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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED ___________________ [FEE REQUIRED]
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FROM AUGUST 1, 1996 TO DECEMBER 31, 1996 [NO FEE REQUIRED]
Commission File No. 2-67096
TRI-VALLEY CORPORATION
------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-061743
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(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification Number)
230 South Montclair Street, Suite 101, Bakersfield, California 93309
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(Address of Principal Executive Offices)
Registrant's Telephone Number Including Area Code: (805) 837-9300
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
----------------- -----------------------------------------
Common Electronic Bulletim Board NASDAQ
$0.01 Par Value Common Stock
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. Yes X No
-----
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this Form, and no disclosure will be contained
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB, if
applicable, or any amendment to this Form 10-KSB. X
---
The issuer's revenues for the most recent fiscal year were $879,247.
As of December 31, 1996, 14,102,473 common shares were issued and outstanding.
As of midnight March 26, 1997, 14,413,248 common shares were issued and
outstanding, and the aggregate market value of the common shares of Tri-Valley
Corporation held by non-affiliates on that date was approximately $1,406,250.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company held March 22, 1997, which was filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1996.
The total number of pages in this Form 10-KSB are 50.
The Index of Exhibits included in this Form 10-KSB is located at page 50.
<PAGE>
PART I
------
ITEM 1. BUSINESS
- --------------------
Tri-Valley Corporation (formerly Tri-Valley Oil & Gas Corporation), a Delaware
corporation, hereinafter referred to as "Company," "Registrant", "Parent" or
"Tri-Valley", has been engaged in the business of exploring, acquiring,
developing and dealing in prospective and producing petroleum and mineral
properties and interests therein. Precious metal activity has been carried on
directly by the Parent and oil and gas activities through its wholly owned
subsidiary, Tri-Valley Oil & Gas Company ("TVOG").
TVOG was organized as a California corporation in 1963. TVOG, the subsidiary,
effects exploration relationships with various major oil companies such as
Phillips Petroleum Company (Houston Regional Office), Occidental USA and
Texaco USA with whom it has co-ventured on a 50-50 basis to use their
proprietary data to generate exploration plays in the Sacramento Valley. This
relationship involves a TVOG submittal procedure wherein the major company has
a short period to accept or reject plays generated by TVOG in the area of
mutual interest ("AMI"). If it accepts, it joins up to 50% under the terms of
the agreement involved. TVOG is operator for these co-ventures.
Historically an oil and gas exploration and production company, emphasizing
the Sacramento Valley natural gas province, the Company added precious metals
exploration in fiscal 1987. The precious metal properties are located in
interior Alaska, known as the Richardson, Alaska property. Precious metal
activity has been an exploratory activity since inception. In February 1991,
Tri-Valley signed an agreement with the Moscow based Central Research
Institute of Geological Prospecting for Base and Precious Metals ("TsNIGRI")
to demonstrate their proprietary technology for evaluating large areas of
covered sub-Arctic terrain for precious metals on Tri-Valley's then 64 square
mile lode gold claim block at Richardson, Alaska. Based on the results of this
study, Tri-Valley management believes it to be prudent for the Company to
continue to develop the precious metals segment of the Company. At present,
this is only a prognostic resource and not a proven reserve.
----------------------------
CHANGE IN YEAR END
- ---------------------
On March 10, 1996, the board determined to change the Company's fiscal year
end from July 31 to December 31. This Form 10-KSB is being filed to show the
results of the five month transition period from August 1, 1996 to December
31, 1996, and are not necessarily indicative of operations for a full year.
<PAGE>
ITEM 1. BUSINESS (Continued)
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CHAPTER 11 PROCEEDINGS
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CURRENT YEAR DEVELOPMENTS
On January 30, 1996, Tri-Valley Corporation ("TVC") and its wholly owned
subsidiary, Tri-Valley Oil & Gas Co. ("TVOG") filed voluntary petitions in the
United States Bankruptcy Court (the "Bankruptcy Court") for the Eastern
District of California sitting in Fresno seeking to reorganize under Chapter
11 of the Federal Bankruptcy Code (the "Code"). The Chapter 11 cases of TVC
and TVOG were substantially consolidated under TVC, and TVC continues to file
consolidated tax and SEC reports.
On November 1, 1996, the Company and its wholly owned subsidiary were
dismissed from Chapter 11, having paid their secured and unsecured creditors
100 cents on the dollar.
CHAPTER 11 REORGANIZATION
- ---------------------------
In March, April and September 1995, the Company arranged borrowings of
$100,000, $400,000 and $120,000, respectively, totaling $620,000 from Frank
Agar, an individual of Midland Texas. Terms of the loans were on a six month
note with a 30 day call paying 10% annual interest and collateralized by all
of TVOG's producing gas properties in the Sacramento Valley of California.
