled to cumulate their votes in the election of directors. Thus, each shareholder is given a number of votes equal to the number of shares held multiplied by the number of directors to be elected, and the shareholder is entitled to apportion such votes among the nominees as the shareholder selects. 	All issued and outstanding shares of the Common equity are fully paid and non-assessable. Shareholders do not have preemptive rights. Description of the Preferred Stock 	The Board of Directors is empowered, by the Articles as amended on August 23, 1994 to issue 100,000 shares of Preferred Stock and to divide the same into series, fix the number of shares constituting each series, and to fix or alter the voting rights, dividend rights, dividend rates, conversion rights, rights and term or redemption, rights upon dissolution or liquidation and other special rights on any unissued series of Preferred Stock. 	During 1995, the Board authorized the creation of a $1,000 preferred stock and pursuant to that authorization the Company issued a total of 505.15 shares in exchange for $505,150. The series of preferred stock issued, carries an annual dividend of 30%, is callable by the Company at par at any time on notice to the holder. If the Company has not called the preferred stock for redeemption by January 1, 1997, the holder may require the Company to redeem the preferred stock. The preferred stock is convertible into common stock, at the option of the holder, at a price equal to 80% of the price at which the common stock may be sold in an initital public offering of the common stock of the Company. PART II ITEM 1. MARKET PRICE, DIVIDENDS AND OTHER SHAREHOLDER MATTERS. Market Information. Lack of Public Market 	There has been no market for the shares of the Company. It is expected that as a result of the acquisition of DIC a market may develop, but the nature and extent thereof is speculative. See "Business - Acquisition of DIC." Shares issued 	At April 30, 1996, the Company's Articles of Incorporation authorized the issuance of fifty million common shares, of which 4,975,460 were issued and outstanding. As of such date, there were no options or warrants convertible into common equity outstanding. However, as of such date the Company had outstanding a class of Preferred Stock which is under certain conditions convertible into common shares; at such date 505.15 shares of such preferred stock had been issued. Such preferred stock is convertible into common stock at a price equal to eighty percent of the price at which a share of common stock is sold to the public in the Company's initial public offering. See "Description of the Preferred Shares." Shares Available for Resale 	At April 30, 1996, had the Company been subject to the reporting requirements of the Securities and Exchange Act, approximately 4,467,914 shares of the common equity of the Company would have been eligible for resale under Rule 144 under the Securities Act of 1933, of which approximately 4,393,661 shares were held by affiliates of the Company and constituted "restricted" shares. In addition, shares issued in connection with the acquisition of DIC (See "Business - Acquisition of DIC") were issued pursuant to an exemption from the registration and prospectus delivery requirements of the Securities Act pursuant to section 3(a)10) thereof and are believed to be freely transferable. In such transaction, 497,546 shares were issued. To the knowledge of the Company, none of the issuees constitutes an "affiliate" of the Company, nor does any such issuee hold more than five percent of the common equity of the Company. 	 	 The remaining 4,477,914 shares of common stock held by existing stockholders (the "Restricted Shares") were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act. These shares may be sold in the public market only if registered or pursuant to an exemption from registration such as Rules 144, or 144(k) under the Securities Act, which are summarized below. 	Approximately 207,000 of these Restricted Shares are eligible for sale in the public market upon compliance with Rule 144(k). 	In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least two years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's common stock (approximately 49,754 shares) (ii) the average weekly trading volume of the Company's Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or person whose shares are aggregated) who is not deemed to have been an Affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least three years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. 	None of the shares otherwise eligible for resale under Rule 144, will be so eligible until the Company has been subject to the reporting requirements of the Securities and Exchange Act for a period of 90 days. It is expected that such 90 day period will expire on or about October 1, 1996. Possible Sale of Shares by the Company and Registration Rights 	The Company has no agreements by which it is obligated to register any shares of common equity. However, the Company plans to privately offer shares of its common stock in the near future and is considering the issuance of common equity in a transaction registered under the Securities Act, but has not formulated definitive plans for the latter. The Company is seeking to implement the first alternative by a placement of up to 2,500,000 shares of its common stock privately through the efforts of Drake Capital Securities, Inc. See "Certain Relationships and Related Transactions." If the Company privately places any of its common shares, it is anticipated that the purchasers thereof will be accorded rights to require the Company to register the shares. In addition, if the Company conducts an initial public offering of its shares, it is probable that the existing holders of the Preferred Stock will be accorded the right to have their shares registered as part of the offering. The Company is also considering the issuance of common equity in a transaction registered under the Securities Act, but has not formulated definitive plans therefor. Holders of Common Equity 	At April 30, 1996, there were approximately 73 holders of record known to the Company of the common equity of the Company. Dividends 	The Company has never paid dividends on its common equity and has no plans to do so in the foreseeable future. Payment of dividends is presently restricted by the Company's bank loan agreement, which restricts such payments, and by the General Corporation Law of the State of California, which renders impermissible the payment of dividends under the present financial condition of the Company. ITEM 2. LEGAL PROCEEDINGS 	At March 31, 1996, the Company was a defendant to several lawsuits in which the plaintiff claimed that the Company had failed to pay for work or materials, and the Company disputed the values of the services or materials. The aggregate amount claimed by all plaintiffs is approximately $39,000. The Company believes that all of such suits will be settled for less than the amount claimed and that none is material to the Company or its properties. 	In December 1995, the Company filed a law suit in the Superior Court for the County of Los Angeles, California, styled Geo Petroleum, Inc. v. Hydro-Test, Inc. in the amount of $63,000 against a contractor for lost revenue and damages incurred while performing services on one of the Company's oil and gas properties. 	In August 1995, various persons affiliated with the W.A. Harriman interests commenced a suit, to which Geo is not a party, in the Superior Court for the County of Los Angeles, California, styled Edward Northrop et. al. v. First Los Angeles Bank et al (No.SC 037968). Prior to such time, the plaintiffs had provided collateral which was used to secure a loan from the Bank to Geo. In the suit, the plaintiffs claim, inter alia, that the Bank or one of its officials converted certain dividends that had accrued on the collateral. The plaintiffs assert that had they known of the conversion, they would not have consented to a renewal and recollateralization of the bank loan. Geo is not a party to the litigation, but should the plaintiffs be successful in the litigation, they might receive back the collateral which secures repayment of Geo's loan from the Bank. Geo is nevertheless liable to repay the bank loan, which has an outstanding balance of approximately $1.46 million. See"Certain Relationships and Related Transactions." The litigation appears to be quiescent. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. 	The Company changed its independent accountants as of the end of its 1994 year. Deloitte & Touche LLP had audited the financial statements of Geo for the year ended December 31, 1994. There were no disagreements with Deloitte & Touche LLP respecting accounting or auditing matters. Effective January 1, 1996, Geo as a matter of business judgment engaged the services of Ernst & Young LLP for Geo's 1995 audit. 	