The purpose of the loans was to consolidate increasingly short term
obligations and provide short term operating capital, enabling the Company to
accommodate two years of heavy losses due to production declines and gas
prices plunging to unforeseen 20 year lows.
At the time of the loans, the Company's management anticipated hooking up a
major discovery, and drilling an offset well to accelerate production
revenues. With this enhancement and some third party collateral, it appeared
that take out financing from a conventional institution could be arranged.
Permit delays and freezing of credit lines due to a merger between banks
eliminated that approach. As the six month financing period ended, the board
of directors met with the secured lender and worked out a 90 day standstill in
order to sell the reserves and preserve the stockholder equity above the
lender's interest.
Three substantial offers from capable parties were received. The lead offer
exceeded the loan principal by approximately $1 million and the Company
proceeded toward acceptance. One day before the close, the offerer abruptly
terminated citing several unacceptable conditions. The Company believed none
of the conditions were items that affected the economic value of the deal and
none that could not be handled in the closing and post closing stages.
<PAGE>
ITEM 1. BUSINESS (Continued)
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CHAPTER 11 REORGANIZATION (Continued)
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The Company immediately contacted its other two backup buyers. One could not
arrange financing before the foreclosure date. The other pulled out one day
before the foreclosure citing a "wait and see" position. On the day of the
foreclosure deadline, discussions with the secured lender promised to "work
something out", but were not attended by any forbearance in writing. The
Company obviously could not negotiate without such written forbearance and was
advised its only alternative was to file for protection under Chapter 11 of
the Federal Bankruptcy Code.
The initial intent of management upon opting for Chapter 11 was to protect the
Company's reserves and to submit a plan of reorganization which would, in the
best case scenario, allow for the payment of all Company obligations at 100
cents on the dollar. As a plan was being developed, management was introduced
to an investment group who agreed to pay off several of the Company's major
obligations, including the note to Frank Agar, and in return, the investors
would receive notes which could be, and, subsequent to year end, were
converted into newly issued restricted shares of Tri-Valley Corporation common
stock. This infusion of new capital and increased revenue from operations
enabled the Company to seek and obtain dismissal of the bankruptcy. Although
a reorganization plan was never filed, the Company's management was able to
meet its initial goals of protecting its reserves and paying all obligations
at 100 cents on the dollar.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ----------------------------------------
F. Lynn Blystone - 60 President and Chief Executive Officer 1974
- -----------------
Tri-Valley Corporation, and its wholly
owned subsidiary, Tri-Valley Oil & Gas
Company, Bakersfield, California
Mr. Blystone became president of Tri-Valley Corporation in October 1981, and
was nominally vice president from July to October 1981. His background
includes institution management, venture capital and various management
functions for a mainline pipeline contractor including the Trans Alaska
Pipe-line Project. He has founded, run and sold companies in several fields
including Learjet charter, commercial construction, municipal finance and land
development. He is also president of a family corporation, Bandera Land
Company, Inc., with real estate interests in Kern, Riverside and Orange
Counties, California. A graduate of Whittier College, California, he did
graduate work at George Williams College, Illinois, in organization
management. He gives full time to Tri-Valley.
<PAGE>
ITEM 1. BUSINESS (Continued)
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EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
- ----------------------------------------
Thomas J. Cunningham - 54 Treasurer and Chief Financial Officer 1997
- ----------------------
Tri-Valley Corporation, and its wholly
owned subsidiary, Tri-Valley Oil & Gas
Company, Bakersfield, California
Named as Tri-Valley Corporation's Treasurer and CFO on February 28, 1997, Mr.
Cunningham has over 25 years experience in corporate finance, public company
reporting, shareholder relations, and employee benefits. In his career, he
served as Plant Property and Equipment Supervisor, corporate wide, for Tesoro
Petroleum, as Controller and Assistant Secretary for Tucker Drilling Company,
and as Executive Vice President and Chief Financial Officer for Star
Resources. Most recently, he was a Management Consultant in finance,
marketing, and human resource matters including employee benefit plans. He
received his education in accounting and business administration from Angelo
State University, San Angelo, Texas.
ITEM 2. PROPERTIES
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The Company's headquarters and administrative offices are located at 230 South
Montclair Street, Suite 101, Bakersfield, California 93309. The Company
leases approximately 2,500 square feet of office space at that location for a
monthly rental of $1,350.
The principal properties of the Company consist of proven and unproven oil and
gas and precious metal properties, maps and geologic records related to
prospective oil and gas and precious metal properties, office and other
equipment. The oil and gas properties in which the Company holds interests
are primarily located in the area of central California known as the
Sacramento Valley. The Company contracts for the drilling of all its wells
and does not own any drilling equipment, bulk storage facilities,
transportation pipelines or refineries. The precious metal properties are
located in interior Alaska. They are comprised of leased claims on State
lands, leased patented claims, direct claims of the Company on State open
lands requiring annual assessment work and, in the case of State of Alaska
lands, an annual per claim fee. All fees are current, however, the Company
reduced its claim block, in Alaska, subsequent to November 30, 1995, to
concentrate on the most advanced targets.
During 1995, the Company borrowed a total of $620,000 from Frank Agar to
consolidate short-term obligations and provide short-term operating capital.
The loan is secured by all of TVOG's producing gas properties in the
Sacramento Valley of California. For full description see Item 1. "Business -
Chapter 11 Reorganization."
For the years ended July 31, 1992 through 1996, the Company retained the
services of an independent engineer for the purposes of estimating the
Company's net share of proved developed oil and gas reserves on all the
Company's properties.
<PAGE>
ITEM 2. PROPERTIES (Continued)
- ----------------------
For this year, the Company retained independent engineering of its reserves by
Cecil Engineering, a long established consulting engineering firm which does
SEC reserve calculations. The Company does not include any undeveloped
reserves in these reserve studies and, accordingly, only proved developed
reserves are reported herein. Price is a material factor in the stated
reserves of the Company. Higher prices generally permit longer recovery,
hence larger reserves at higher values. Conversely, lower prices generally
limit recovery, hence smaller reserves in that event. In the latter part of FY
95, gas prices plunged temporarily to 20 year lows that drastically downsized
Tri-Valley reserve values at July 31, 1995. The Company believes its July 31,
1995 reserve report, which was required under SEC Regulations to use this
price aberration in its calculations, is not representative of the current
values of its reserves, especially since the gas price has risen substantially
since July 1995 and a substantive new well has been put in production. This
was corroborated by the fact that Tri-Valley received several offers from
ready, willing and able buyers as much as 2.5 times the $835,771 represented
in the independent engineer's report for July 31, 1995.
The estimated future net recoverable oil and gas reserves from proved
developed properties as of December 31, 1996, and July 31, 1996, were as
follows:
<TABLE>
<CAPTION>
BBL MCF
--- ---------
<S> <C> <C> <C> <C>
December 31, 1996 Condensate 644 Natural Gas 2,003,135
July 31, 1996 Condensate 442 Natural Gas 1,934,339
</TABLE>
The process of estimating oil and gas reserve quantities is inherently
imprecise. Ascribing monetary values to those reserves, therefore, yields
imprecise estimated data at best.
Using year-end oil and gas prices and current levels of lease operating
expenses, the estimated present value of the future net revenue to be derived
from the Company's proved developed oil and gas reserves, discounted at 10%,
was $1,394,701 and $1,126,910 at December 31, 1996, and July 31, 1996,
respectively. Reference is made to the unaudited supplemental information of
the consolidated financial statements for further information on oil and gas
reserves and estimated values.
<PAGE>
ITEM 2. PROPERTIES (Continued)
- ----------------------
Registrant did not file estimates of total proved net oil or gas reserves
with, or included in reports to, any other Federal authority or agency since
the beginning of the last fiscal year, except for estimates filed with the
U.S. Bankruptcy Court. As yet, few reserve estimates are available for the
Company's precious metal properties as they were all acquired as geologic
plays with minimal testing and assay to date. TVC does not project any ore
reserve tons of its Richardson, Alaska property. However, TVC has recovered
over 3,000 raw ounces of gold from a 30,000 ton bulk sampling of one 5-acre
area. From trenching, core and TVC drilling, bulk sampling and assaying, the
Company has reason to believe that larger commercially recoverable reserves
may be exposed by its subsequent programs. The future recovery of raw ounces
on a per ton basis is purely speculative at this time.
The following table sets forth the net quantities of natural gas and crude oil
produced by Registrant during:
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
December 31, 1996 July 31, 1996
----------------- -------------
<S> <C> <C>
Natural Gas (MCF) 111,261 272,532
Crude Oil (BBL) 70 210
</TABLE>
The following table sets forth the average sales price and average production
(lifting) cost per unit of oil and gas produced by registrant during:
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
December 31, 1996 July 31, 1996
------------------ --------------
<S> <C> <C>
Natural gas (per MCF) $ 2.00 $ 2.00
Production costs
(per MCF) .10 .10
------------------ --------------
Net Profit per MCF $ 1.90 $ 1.90
================== ==============
</TABLE>
<PAGE>
ITEM 2. PROPERTIES (Continued)
- ----------------------
As of December 31, 1996, the Company had the following gross and net position
in wells and developed acreage:
Wells(2) Acres(1)
--------------- -----------------
Gross Net Gross Net
------ --------- ------- ------
13 3.576 2785.00 740.40
(1) "Gross" acres represent the total acres in which the Company has a
working interest; "net" acres represent the aggregate of the working interests
of the Company in the gross acres.