Geo has provided a copy of this disclosure to its present and its former accountants and has requested both to review such disclosure. A letter confirming the foregoing from Deloitte & Touche LLP has been filed as an exhibit to this registration statement. Geo did not discuss the application of accounting principles to any specific transaction or the type of audit opinion that might be rendered, prior to engaging its new accounting firm. ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES. 	On April 9, 1996, pursuant to an order qualifying the securities issued by the Department of Corporations of the State of California after a hearing on the fairness thereof, the Company issued an aggregate of 497,546 common shares in the acquisition by way of merger, of Drake Investment Corporation, an inactive California corporation. Such issuance was exempt by reason of section 3(a)(10) of the Securities Act of 1933. The number of beneficial issuees was fifty. The issuance was not underwritten. 	In April, 1994, the Company issued 476,242 common shares in exchange for interests in two oil and gas properties in which the Company owned the majority interest. The number of persons to whom shares were issued was 6, all of whom had a preexisting relationship of long standing with the Company and its principal shareholders and one of which such persons was Gerald T. Raydon. To the Company's knowledge each of such persons was an "accredited investor" as that term is used in Regulation D under the Securities Act. Such issuance was exempt by reason of sections 4(2) and 3(a)(11) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder. No underwritter was involved in these transactions and no compensation was paid to any third person by reason of such issuances. No general advertising was employed in connnection with the sales. The Company maintains stop transfer instructions with respect to the shares so issued. 	During the period September 1, 1994 to October 1, 1995, the Company exchanged for cash in the amount of each note, its promissory notes due one year or less from the date of issuance, with 21 individuals (including revocable trusts controlled by three such individuals) in the aggregate amount of $1,156,132, bearing interest at a rate of ten percent per annum, plus a payment out of production from certain of the wells of the Company equal to an additional twenty percent per annum. During 1995, the maturity date of each of the notes due in 1995 was extended to a date in 1996. All of the persons to whom such notes were issued had a preexisting relationship of long standing with the Company and its principal shareholders and such issues included two relatives of the principal shareholders. To the Company's knowledge each of such persons was an "accredited investor" as that term is used in Regulation D under the Securities Act. Such issuance was exempt by reason of sections 4(2) and 3(a)(11) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder. No underwritter was involved in these transactions and no compensation was paid to any third person by reason of such issuances. No general advertising was employed in connnection with the issuances. 	In 1992, the Company issued its promissory note in the principal amount of $1.3 million (now $1.46 million) to First Los Angeles Bank, a California Banking institution, in exchange for a loan of such amount bearing interest at a rate of prime plus two percentage points. The loan was due one year from the date of issuance and was secured by publicly traded stock, certificates for which were provided by five individuals affiliated with the W. A. Harriman interests. See "Security Ownership of Certain Beneficial Owners and Management." The loan has been renewed annually, until April 15, 1996 and is presently due. The issuance of the note and each renewal was exempt under section 4(2) of the Securities Act. In connection with the initial bank loan, the Company issued 273,722 shares of it common stock (giving effect to the stock split occuring in January 1996) to the persons providing such collateral. The issuance of the stock was exempt under section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder. No underwritter was involved in these transactions and not compensation was paid to any third person by reason of the issuance of the stock. No general advertising was employed in connection with the issuances. 	At various times during 1995, Geo issued shares of its Preferred Stock, $1,000 par value, aggregating a total of 530.15 shares. Such shares were issued to a total of seventeen issues (two of whom are related by blood to the chief executive officer). Sixteen of the issuances (to fourteen persons) were in exchange for the surrender of promissory notes theretofore issued by the Company (see description above), four were issued in exchange for cash and one was issued in exchange for services performed by a holder of the Company's notes in exchange for services rendered in assisting the Company in exchanging preferred stock for such notes. To the Company's knowledge each of such persons was an "accredited investor" as that term is used in Regulation D under the Securities Act. Such issuance was exempt by reason of sections 4(2) and 3(a)(11) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder. No underwritter was involved in these transactions and no compensation was paid to any third person, save as indicated above and then in an amount of 2.4 shares of preferred stock, by reason of such issuances. No general advertising was employed in connnection with the issuances. ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Certain Indemnification Rights 		As permitted by California law, the bylaws of the Company provide broad rights of indemnification to the officers and directors of the Company.The Articles of Incorporation of the Company provide, in part, that: (a) The liability of directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) The corporation is authorized to provide indemnification of agents, as defined in Section 317 of the California Corporations Code, through by-law provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, which indemnification may be in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code with respect to actions for breaches of duty to the corporation and its shareholders. (c) Any amendment, repeal, or modification of any provision of this Article V shall not adversely affect any right or protection of an agent of this corporation existing at the time of such amendment, repeal or modification.. In the view of the Securities and Exchange Commission, the breadth of such indemnification provisions may be such as to be violative of public policy as adumbrated by the federal security laws. Geo Petroleum, Inc. Index to Financial Statements Report of Ernst & Young LLP, Independent Auditors F-2 Report of Deloitte & Touche LLP, Independent Auditors F-3 Balance Sheets at December 31, 1995 and 1994 F-4 Statements of Operations for the years ended December 31, 1995 and 1994 F-6 Statements of Stockholders' Equity for the years ended December 31, 1995 and 1994 F-7 Statements of Cash Flows for the years ended December 31, 1995 and 1994 F-8 Notes to Financial Statements F-10 Report of Independent Auditors Stockholders and Board of Directors Geo Petroleum, Inc. We have audited the accompanying balance sheet of Geo Petroleum, Inc. as of December 31, 1995, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1995 financial statements referred to above present fairly, in all material respects, the financial position of Geo Petroleum, Inc. at December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company had incurred recurring losses from operations through December 31, 1994, and had an accumulated deficit and negative working capital at December 31, 1995. In addition, the Company has defaulted on a loan agreement with a bank and has not complied with certain related covenants. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/ Ernst & Young LLP Los Angeles, California April 30, 1996 June 20, 1996 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders GEO Petroleum, Inc. Torrance, California We have audited the accompanying balance sheet of GEO Petroleum, Inc. ("the Company") as of December 31, 1994, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses from operations and had an accumulated deficit and negative working capital at December 31, 1994. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Deloitte & Touche LLP Los Angeles, California June 28, 1995, except for Notes 2 and 8 for which the date is November 29, 1995 Geo Petroleum, Inc. Balance Sheets DECEMBER 31 1995 1994 ------------------ ASSETS		 Current assets:		 Cash and cash equivalents (NOTE 1)<F1> $ 100,565 $ 139,874 Accounts receivable:		 Accrued oil and gas revenues (net of allowances for doubtful accounts of $17,775 in 1995 and $6,430 in 1994) 161,308 121,194 Joint interest and other (NOTE 3)<F3> 200,026 132,514 Prepaid expenses and other 52,413 5,794 -------------------------- Total current assets	 514,312 399,376 		 		 		 Property and equipment (NOTES 1 AND 3)<F1><F3>:	 Oil and gas properties 4,698,877 4,262,003 Office furniture and equipment 65,948 51,271 -------------------------- 4,764,825 4,313,274 Accumulated depletion and depreciation (1,037,404) (840,920) -------------------------- 3,727,421 3,472,354 Deferred charge, net (NOTE 1)<F1> - 45,000 ------------------------- Total assets $4,241,733 $3,916,730 ========================== <FN> <F1> 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Geo Petroleum, Inc. (the Company) is a private oil and gas production company that was founded in 1986 in the state of California. The Company engages in the development, production and management of oil and gas properties located in California. On April 9, 1996, the Company's Board of Directors approved the proposed merger with Drake Investment Corp. (Drake). The terms and conditions of the merger are further described in Note 8. BASIS OF PRESENTATION The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, as of December 31, 1995, the Company's accumulated deficit totaled $1,238,791, and current liabilities exceeded current assets by $2,303,360. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its current obligations on a timely basis, to obtain additional financing, and ultimately to obtain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations. These potential alternatives include, among other things, a private and public placement of debt or equity, extending or refinancing the bank loan using oil and gas properties as collateral, sale of oil and gas properties and obtaining an advance on future production from an end user. As a first step in a potential public or private offering, the Company has signed an agreement to merge with Drake (see Note 8). There can be no assurance that any of these potential alternatives will materialize. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. CASH AND CASH EQUIVALENTS Cash equivalents include certificates of deposit with original maturity dates of less than three months. The Company maintains a $100,000 certificate of deposit for state of California authorization purposes to perform additional oil and gas well recompletions. These funds are subject to certain withdrawal restrictions until completion of the work. DEFERRED CHARGE The deferred charge consists of unamortized loan costs, which were amortized over five years through September 1995 (see Note 2). Amortization expense was $45,000 in 1995 and $60,000 in 1994. INVESTMENT IN PARTNERSHIP Included in oil and gas properties is an investment in a general partnership that was created in 1991 to produce oil at a well located on one of the Company's oil and gas properties. The Company is the managing partner in this general partnership, and this investment is accounted for under the pro rata consolidation method. PROPERTY AND EQUIPMENT The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas reserves are capitalized as incurred. The costs of oil and gas properties are accumulated in a cost center and are subject to a cost center ceiling which such costs do not exceed. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are depleted over the estimated useful lives of the properties by application of the unit-of-production method using only proved oil and gas reserves, excluding future estimated costs and related proved undeveloped oil reserves at the Vaca Oil Sands property, which relate to a major development project involving an enhanced recovery process. The evaluations of the oil and gas reserves were prepared by Sherwin D. Yoelin, a petroleum engineer. Depletion expense recorded for the years ended December 31, 1995 and 1994 was $196,484 and $218,723, respectively. Substantially all additions to oil and gas properties in 1995 and 1994 relate to recompletions of existing producing or previously producing wells. Depreciation of office equipment and furniture is computed using the straight-line method, with depreciation rates based upon their estimated useful lives, which range between five and seven years. Depreciation expense was $5,198 and $3,730 for the years ended December 31, 1995 and 1994, respectively. REVENUE Revenue is recorded net of royalties and certain other costs that the Company incurs to bring the oil and gas into salable condition. The Company had one significant customer in 1995 and 1994 which comprised approximately 53% and 33% of gross oil and gas sales, respectively. Included in other revenues for 1995 is $250,000 received from the settlement of a lawsuit against a contractor for damages incurred while performing services on one of the Company's oil and gas properties. EARNINGS PER COMMON SHARE Net income (loss) per common share is based upon average outstanding common shares, adjusted for the stock split described in Note 8, during each year (4,383,183 shares in 1995 and 3,676,025 shares in 1994). Such calculations do not assume any conversion of the redeemable convertible preferred stock into common stock because determination of the conversion price is subject to future events. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts in the financial statements have been reclassified to conform to current year presentation. <F3> 3. RELATED PARTY TRANSACTIONS The Company has entered into agreements with another entity to sell gas and offer water disposal services at certain locations. The principal officer/shareholder of the Company is also the principal officer/shareholder of the other entity. Total revenue to the Company from these agreements was $257,024 and $174,294 in 1995 and 1994, respectively. At December 31, 1995 and 1994, the Company had a net receivable balance of $155,686 and $81,312, respectively, from the other entity. The Company's principal officer/shareholder previously held a net profit interest of 25% in the East Los Angeles and Vaca Tar Sands oil and gas properties. In 1994, the Company acquired the 25% net profit interest in the East Los Angeles property and 20% of the net profit interest in the Vaca Tar Sands property from the principal officer/shareholder. In exchange for these interests, the Company issued 450,129 shares of common stock valued at $103,421, which was the approximate cost of the properties to the principal officer/shareholder. At the date of the acquisition in 1994, the principal officer/shareholder owed the Company $31,516, which amount was forgiven as part of the purchase consideration. In 1987, the Company acquired certain interests in oil and gas properties from its principal officer/shareholder in exchange for 833,400 shares of the Company's common stock valued at $781,400, which was the approximate cost of the properties to the principal officer/shareholder. At December 31, 1995 and 1994, the Company had notes payable to relatives of the principal officer/shareholder totaling $53,563 and $86,819, respectively. At December 31, 1994, relatives of the principal officer/shareholder owed the Company $6,471 relating to the net revenue interests in certain oil and gas properties. No such amounts were owed at December 31, 1995. In December 1995, notes payable by the Company to a relative of the principal officer/shareholder totaling $30,000 were converted into 30.0 shares of the Company's redeemable convertible preferred stock aggregating $30,000 (see Note 4). The principal officer/shareholder of the Company has not taken a salary since inception of the Company. </FN> 	 DECEMBER 31 1995 1994 ------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:	 Accounts payable:		 Accrued royalties $ 438,507 $ 289,076 Trade and other (NOTE 3)<F3> 283,161 510,512 Bank overdraft - 26,002 Dividends payable 20,120 - Accrued expenses 107,821 78,697 Current portion of notes payable (NOTE 2)<F2> 1,968,063 1,636,000 -------------------------- Total current liabilities 2,817,672 2,540,287 		 Notes payable (NOTE 2)<F2> - 600,813 		 Redeemable convertible preferred stock, $1,000 par value; authorized 100,000 shares; issued and outstanding 505.15 shares at December 31, 1995 (NOTE 4)<F4> 505,150 - 		 Stockholders' equity (NOTES 2, 3 AND 5)<F2><F3><F5> Common stock, no par value; authorized 5,000,000 shares; issued and outstanding 1,755,700 and 1,681,417 shares at December 31, 1995 and 1994, respectively 2,157,702 2,147,702 Accumulated deficit (1,238,791) (1,372,072) -------------------------- Total stockholders' equity 918,911 775,630 -------------------------- Total liabilities and stockholders' equity $4,241,733 $3,916,730 ========================== SEE ACCOMPANYING NOTES. <FN> <F2> 2. NOTES PAYABLE Notes payable consisted of the following: DECEMBER 31 1995 1994 ---------------------- Note payable to bank $1,460,000 $1,460,000 Notes payable to investors 508,063 776,813 -------------------------- 1,968,063 2,236,813 Less current portion 1,968,063 1,636,000 -------------------------- Total long-term debt $ - $ 600,813 ========================== The Company has issued notes payable to various investors bearing an interest rate of 10% and a guaranteed oil and gas production payment equal to 20% of the outstanding principal amount per annum. The holders of the notes have extended the maturities of the notes to various dates in 1996, and all of the notes are secured by interests in the Company's oil and gas properties. The note payable to bank bears interest at prime plus 2.0%. At December 31, 1995 and 1994, the prime rate was 8.5%. Interest payments are due monthly, and the outstanding principal amount and all unpaid interest was due on October 15, 1995. In October 1995, the bank extended the maturity date of the note payable to April 15, 1996, which was also not paid and is currently delinquent. The Company was not in compliance with certain loan covenants at and subsequent to December 31, 1995, including restrictions on incurring additional debt and failure to make certain payments to outside vendors on a timely basis. While the bank has not taken any action regarding such noncompliance, the covenants have not been waived through the extended maturity date. As a result, the note is classified as current at December 31, 1995. The Company is engaged in discussions with the bank to further extend the maturity of the note. In 1990, the Company issued 107,300 shares of common stock, an option to purchase 70,833 additional shares of common stock at $6 per share and a recorded deed of trust on 20% of the Company's interest in its Vaca Tar Sands property to certain parties in exchange for those parties providing the collateral, 35,000 shares of Union Pacific Corp. common stock, for the Company's note payable to a bank. The consideration issued was valued at $300,000, its estimated fair market value, and was amortized as additional loan costs over five years. The 35,000 shares of Union Pacific Corp. common stock is held in a trust and had an approximate value of $2,310,000 at December 31, 1995. In the event of default on the bank note payable, the parties providing the collateral may take steps to recover from the Company the value of any collateral taken by the bank. The collateral agreements and the stock purchase option expired on September 11, 1995. In connection with the extension of the maturity date of the bank note payable, the collateral agreement was extended to April 15, 1996. No additional consideration was given for this extension. <F3> 3. RELATED PARTY TRANSACTIONS The Company has entered into agreements with another entity to sell gas and offer water disposal services at certain locations. The principal officer/shareholder of the Company is also the principal officer/shareholder of the other entity. Total revenue to the Company from these agreements was $257,024 and $174,294 in 1995 and 1994, respectively. At December 31, 1995 and 1994, the Company had a net receivable balance of $155,686 and $81,312, respectively, from the other entity. The Company's principal officer/shareholder previously held a net profit interest of 25% in the East Los Angeles and Vaca Tar Sands oil and gas properties. In 1994, the Company acquired the 25% net profit interest in the East Los Angeles property and 20% of the net profit interest in the Vaca Tar Sands property from the principal officer/shareholder. In exchange for these interests, the Company issued 450,129 shares of common stock valued at $103,421, which was the approximate cost of the properties to the principal officer/shareholder. At the date of the acquisition in 1994, the principal officer/shareholder owed the Company $31,516, which amount was forgiven as part of the purchase consideration. In 1987, the Company acquired certain interests in oil and gas properties from its principal officer/shareholder in exchange for 833,400 shares of the Company's common stock valued at $781,400, which was the approximate cost of the properties to the principal officer/shareholder. At December 31, 1995 and 1994, the Company had notes payable to relatives of the principal officer/shareholder totaling $53,563 and $86,819, respectively. At December 31, 1994, relatives of the principal officer/shareholder owed the Company $6,471 relating to the net revenue interests in certain oil and gas properties. No such amounts were owed at December 31, 1995. In December 1995, notes payable by the Company to a relative of the principal officer/shareholder totaling $30,000 were converted into 30.0 shares of the Company's redeemable convertible preferred stock aggregating $30,000 (see Note 4). The principal officer/shareholder of the Company has not taken a salary since inception of the Company. <F4> 4. REDEEMABLE CONVERTIBLE PREFERRED STOCK During 1994, the Company authorized 100,000 shares of preferred stock with a par value of $1,000 per share. At December 31, 1994, no shares of preferred stock had been issued. In December 1995, the Company issued 48.0 shares of its redeemable convertible preferred stock to three investors for cash totaling $48,000. Additionally, the Company issued 2.4 shares to an individual as a finders fees payment for services performed in 1995. Also during December 1995, 17 holders of notes payable totaling $454,750 converted such notes into 454.75 shares of the Company's redeemable convertible preferred stock. In connection with the issuance of the Company's redeemable convertible preferred stock in 1995, fourth quarter dividends amounting to $20,120 were declared and are payable as of December 31, 1995. The series of preferred stock issued, carrying an annual dividend of 30%, is callable by the Company at par at any time on notice to the holder. If the Company has not called the preferred stock for redemption by January 1, 1997, the holder may require the Company to redeem the preferred stock. The preferred stock is convertible into common stock, at the option of the holder, at a price equal to 80% of the price at which the common stock may be sold in an initial public offering of the common stock of the Company. <F5> 5. COMMON STOCK In June 1995, the Company issued 72,730 shares of common stock to a consulting company as payment for services that were performed in 1994 and 1995. The parties agreed that the stock issued had a value of $10,000 and that approximately 80% of the services were performed at December 31, 1994. Accordingly, at December 31, 1994, the Company had a payable balance of $8,000 relating to these services. </FN> Geo Petroleum, Inc. Statements of Operations Year ended December 31 1995 1994 -------------------------- Revenues (NOTES 1 AND 3)<F1><F3>: Oil and gas sales $1,563,206 $1,053,036 Other revenue 552,544 137,648 Interest income 3,102 4,868 -------------------------- 2,118,852 1,195,552 Expenses:		 Lease operating expenses 943,283 907,713 Depletion and depreciation 196,484 222,453 Amortization of deferred loan costs (NOTE 1)<F1> 45,000 60,000 General and administrative 402,978 256,519 Interest expense 377,706 307,333 -------------------------- Income (loss) before income taxes 153,401 (558,466) Provision for income taxes (NOTE 6)<F6> - - -------------------------- Net income (loss) 153,401 (558,466) Less preferred stock dividends (20,120) - -------------------------- Net income (loss) applicable to common stock $ 133,281 $ (558,466) ========================== 		 Net income (loss) per share of common stock $ 0.03 $ (0.15) ========================== SEE ACCOMPANYING NOTES. <FN> <F1> 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Geo Petroleum, Inc. (the Company) is a private oil and gas production company that was founded in 1986 in the state of California. The Company engages in the development, production and management of oil and gas properties located in California. On April 9, 1996, the Company's Board of Directors approved the proposed merger with Drake Investment Corp. (Drake). The terms and conditions of the merger are further described in Note 8. BASIS OF PRESENTATION The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, as of December 31, 1995, the Company's accumulated deficit totaled $1,238,791, and current liabilities exceeded current assets by $2,303,360. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its current obligations on a timely basis, to obtain additional financing, and ultimately to obtain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations. These potential alternatives include, among other things, a private and public placement of debt or equity, extending or refinancing the bank loan using oil and gas properties as collateral, sale of oil and gas properties and obtaining an advance on future production from an end user. As a first step in a potential public or private offering, the Company has signed an agreement to merge with Drake (see Note 8). There can be no assurance that any of these potential alternatives will materialize. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. CASH AND CASH EQUIVALENTS Cash equivalents include certificates of deposit with original maturity dates of less than three months. The Company maintains a $100,000 certificate of deposit for state of California authorization purposes to perform additional oil and gas well recompletions. These funds are subject to certain withdrawal restrictions until completion of the work. DEFERRED CHARGE The deferred charge consists of unamortized loan costs, which were amortized over five years through September 1995 (see Note 2). Amortization expense was $45,000 in 1995 and $60,000 in 1994. INVESTMENT IN PARTNERSHIP Included in oil and gas properties is an investment in a general partnership that was created in 1991 to produce oil at a well located on one of the Company's oil and gas properties. The Company is the managing partner in this general partnership, and this investment is accounted for under the pro rata consolidation method. PROPERTY AND EQUIPMENT The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas reserves are capitalized as incurred. The costs of oil and gas properties are accumulated in a cost center and are subject to a cost center ceiling which such costs do not exceed. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are depleted over the estimated useful lives of the properties by application of the unit-of-production method using only proved oil and gas reserves, excluding future estimated costs and related proved undeveloped oil reserves at the Vaca Oil Sands property, which relate to a major development project involving an enhanced recovery process. The evaluations of the oil and gas reserves were prepared by Sherwin D. Yoelin, a petroleum engineer. Depletion expense recorded for the years ended December 31, 1995 and 1994 was $196,484 and $218,723, respectively. Substantially all additions to oil and gas properties in 1995 and 1994 relate to recompletions of existing producing or previously producing wells. Depreciation of office equipment and furniture is computed using the straight-line method, with depreciation rates based upon their estimated useful lives, which range between five and seven years. Depreciation expense was $5,198 and $3,730 for the years ended December 31, 1995 and 1994, respectively. REVENUE Revenue is recorded net of royalties and certain other costs that the Company incurs to bring the oil and gas into salable condition. The Company had one significant customer in 1995 and 1994 which comprised approximately 53% and 33% of gross oil and gas sales, respectively. Included in other revenues for 1995 is $250,000 received from the settlement of a lawsuit against a contractor for damages incurred while performing services on one of the Company's oil and gas properties. EARNINGS PER COMMON SHARE Net income (loss) per common share is based upon average outstanding common shares, adjusted for the stock split described in Note 8, during each year (4,383,183 shares in 1995 and 3,676,025 shares in 1994). Such calculations do not assume any conversion of the redeemable convertible preferred stock into common stock because determination of the conversion price is subject to future events. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts in the financial statements have been reclassified to conform to current year presentation. <F3> 3. RELATED PARTY TRANSACTIONS The Company has entered into agreements with another entity to sell gas and offer water disposal services at certain locations. The principal officer/shareholder of the Company is also the principal officer/shareholder of the other entity. Total revenue to the Company from these agreements was $257,024 and $174,294 in 1995 and 1994, respectively. At December 31, 1995 and 1994, the Company had a net receivable balance of $155,686 and $81,312, respectively, from the other entity. The Company's principal officer/shareholder previously held a net profit interest of 25% in the East Los Angeles and Vaca Tar Sands oil and gas properties. In 1994, the Company acquired the 25% net profit interest in the East Los Angeles property and 20% of the net profit interest in the Vaca Tar Sands property from the principal officer/shareholder. In exchange for these interests, the Company issued 450,129 shares of common stock valued at $103,421, which was the approximate cost of the properties to the principal officer/shareholder. At the date of the acquisition in 1994, the principal officer/shareholder owed the Company $31,516, which amount was forgiven as part of the purchase consideration. In 1987, the Company acquired certain interests in oil and gas properties from its principal officer/shareholder in exchange for 833,400 shares of the Company's common stock valued at $781,400, which was the approximate cost of the properties to the principal officer/shareholder. At December 31, 1995 and 1994, the Company had notes payable to relatives of the principal officer/shareholder totaling $53,563 and $86,819, respectively. At December 31, 1994, relatives of the principal officer/shareholder owed the Company $6,471 relating to the net revenue interests in certain oil and gas properties. No such amounts were owed at December 31, 1995. In December 1995, notes payable by the Company to a relative of the principal officer/shareholder totaling $30,000 were converted into 30.0 shares of the Company's redeemable convertible preferred stock aggregating $30,000 (see Note 4). The principal officer/shareholder of the Company has not taken a salary since inception of the Company. <F6> 6. INCOME TAXES Deferred income taxes result from temporary differences in the recognition of revenues and expenses for financial accounting and tax reporting purposes. Net deferred income taxes were composed of the following: DECEMBER 31 1995 1994 ------------------------- Deferred income tax asset - operating loss carryforwards $1,450,000 $1,100,000 Deferred income tax liability - differences between book and tax basis of property (1,050,000) (950,000) Valuation allowance (400,000) (150,000) -------------------------- Net deferred income taxes $ - $ - ========================== As of December 31, 1995 and 1994, the Company had net operating loss carryforwards available in future periods to reduce income taxes that may be payable at those dates. For federal income tax purposes, net operating loss carryforwards amounted to approximately $3,740,000 and $2,750,000 for 1995 and 1994, respectively, and expire during the years 2001 through 2009. For state income tax purposes, net operating loss carryforwards amounted to approximately $1,950,000 and $1,480,000 for 1995 and 1994, respectively, and expire during the years 2004 through 2010. The Company is delinquent in filing its 1994 income tax returns. </FN> Geo Petroleum, Inc. Statements of Stockholders' Equity Number of Common Shares Common Accumulated Outstanding Stock Deficit Total -------------------------------------------- Balance at December 31,1993 1,201,175 $2,034,275 $(813,606) $1,220,669 Net loss - - (558,466) (558,466) Issuance of stock 480,242 113,427 - 113,427 ----------------------------------------------- Balance at December 31, 1994 1,681,417 2,147,702 (1,372,072) 775,630 Net income - - 153,401 153,401 Issuance of stock 74,283 10,000 - 10,000 Preferred stock dividends - - (20,120) (20,120) ----------------------------------------------- Balance at December 31, 1995 1,755,700 $2,157,702 $(1,238,791) $918,911 =============================================== SEE ACCOMPANYING NOTES. Geo Petroleum, Inc. Statements of Cash Flows YEAR ENDED DECEMBER 31 1995 1994 ----------------------- OPERATING ACTIVITIES Net income (loss) $ 153,401 $ (558,466) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:		 Depletion and depreciation 196,484 222,453 Amortization of deferred loan costs 45,000 60,000 Fees paid in stock 10,000 4,000 Changes in operating assets and liabilities: Accounts receivable (107,626) (114,683) Prepaid expenses and other (46,619) 22,543 Accounts payable (77,920) 88,138 Accrued expenses 29,124 73,830 -------------------------- Net cash provided by (used in) operating activities 201,844 (202,185) 		 INVESTING ACTIVITIES		 Additions to property and equipment (451,551) (613,611) -------------------------- Net cash used in investing activities (451,551) (613,611) FINANCING ACTIVITIES		 Proceeds from notes payable 307,000 776,813 Payments on notes payable (121,000) - Bank overdraft (26,002) 26,002 Preferred stock issued 50,400 - -------------------------- Net cash provided by financing activities 210,398 802,815 -------------------------- Geo Petroleum, Inc. Statements of Cash Flows (continued) YEAR ENDED DECEMBER 31 1995 1994 ------------------------ Net decrease in cash and cash equivalents (39,309) (12,981) 	 Cash and cash equivalents at beginning of year 139,874 