(2) "Gross" wells represent the total number of producing wells in which
the Company has a working interest or overriding royalty. "Net" wells
represent the number of gross producing wells multiplied by the percentages of
the working interests or royalty interests therein by the Company.
The following table sets forth the number of productive and dry exploratory
and development wells drilled by the Company during:
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
December 31, 1996 July 31, 1996
----------------- -------------
<S> <C> <C>
Exploratory
- -----------
Producing 1.0 1.0
Dry -0- -0-
----------------- -------------
Total 1.0 1.0
================= =============
Development
- -----------
Producing -0- -0-
Dry -0- -0-
----------------- -------------
Total -0- -0-
================= =============
</TABLE>
The above table, regarding net wells, recognizes only those wells in which the
Company holds an overriding royalty interest or an earned working interest.
Working interests to be earned at payout have not been included. Tri-Valley
changed its farmout terms in 1987 to allow for the Company to participate in
the completion of promoted prospects and thereby retain a larger working
interest in wells.
The Company deals with both industry and sophisticated individual partners on
its oil, gas and precious metals projects.
<PAGE>
ITEM 2. PROPERTIES (Continued)
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The Company continually screens geologically prospective acreage as to its
availability for leasing. Oil and gas and precious metals prospects developed
by the Company's own staff and by other sources are regularly evaluated.
The following table sets forth information regarding undeveloped acreage in
which the Company had an interest on December 31, 1996.
State Gross Acres Net Acres
----- ----------- ---------
California oil and gas 2,785.00 740.40
Alaska minerals 24,000.00 23,300.00
Some of the Company's undeveloped acreage is held pursuant to leases from
landowners. Such leases have varying dates of execution and generally expire
one to five years after the date of the lease.
The Company is obligated to pay varying annual delay rentals to the lessors on
such properties in order to prevent the leases from expiring. Mineral
properties claimed on open State land require minimum annual assessment work
of $100 worth per State of Alaska claim. The Company had no Federal claims,
1,678 State of Alaska claims, and 10 prospecting sites, totaling 66,281 net
acres as of July 31, 1995. Subsequent to November 30, 1995, the Company
reduced its claim block to 606 claims and prospecting sites totaling over
24,000 acres (over 37.5 square miles) to concentrate on the most advanced
targets. Expenditures on the Richardson, Alaska acreage have already carried
forward annual assessment requirements more than four years on all Alaska
claims.
ITEM 3. LEGAL PROCEEDINGS
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On January 30, 1996, Tri-Valley and its wholly owned subsidiary, Tri-Valley
Oil & Gas Co. filed voluntary petitions in the United States Bankruptcy Court
for the Eastern District of California sitting in Fresno seeking to reorganize
under Chapter 11 of the Federal Bankruptcy Code. Citing improved cash flow
due to new capital and increased production, the Company moved for and, on
November 1, 1996, was granted dismissal from any further Chapter 11
proceedings.
Since the petition date, the Company continued in possession of its properties
and, as debtors in possession, were authorized to operate and manage their
respective businesses and enter into all transactions (including obtaining
services, supplies and inventories) that each could have entered into in the
ordinary course of their business had their been no bankruptcy. Although each
debtor was authorized to operate its business as a debtor in possession, it
could not engage in transactions outside the ordinary course of business
without first complying with the notice and hearing provisions of the
Bankruptcy Code and obtaining Bankruptcy Court approval where necessary.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (Continued)
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An official unsecured creditor's committee (the "Creditors' Committee") was
appointed by the Office of the United States Trustee pursuant to Section 1102
of the Bankruptcy Code. The Creditors' Committee had the right to review and
object to certain business transactions and was expected to participate in the
negotiation of any plan of reorganization. The Company was required to pay
certain expenses of the Creditors' Committee, including counsel fees, to the
extent allowed by the Bankruptcy Court. No expenses were incurred as the
committee never met or retained counsel.
However, an Official Committee of Equity Security Holders ("OCESH") was formed
under the auspices of the United States Trustee ("UST") who comprised it in a
manner which gave a minority of dissident shareholders both quorum and a
majority. The OCESH retained counsel and filed numerous motions of
opposition and delay in an effort to promote the agenda of the dissidents. At
the dismissal, the Company was required to escrow $60,000 against possible
legal fees. Subsequent to the transition period end, Tri-Valley agreed to pay
approximately $29,000 in allowable legal fees to settle this issue.
The following lawsuits were settled prior to the dismissal of the Company from
Chapter 11 proceedings, and, to the best of management's knowledge, there are
no other material pending legal proceedings.