152,855 ------------------------- Cash and cash equivalents at end of year $ 100,565 $139,874 ========================= 		 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION		 Cash paid during the year for interest $ 414,821 $ 188,816 ========================= Cash paid during the year for income taxes $ 800 $ - ========================= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1995, the Company issued 454.75 shares of the Company's redeemable convertible preferred stock in exchange for the retirement of certain notes payable aggregating $454,750. Additionally, the Company issued 2.4 shares of the Company's redeemable convertible preferred stock to an individual as a finder's fee payment for services rendered in 1995. In connection with the issuance of the Company's redeemable convertible preferred stock, fourth quarter dividends amounting to $20,120 were declared and payable as of December 31, 1995. Also, the Company issued 72,730 shares of common stock to a consulting company as payment for services that were performed in 1994 and 1995. During 1994, the Company issued 476,242 shares of common stock and forgave accounts receivable in the amounts of $32,358 in exchange for certain oil and gas property interests valued at $141,785. SEE ACCOMPANYING NOTES. Geo Petroleum, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 1995 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Geo Petroleum, Inc. (the Company) is a private oil and gas production company that was founded in 1986 in the state of California. The Company engages in the development, production and management of oil and gas properties located in California. On April 9, 1996, the Company's Board of Directors approved the proposed merger with Drake Investment Corp. (Drake). The terms and conditions of the merger are further described in Note 8. BASIS OF PRESENTATION The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, as of December 31, 1995, the Company's accumulated deficit totaled $1,238,791, and current liabilities exceeded current assets by $2,303,360. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its current obligations on a timely basis, to obtain additional financing, and ultimately to obtain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations. These potential alternatives include, among other things, a private and public placement of debt or equity, extending or refinancing the bank loan using oil and gas properties as collateral, sale of oil and gas properties and obtaining an advance on future production from an end user. As a first step in a potential public or private offering, the Company has signed an agreement to merge with Drake (see Note 8). There can be no assurance that any of these potential alternatives will materialize. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. CASH AND CASH EQUIVALENTS Cash equivalents include certificates of deposit with original maturity dates of less than three months. The Company maintains a $100,000 certificate of deposit for state of California authorization purposes to perform additional oil and gas well recompletions. These funds are subject to certain withdrawal restrictions until completion of the work. DEFERRED CHARGE The deferred charge consists of unamortized loan costs, which were amortized over five years through September 1995 (see Note 2). Amortization expense was $45,000 in 1995 and $60,000 in 1994. INVESTMENT IN PARTNERSHIP Included in oil and gas properties is an investment in a general partnership that was created in 1991 to produce oil at a well located on one of the Company's oil and gas properties. The Company is the managing partner in this general partnership, and this investment is accounted for under the pro rata consolidation method. PROPERTY AND EQUIPMENT The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas reserves are capitalized as incurred. The costs of oil and gas properties are accumulated in a cost center and are subject to a cost center ceiling which such costs do not exceed. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are depleted over the estimated useful lives of the properties by application of the unit-of-production method using only proved oil and gas reserves, excluding future estimated costs and related proved undeveloped oil reserves at the Vaca Oil Sands property, which relate to a major development project involving an enhanced recovery process. The evaluations of the oil and gas reserves were prepared by Sherwin D. Yoelin, a petroleum engineer. Depletion expense recorded for the years ended December 31, 1995 and 1994 was $196,484 and $218,723, respectively. Substantially all additions to oil and gas properties in 1995 and 1994 relate to recompletions of existing producing or previously producing wells. Depreciation of office equipment and furniture is computed using the straight-line method, with depreciation rates based upon their estimated useful lives, which range between five and seven years. Depreciation expense was $5,198 and $3,730 for the years ended December 31, 1995 and 1994, respectively. REVENUE Revenue is recorded net of royalties and certain other costs that the Company incurs to bring the oil and gas into salable condition. The Company had one significant customer in 1995 and 1994 which comprised approximately 53% and 33% of gross oil and gas sales, respectively. Included in other revenues for 1995 is $250,000 received from the settlement of a lawsuit against a contractor for damages incurred while performing services on one of the Company's oil and gas properties. EARNINGS PER COMMON SHARE Net income (loss) per common share is based upon average outstanding common shares, adjusted for the stock split described in Note 8, during each year (4,383,183 shares in 1995 and 3,676,025 shares in 1994). Such calculations do not assume any conversion of the redeemable convertible preferred stock into common stock because determination of the conversion price is subject to future events. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts in the financial statements have been reclassified to conform to current year presentation. 2. NOTES PAYABLE Notes payable consisted of the following: DECEMBER 31 1995 1994 ---------------------- Note payable to bank $1,460,000 $1,460,000 Notes payable to investors 508,063 776,813 -------------------------- 1,968,063 2,236,813 Less current portion 1,968,063 1,636,000 -------------------------- Total long-term debt $ - $ 600,813 ========================== The Company has issued notes payable to various investors bearing an interest rate of 10% and a guaranteed oil and gas production payment equal to 20% of the outstanding principal amount per annum. The holders of the notes have extended the maturities of the notes to various dates in 1996, and all of the notes are secured by interests in the Company's oil and gas properties. The note payable to bank bears interest at prime plus 2.0%. At December 31, 1995 and 1994, the prime rate was 8.5%. Interest payments are due monthly, and the outstanding principal amount and all unpaid interest was due on October 15, 1995. In October 1995, the bank extended the maturity date of the note payable to April 15, 1996, which was also not paid and is currently delinquent. The Company was not in compliance with certain loan covenants at and subsequent to December 31, 1995, including restrictions on incurring additional debt and failure to make certain payments to outside vendors on a timely basis. While the bank has not taken any action regarding such noncompliance, the covenants have not been waived through the extended maturity date. As a result, the note is classified as current at December 31, 1995. The Company is engaged in discussions with the bank to further extend the maturity of the note. In 1990, the Company issued 107,300 shares of common stock, an option to purchase 70,833 additional shares of common stock at $6 per share and a recorded deed of trust on 20% of the Company's interest in its Vaca Tar Sands property to certain parties in exchange for those parties providing the collateral, 35,000 shares of Union Pacific Corp. common stock, for the Company's note payable to a bank. The consideration issued was valued at $300,000, its estimated fair market value, and was amortized as additional loan costs over five years. The 35,000 shares of Union Pacific Corp. common stock is held in a trust and had an approximate value of $2,310,000 at December 31, 1995. In the event of default on the bank note payable, the parties providing the collateral may take steps to recover from the Company the value of any collateral taken by the bank. The collateral agreements and the stock purchase option expired on September 11, 1995. In connection with the extension of the maturity date of the bank note payable, the collateral agreement was extended to April 15, 1996. No additional consideration was given for this extension. 