The lawsuit between the Company and Carl Mitchell for payment of advance
royalties allegedly due the Estate of John R. Mitchell on the Richardson,
Alaska property as well as a reimbursement of certain expenses allegedly
incurred for the benefit of the Richardson property. The Company settled this
claim in full for $80,000 during the fiscal year 1996 which is the amount
management believed it owed.
During fiscal 1996, a lawsuit between the Company and Helen L O'Brien, former
TVC\TVOG vice president and secretary-treasurer, concerning her claim for
additional compensation from the Employee Overriding Royalty Program was
settled. The settlement amount is not material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the first quarter of fiscal 1997, the Company submitted its Proxy
Statement and the Notice of Annual Meeting of Shareholders dated March 22,
1997 to all shareholders of record. The Proxy Statement contained four items
for the shareholders' vote at the fiscal 1997 meeting held on March 22, 1997.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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(Continued)
Management cast a minimum of 9,832,417 votes on all items and was pleased to
declare that all four items on the agenda were approved. The final number of
votes cast for each item on the agenda are as follows:
1. Re-elect management slate of directors:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C> <C> <C>
Earl H. Beistline 9,832,417 48,941
F. Lynn Blystone 9,985,617 54,741
Milton J. Carlson 9,832,417 48,941
Dennis P. Lockhart 9,855,352 26,006
Loren J. Miller 9,870,458 10,900
Terrance L. Stringer 9,832,417 48,941
</TABLE>
2. Re-appoint Brown Armstrong Randall & Reyes, Accountancy Corporation
as independent accountants:
9,787,554 shares for, out of 9,881,358 shares voting
(99.05% of votes cast)
3. Amend charter to increase common stock authority to 50,000,000 shares.
9,678,548 for, out of 9,881,358 shares voting
(97.9% of votes cast and 67.15% of the issued and outstanding shares)
4. Authorize management to transact other business at the meeting:
9,799,457 shares for, out of 9,881,318 shares voting
(99.17% of votes cast)
It was moved, seconded and carried that the actions and acts of the board of
directors and executive actions of the president since the last meeting be
ratified.
No matters were submitted to a vote during fiscal year ended July 31, 1996.
<PAGE>
PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND
- --------------------------------------------------------------------
RELATED SECURITY HOLDER MATTERS
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Shares of Tri-Valley Corporation stock have been traded in the
over-the-counter market. The following table shows the high and low bid and
asked prices of Tri-Valley stock for the quarterly periods indicated as
reported by the OTC Stock Journal:
<TABLE>
<CAPTION>
Bid Prices Asked Prices
----------- -------------
High Low High Low
----- ----------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996:
First Quarter $ .1563 $ .05 $ .1875 $ .15
Second Quarter $ .15 $ .03 $ .16 $ .14
Third Quarter $ .3125 $ .105 $ .50 $ .14
Fourth Quarter $ .4375 $ .13 $ .50 $ .438
</TABLE>
As of December 31, 1996, the Company estimates 850 shareholders in 40 states
and 4 foreign countries of record of Tri-Valley Corporation common stock.
The Company historically has paid no dividends, and at this time does not plan
to pay any dividends in the immediate future. While in bankruptcy, the Company
was prohibited from making cash dividend payments under its debtor in
possession financing. This no longer applies as the Company was dismissed from
Chapter 11 proceedings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------------------------------------------------------------------
CONDITION
- ---------
In its 34th year of business, the Company is primarily involved in exploration
and production of natural gas and gold. Fiscal 1996 saw Tri-Valley suffer
from severe cash flow constraints attributable to significant operating losses
stemming from a short-term plunge in gas prices to 20 year lows and declined
production from depleting zones.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------------------------------------------------------------------
CONDITION (Continued)
- ---------
On January 30, 1996, Tri-Valley Corporation and its wholly owned subsidiary,
Tri-Valley Oil & Gas Company filed voluntary petitions under Chapter 11 of the
Federal Bankruptcy Code seeking to reorganize under the Code. (The Company
successfully used the bankruptcy to buy time to raise new capital and, after
paying all creditors in full, was dismissed 10 months later on November 1,
1996). The Company has experienced significant operating losses in the last
three years stemming from production decline and a temporary plunge in gas
prices to 20 year lows and the costs of the Chapter 11. However, cash flow is
increasing primarily due to new wells beginning production and the reduction
in costs associated with the Chapter 11 proceedings. These reductions should
help the Company to be profitable in the next full year of operations. Both
production and price have since increased and management expects liquidity not
to be of any concern in the future. A substantial capital formation program
is under way which improves the financial strength of the Company.
Tri-Valley Oil & Gas, the wholly owned subsidiary of Tri-Valley Corporation
discovered two new large gas pools in the Tracy gas field. The new gas pools
were discovered by drilling the Pimentel No. 1-15. Based on the information
from this well, the Company is enthused about the opportunity for additional
locations on this property and is considering a 3-D seismic shooting campaign
to define optimum exploration and development programs for the horizons. The
revenue from this discovery will result in significant increased revenue when
it is placed into production in the next few months. The Company is further
encouraged about the deeper sub-thrust F zone prospect with a target in excess
of 300 billion cubic feet of gas and is looking forward to accelerating a
funding program for that exploration segment.
Subsequent to the fiscal year ending July 31, 1996, and prior to December 31,
1996, Tri-Valley's capital formation program has generated $3,000,000 in new
money from the sale of unregistered stock and participation in projects. As a
result, Tri-Valley was dismissed from Chapter 11 in the strongest capital
position in its corporate history. The Company has changed its fiscal year to
December 31 in order to reflect this strength on its audited financial
statements.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------------------------------------------------------------------
CONDITION (Continued)
- ---------
The Company's hydrocarbon reserves at December 31, 1996 were valued by
independent engineers at a net present value of $1,394,701, up from the July
31, 1996 value of $1,126,910, after the SEC mandatory 10% discount rate, and
also taking into consideration the effect of income tax. This value does not
appear on the balance sheet because accounting rules require discovered
reserves to be carried on the balance sheet at cost of obtaining them rather
then the actual future net revenue from producing them. Since Tri-Valley
arranges to be carried in the test wells on prospects, it incurs very little
costs and, therefore, very little value of discovered reserves appears on the
balance sheet despite the fact that reserves are a most important value of the
Company, especially from an industry point of view. Also not on the balance
sheet is significant value resulting from more than $1,500,000 in outside
investment by third parties into exploration on the properties adjacent to the
Company's Richardson, Alaska property. Such exploration is, in the Company's
opinion, a great value to the Company because it helps the Company further
define its exploration activities, and, as such, the Company benefits greatly
from the third party's expertise and effort. These values, in management's
opinion, constitute a significant part of the value of the Company even though
it is presently unrecognized, on the balance sheet. In the long term, the
Company's viability will be dependent on its ability to achieve successful
future operations.
Similarly, Tri-Valley has invested $1,680,000 (the equivalent of less than
4,500 ounces of gold at today's price) in its Richardson, Alaska lode gold
exploration project. A substantial part of this is represented by contract
payments of 300,000 shares of Tri-Valley preferred stock, convertible
one-for-one into common, to TsNIGRI, the Moscow based Central Research
Institute of Geological Prospecting for Base and Precious Metals. TsNIGRI has
performed over 1,000 line miles of ground traverses for geological,
geochemical, biochemical, hydrochemical sampling and geophysical profiles
throughout 225 square miles of Tri-Valley's claim block and surroundings.
Over 5,000 samples have been run through a variety of laboratory analysis
including over 1,000 samples assayed by Bondar-Clegg, an industry accepted
assay house. Physical gold has been found at 60 locations wide spread over a
20 mile swath on the claims and TsNIGRI has increased their forecast to over 2
million ounces of recoverable gold. At present, this is only a prognostic
resource and not a proven reserve. Since 1993, Tri-Valley has spent time
assimilating this vast amount of new data to define more specific targets for
field confirmation in the future.
Management believes it has demonstrated that the Company possesses a superior
mineral property which could reward the shareholders dramatically from
discovery success with little downside exposure at present.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------------------------------------------------------------------
CONDITION (Continued)
- ---------
BUSINESS REVIEW
Change in Year End
- ---------------------
The Company has changed the year end from July 31 to a December 31 fiscal year
end.
Natural Gas Activities
- ------------------------
Natural gas prices continued to firm which provided additional revenue to the
Company and stimulated investor support for the Company's projects and the
market price of its stock.
After two years of diligent effort, numerous industry, regulatory, geographic,
and mechanical obstacles were overcome to hook up the Webb Tract No. 1. A
major dry gas discovery, it began producing nearly 5 million cubic feet per
day from a dual completion. The gas is contracted to Tosco with 60% on a
fixed price and 40% on the spot market as agreed among the working interest
partners. The working interest partners have been cash called to drill the WT
No. 2 development well this spring followed by a WT No. 3 step out well.
Tri-Valley's natural gas discoveries and production raised it into the top 10%
of 193 California dry gas operators. Among U.S. petroleum companies ranked
annually by the Oil & Gas Journal, Tri-Valley rose to 195th place giving it a
total gain over the past eight years of 199 places.
The Company announced two new pool discoveries in its Pimentel 1-15 well in
the City of Tracy. The Company is methodically testing the extensive
indications of hydrocarbon bearing zones to complete the well for optimum
deliverability. The Company expects to drill multiple locations to develop
the discovery and is considering additional seismic shooting to further define
the field as well as enhance a deeper, larger target for drilling this year.