3. RELATED PARTY TRANSACTIONS The Company has entered into agreements with another entity to sell gas and offer water disposal services at certain locations. The principal officer/shareholder of the Company is also the principal officer/shareholder of the other entity. Total revenue to the Company from these agreements was $257,024 and $174,294 in 1995 and 1994, respectively. At December 31, 1995 and 1994, the Company had a net receivable balance of $155,686 and $81,312, respectively, from the other entity. The Company's principal officer/shareholder previously held a net profit interest of 25% in the East Los Angeles and Vaca Tar Sands oil and gas properties. In 1994, the Company acquired the 25% net profit interest in the East Los Angeles property and 20% of the net profit interest in the Vaca Tar Sands property from the principal officer/shareholder. In exchange for these interests, the Company issued 450,129 shares of common stock valued at $103,421, which was the approximate cost of the properties to the principal officer/shareholder. At the date of the acquisition in 1994, the principal officer/shareholder owed the Company $31,516, which amount was forgiven as part of the purchase consideration. In 1987, the Company acquired certain interests in oil and gas properties from its principal officer/shareholder in exchange for 833,400 shares of the Company's common stock valued at $781,400, which was the approximate cost of the properties to the principal officer/shareholder. At December 31, 1995 and 1994, the Company had notes payable to relatives of the principal officer/shareholder totaling $53,563 and $86,819, respectively. At December 31, 1994, relatives of the principal officer/shareholder owed the Company $6,471 relating to the net revenue interests in certain oil and gas properties. No such amounts were owed at December 31, 1995. In December 1995, notes payable by the Company to a relative of the principal officer/shareholder totaling $30,000 were converted into 30.0 shares of the Company's redeemable convertible preferred stock aggregating $30,000 (see Note 4). The principal officer/shareholder of the Company has not taken a salary since inception of the Company. 4. REDEEMABLE CONVERTIBLE PREFERRED STOCK During 1994, the Company authorized 100,000 shares of preferred stock with a par value of $1,000 per share. At December 31, 1994, no shares of preferred stock had been issued. In December 1995, the Company issued 48.0 shares of its redeemable convertible preferred stock to three investors for cash totaling $48,000. Additionally, the Company issued 2.4 shares to an individual as a finders fees payment for services performed in 1995. Also during December 1995, 17 holders of notes payable totaling $454,750 converted such notes into 454.75 shares of the Company's redeemable convertible preferred stock. In connection with the issuance of the Company's redeemable convertible preferred stock in 1995, fourth quarter dividends amounting to $20,120 were declared and are payable as of December 31, 1995. The series of preferred stock issued, carrying an annual dividend of 30%, is callable by the Company at par at any time on notice to the holder. If the Company has not called the preferred stock for redemption by January 1, 1997, the holder may require the Company to redeem the preferred stock. The preferred stock is convertible into common stock, at the option of the holder, at a price equal to 80% of the price at which the common stock may be sold in an initial public offering of the common stock of the Company. 5. COMMON STOCK In June 1995, the Company issued 72,730 shares of common stock to a consulting company as payment for services that were performed in 1994 and 1995. The parties agreed that the stock issued had a value of $10,000 and that approximately 80% of the services were performed at December 31, 1994. Accordingly, at December 31, 1994, the Company had a payable balance of $8,000 relating to these services. 6. INCOME TAXES Deferred income taxes result from temporary differences in the recognition of revenues and expenses for financial accounting and tax reporting purposes. Net deferred income taxes were composed of the following: DECEMBER 31 1995 1994 ------------------------- Deferred income tax asset - operating loss carryforwards $1,450,000 $1,100,000 Deferred income tax liability - differences between book and tax basis of property (1,050,000) (950,000) Valuation allowance (400,000) (150,000) -------------------------- Net deferred income taxes $ - $ - ========================== As of December 31, 1995 and 1994, the Company had net operating loss carryforwards available in future periods to reduce income taxes that may be payable at those dates. For federal income tax purposes, net operating loss carryforwards amounted to approximately $3,740,000 and $2,750,000 for 1995 and 1994, respectively, and expire during the years 2001 through 2009. For state income tax purposes, net operating loss carryforwards amounted to approximately $1,950,000 and $1,480,000 for 1995 and 1994, respectively, and expire during the years 2004 through 2010. The Company is delinquent in filing its 1994 income tax returns. 7. COMMITMENTS The Company leases office space under a noncancelable operating lease agreement expiring June 30, 1996. The Company also leases equipment under month-to-month leases. Future minimum lease payments under the noncancelable operating lease are $3,240 for the period from January 1, 1996 through June 30, 1996. Total rental expense incurred under all lease agreements was $31,346 for the years ended December 31, 1995 and 1994. 8. EVENTS SUBSEQUENT TO DECEMBER 31, 1995 Effective April 9, 1996, the Company merged with Drake. The agreement provides that 10% of the Company's outstanding common stock after the merger will be issued to the Drake shareholders in exchange for the net assets of Drake. Subsequent to December 31, 1995, the Articles of Incorporation were amended to provide for an authorized capital of fifty million shares of common stock and, in connection with the merger with Drake, the outstanding shares, including those issued in connection with the acquisition, were split at the rate of 2.5505 to 1. 9. OIL AND GAS OPERATIONS (UNAUDITED) At December 31, 1995, the Company had interests in oil and gas properties that are principally located in Southern California. The Company does not own or lease any oil and gas properties outside the United States. COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES Costs incurred in oil and gas producing activities were as follows: YEAR ENDED DECEMBER 31 1995 1994 ---------------------- (IN THOUSANDS) (UNAUDITED) Property acquisition costs:		 Proved properties $ 90,289 $141,785 Exploration costs - - Development costs 346,585 613,611 ------------------------ Total costs $436,874 $755,396 ======================== ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES Reserve information presented below is based upon reports prepared by the Company's independent petroleum reservoir engineer. Reserve estimates are inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, these estimates are expected to change as future information becomes available. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. Net quantities of crude oil and natural gas for the Company as of the beginning and the end of the years ended December 31, 1995 and 1994, as well as the changes in proved reserves during such years, are set forth in the tables below: OIL AND GAS RESERVE DATA YEAR ENDED DECEMBER 31 1995 1994 --------------------------------- Oil Gas Oil Gas Bbls MCF Bbls	MCF ---------------------------------- (IN THOUSANDS) (UNAUDITED) Proved developed reserves, net: Beginning of year 3,495 5,329 3,468 11,078 Revisions of previous estimates (193) 314 (291) (5,718) Purchase of reserves in place - - 400 - Production (102) (112) (82) (31) ----------------------------------- End of year 3,200 5,531 3,495 5,329 =================================== Proved undeveloped reserves, net: End of year 27,614 - ================= Prior to 1995, the Company had made no expenditures toward developing its undeveloped Vaca Oil Sands reserves which were purchased in 1990. In 1995, the Company took steps toward the development of these reserves by obtaining a governmental permit allowing it to drill 120 wells on part of its acreage. A plan for the development of the property using the same enhanced recovery process presently in use on the producing Vaca Oil Sands wells has been deemed feasible by the Company's independent petroleum engineer. A significant uncertainty remains involving the financial ability of the Company to develop the reserves. The future costs for the complete development of the property are estimated by the independent petroleum engineer to be $66,650,000 with net cash flow before income taxes estimated to be $169,977,000 on an undiscounted basis or $69,879,000 discounted to present value at 10%. No reserve report was filed with any federal authorities or agencies during 1995 and 1994. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES The following tables set forth the computation of the standardized measure of discounted future net cash flows relating to proved reserves at December 31, 1995 and 1994, respectively. The standardized measure is the estimated future cash inflows from proved reserves less estimated future production and development costs and estimated future income taxes. Future cash inflows represent expected revenues from the production of proved reserves based on prices and any fixed determinable future escalation provided by contractual arrangements in existence at fiscal year end. Escalation based on inflation, federal regulatory changes and supply and demand is not considered. Estimated future production and development costs related to future production of reserves are based on historical costs. Such costs include, but are not limited to drilling development wells and installation of production facilities. Inflation and other anticipatory costs are not considered until the actual cost change takes effect. Estimated future income tax expenses are computed using the appropriate year-end statutory tax rates. Consideration is given to the effects of permanent differences, tax credits and allowances. A discount rate of 10% is applied to the annual future net cash flows after income taxes. The methodology and assumptions used in calculating the standardized measure are those required by FASB Statement No. 69. It is not intended to be representative of the fair market value of proved reserves. The valuations of revenues and costs do not necessarily reflect the amounts to be received or expended by the Company. In addition to the valuations used, numerous other factors are considered in evaluating known and prospective oil and gas reserves. The standardized measure of discounted future net cash flows relating to proved developed oil and gas reserves follows: DECEMBER 31 1995 1994 ---------------------- (IN THOUSANDS) (UNAUDITED) Future cash inflows $60,853 $63,719 Future production and development costs (29,699) (29,316) Future income tax expenses (8,727) (10,384) ----------------------- Future net cash flows 22,427 24,019 10% annual discount for estimated timing of cash flows (8,735) (9,062) ------------------------ Standardized measure of discounted future net cash flows $13,692 $14,957 ======================== For the calculations in the preceding table, estimated future cash inflows from estimated future production of proved developed reserves were computed using average year-end oil and gas prices. The average oil price, primarily based on posted prices, was $15.84 per barrel and $15.11 per barrel at December 31, 1995 and 1994, respectively, and the average gas price, a combination of spot gas prices and contract prices, was $1.84 per thousand cubic feet and $2.05 per thousand cubic feet at December 31, 1995 and 1994, respectively. CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS The changes in standardized measure for discounted future net cash flows relating to proved developed reserves follows: YEAR ENDED DECEMBER 31 1995 1994 ----------------------- (IN THOUSANDS) (UNAUDITED) Sales of oil and gas produced, net of production costs $ (620) $ (145) Net changes in prices and production costs (763) 3,275 Changes in estimated future development costs (332) (131) Development costs incurred during the period 347 614 Revisions of previous quantity estimates (1,252) (8,778) Purchase of reserves in place - 291 Accretion of discount 1,496 1,624 Net change in income taxes 1,022 2,873 Other, principally changes in timing of estimated production (1,163) (905) ----------------------- Net decrease (1,265) (1,282) Beginning of year 14,957 16,239 ----------------------- End of year $13,692 $14,957 ======================== PART III THIS INDEX IS OF THE EXHIBITS WHICH, IN ACCORDANCE WITH RULE 202 OF REGULATION S-T, ARE BEING FILED CONCURRENTLY IN PAPER FORM PURSUANT TO A CONTINUING HARDSHIP EXEMPTION GRANTED ON JUNE 19, 1996. ITEM 1 AND 2. INDEX TO EXHIBITS AND DESCRIPTION EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF EXHIBIT LOCATION NO. - ------- ---------------------- ------------ 2.1 Agreement of Merger and Plan of reorganization between Drake Investment Corp. and Geo Petroleum, Inc., dated November 1, 1995. 2.2 Certificate of Approval of Agreement of Merger between Drake Investment Corp. and Geo Petroleum, Inc., dated April 9, 1996. 2.3 Permit to issue stock in merger, dated March 26,1996. 3.1 Articles of Incorporation of Geo Petroleum, Inc., filed November 6, 1986. 3.1(a) First Amendment to Articles of Incorporation of Geo Petroleum, Inc., filed June 1, 1994. 3.1(b) Second Amendment to Articles of Incorporation of Geo Petroleum, Inc. filed November 7, 1995. 3.1(c) Third Amendment to Articles of Incorporation of Geo Petroleum, Inc. filed December 5, 1995. 3.2 By-laws of Geo Petroleum, Inc., dated November 30, 1986. 4.1 Corporate Resolution establishing Rights, Preferences and Privileges of Preferred Stock, Series A, dated August 23, 1994. 4.1(a) Form of Preferred Stock Certificate. 4.2 Form of Common Stock Certificate. 4.3 Form of Promissory Note, Deed of Trust, and Assignment of Oil Payment of Geo Petroleum, Inc. 10.1 Form of Oil and Gas lease covering various lands in Bandini oil field unit (exemplar), dated January 2, 1975. 10.2 Assignment of Overriding Royalty Interest (East Los Angeles/Bandini)dated February 1, 1979, from Irving Terry and Esther Terry to Wayne Hoylman and Helen W. Hoylman (exemplar). 10.3(a) Form of Oil and Gas lease covering various lands in Oxnard Field (Vaca Tar Sand Unit) (exemplar), dated April 24, 1934. 10.3(b) Pooling Agreement, Vaca Tar Sand Unit, Ventura County, California. 10.4 Form of Oil and Gas lease covering various lands in the Rosecrans Oil Field, Los Angeles County, CA. (exemplar), dated October 15, 1956. 10.5 Gas Sales Contract dated August 31, 1991, between Geo Petroleum Inc. and Capitan Resources, Inc. (East Los Angeles/Bandini fields). 10.6(a) Gas Sales Contract dated August 9, 1991 between Pacific Tube Company and Geo Petroleum, Inc. 10.6(b) Assignment of Gas Sales Contract, Geo Petroleum, Inc. To Capitan Resources, Inc. 10.7 Oil Sales Contract dated August 1, 1995 between Geo Petroleum, Inc. and Kern Oil & Refining (East Los Angeles/Bandini fields). 10.8(a) Oil Sales Contract dated November 22, 1994 between Geo Petroleum,Inc. and Texaco Trading and Transportation Inc. (Oxnard). 10.8(b) Oil Sales Contract dated July 5, 1995 between Geo Petroleum, Inc. and Unocal Corp. (Rosecrans field). 10.9 Oil Sales Contract between Geo Petroleum, Inc. and Kern Oil & Refining Co., dated July 10th, 1995 (Orcutt field). 10.10 Oil and Gas Lease between Gene Careaga, et al and Central California Oil Co.,(Geo's predecessor in interest) Orcutt Field) dated October 3, 1972. 10.11 Water Disposal Agreement between J.W. Hansen and Geo Petroleum,Inc. dated May 14, 1992. 10.12 Water Disposal Agreement between Geo Petroleum, Inc. and Capitan Resources, Inc. dated June 1, 1990. 10.13 Services and Drilling Master Contract (water disposal) between Unocal Corporation and Geo Petroleum, Inc. dated February 3, 1993. 10.14 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. 10.15 Letter Agreement between Geo Petroleum, Inc. and William Rich III, as attorney in fact, (Harriman interests) dated September 6, 1990. 10.16 Surface Use Agreement dated March 31, 1978, as amended, between Los Angeles and Salt Lake Railroad Company and Union Pacific Railroad Co. and Irving Terry. (East Los Angeles and Bandini fields). 10.17 Standard Industrial Lease dated January 1, 1979 between Irving Terry et ux. and Western Avenue Properties (East Los Angeles tank farm). 10.18 Deed from Terry Oil Company, Inc. dated February 5, 1979 to Western Avenue Properties, covering various rights and easements for oil operations (East Los Angeles/Bandini pipeline easements). 10.19 Assignment and Bill of Sale, Rosecrans Area Leases, by and between Kelt California, Inc., and Geo Petroleum, Inc., dated December 1, 1994. 10.20 Quitclaim Deed, Assignment of Leases and Bill of Sale, East Los Angeles and Bandini Oil Fields, by and between Western Avenue Properties, a California general partnership, and Geo Petroleum, Inc., dated January 19, 1990. 16.1 Consent of Ernst & Young LLP to use of their opinion in this document. 16.2 Consent of Deloitte & Touche LLP to use of their opinion in this document. 16.3 Consent of Sherwin D. Yoelin to use all information from his evaluation reports in this document. 	In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. Geo Petroleum, Inc. - ------------------- (Registrant) Date June 18, 1996 ------------- GERALD T. RAYDON By----------------------------------------- Gerald T. Raydon, President (signature)