This new discovery will add significantly to the Company's reserves.
Working interest partners in the Martins-Severin production unit have been
cash called to drill the M-S 6 development well. In all, the Company expects
to substantially increase its reserves, production, and revenue from new wells
this fiscal year.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------------------------------------------------------------------
CONDITION (Continued)
- ---------
BUSINESS REVIEW (Continued)
Natural Gas Activities (Continued)
- ------------------------
Looking to the future, Tri-Valley Oil and Gas acquired for cash and Tri-Valley
Corporation stock, the extensive geologic and seismic data base of San Carlos
Oil and Gas Corporation which was assembled over nearly 50 years by San Carlos
president, Charles W. Hatten. While much of it is concentrated in California,
it also includes several other venues in North America, South America, the
Middle East and the Far East. Mr. Hatten, who built Great Basins Petroleum
into an international petroleum and minerals company has joined TVOG as a
consultant.
Telecommunications
- ------------------
After nearly a year of due diligence, Tri-Valley Corporation is preparing to
propose acquisition of 26 wireless communication licenses held by five
partnerships by exchanging TVC unregistered stock for partnership interests.
At this time, it appears to represent an attractive business opportunity that
would strengthen the Company's balance sheet, revenue sources, and access to
capital. A majority of the partners in the partnerships have voted to be
acquired by Tri-Valley in the event that Company proceeds with the
transaction.
Precious Metal Activities
- ----------------------------
The gold price has remained relatively stable as a physical use commodity and
does not seem to function significantly as a financial instrument to the
extent it did formerly. For instance, international crises do not affect the
price substantially. For some years, physical consumption demand has exceeded
the newly mined supplies, but selling forward by producers and sales into the
physical market from central bank hoards has capped any great price increase.
The Company has proposed a core and reverse circulation drilling program for
the three most advanced targets on its Richardson, Alaska lode gold
exploration project. The Company was actively seeking investment to fund the
program prior to the filing of Chapter 11 petitions. The purpose was to drill
prove reserves at the John Mitchell Lode at the Democrat Dike and drill infer
geologic resources at the Banner/Buckeye and Buck/Shamrock anomalies. Since
dismissal from Chapter 11 on November 1, 1996, the Company has received
expressions of interest and preliminary offers from several mining companies
to joint venture the further exploration and development of the property.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------------------------------------------------------------------
CONDITION (Continued)
- ---------
BUSINESS REVIEW (Continued)
Precious Metal Activities (Continued)
- ----------------------------
Additionally, the Company has been approached by several smaller mining
concerns and is considering continuing its own exploration using internal
funds. The Company is interviewing mining and mineral processing engineers
with a view toward completing the processing of approximately 100,000 tones of
partially crushed, partially processed ore from the John Mitchell lode.
Management believes that an agreement will be reached shortly as to these
discussions. Weather permitting, the Company will begin processing its
pre-crushed ore in the next few months. The anticipated revenue should be
significant enough to allow additional test drilling.
Financial Condition
- --------------------
The financial condition of the Company strengthened substantially in the
period as the Company completed the private placement of unregistered stock
and paid off its creditors 100 cents on the dollar. Only certain term
contracts are left to be serviced in accordance with their terms.
Accordingly, Tri-Valley Corporation and its subsidiary, Tri-Valley Oil & Gas
Company were dismissed from Chapter 11 on November 1, 1996.
Further, gas prices continued to firm which increased revenue. The Company
expects its sales contracts coupled with new production coming on line to
restore its operating revenues to secure levels.
The Company paid off the administrative, legal, and accounting costs of its
Chapter 11 and this offsets any net income despite increased revenues.
However, the balance sheet is greatly enhanced with healthy cash and
receivables balances. Further, the Company's stock is enjoying substantial
gains as recognition of its accomplishments, natural gas prices, and potential
growth.
Tri-Valley expects substantially increased capital infusion to continue from
the exercise of warrants issued to the private placement investors.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------------------------------------------------------------------
CONDITION (Continued)
- ---------
RESULTS OF OPERATIONS
Five Months Ended December 31, 1996, as Compared with Five Months Ended
- ------------------------------------------------------------------------------
December 31, 1995
- -------------------
REVENUES
Revenues continued to increase as natural gas prices firmed so that gas sales
in the period ending December 31, 1996 generated $470,300 versus $275,453 for
the same period in 1995. Overall revenue was $474,521 for the period ending
December 31, 1996 versus $292,666 for the same period in 1995.
COSTS AND EXPENSES
Costs and expenses were greater in the five months ending December 31, 1996,
due to substantial legal and accounting expenses in the general and
administrative section versus the same period in that category the previous
year. This resulted in a net loss before income taxes of $91,422 for the five
months ending December 31, 1996, versus a loss of $49,717 for the same period
the previous year.
The Company expects the legal and accounting costs to reduce in subsequent
quarters while prices appear to remain firm as it aims for profitable
operations. New production, from wells completed after December 31, 1995,
should result in substantial increased revenue.
The balance sheet showed dramatic improvement as the Company paid off its
obligations with proceeds from private placements of its unregistered stock.
Gross assets increased significantly in this period versus the comparable
period last year due to increase in cash and accounts receivable, this was due
to increased gas prices and private placement of stock. Further, stockholder
equity increased in the five months ending December 31, 1996. Additional
capital to increase the net worth is forthcoming from the exercise of warrants
attached to the private placement stock.
COMPARISON OF FISCAL YEARS ENDED JULY 31, 1996 AND 1995
- ----------------------------------------------------------------
REVENUES
Revenues from the sale of oil and gas more than doubled in fiscal year 1996
from $376,154 to $872,386. The increase was from substantial natural gas
production and natural gas price increases as well as $73,884 in one time
accruals from prior production. Production increased from a new well, the
Martins-Severin No. 5, and gas prices strengthened to propel revenues
considerably higher. The Company expects prices to remain firm well into 1997.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------------------------------------------------------------------
CONDITION (Continued)
- ---------
COMPARISON OF FISCAL YEARS ENDED JULY 31, 1996 AND 1995 (CONTINUED)
- ----------------------------------------------------------------
COSTS AND EXPENSES
Costs of the Chapter 11 and new financing drove G&A expenses to $764,799 in
fiscal year 1996 versus $498,421 in fiscal year 1995. All other categories
also increased as the Company wrote off non-productive leases and charged more
to operating expense and depreciation, depletion and amortization due to
increased production. The total expenses in fiscal year 1996 reached
$1,195,005 for a loss of $317,358 versus $737,621 and $306,844, respectively,
for the same period in fiscal year 1995.
Total assets increased slightly to $3,949,375 in fiscal year 1996, up $124,322
from $3,825,053 in fiscal year 1995. However, stockholder equity suffered from
the loss and declined to $1,400,167 in fiscal year 1996, down $313,458 from
$1,713,625 in fiscal year 1995.
The Company anticipates increased revenues for fiscal year 1997 along with
increased expenses as it makes an extraordinary effort to complete several
projects which it expects to fund from operations and new project capital from
the sale of equity.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
----------------------------
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Tri-Valley Corporation
Bakersfield, California
We have audited the accompanying consolidated balance sheets of Tri-Valley
Corporation as of December 31, 1996 and July 31, 1996, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for the five month transition period ended December 31, 1996 and
for the year ended July 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the consolidated financial position of Tri-Valley
Corporation at December 31, 1996 and July 31, 1996, and the results of its
consolidated operations and its cash flows for the five month transition
period ended December 31, 1996, and for the year ended July 31, 1996, in
conformity with generally accepted accounting principles.
BROWN ARMSTRONG RANDALL & REYES
ACCOUNTANCY CORPORATION
Bakersfield, California
February 28, 1997, except for Note 10
whose date is March 22, 1997
<PAGE>
<PAGE>
<PAGE>
The accompanying notes are an integral part of these financial statements.
TRI-VALLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Transition Fiscal Year
Period Ended Ended
December 31, July 31,
1996 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 894,365 $ 258,924
Accounts receivable, trade 278,110 277,586
Prepaid expenses 2,029 2,029
------------- -------------
Total Current Assets 1,174,504 538,539
------------- -------------
PROPERTY AND EQUIPMENT, NET
(Notes 1 and 2) 3,182,860 3,085,825
------------- -------------
OTHER ASSETS
Deposits 62,000 61,000
Investments in partnerships (Note 1) 20,682 (7,152)
Acquisition Costs (Note 1) 29,753 -
Goodwill (net of accumulated amortization
of $167,209 at December 31, 1996 and
$162,690 at July 31, 1996 (Note 1) 266,644 271,163
------------- -------------
Total Other Assets 379,079 325,011
------------- -------------
TOTAL ASSETS $ 4,736,443 $ 3,949,375
============= =============
</TABLE>
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
-------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES
Notes and contracts payable (Note 3) $ 11,042 $ 77,992
Trade accounts payable 57,566 226,057
Amounts payable to joint venture participants 484,008 505,690
Advances from joint venture participants 196,527 483,412
Due to related parties 196,142 204,392
Accrued expenses and other liabilities - 134,908
-------------- ---------------
Total Current Liabilities 945,285 1,632,451
-------------- ---------------
LONG-TERM PORTION OF NOTES AND
CONTRACTS PAYABLE
Notes payable 37,608 16,757
Convertible notes payable - 900,000
-------------- ---------------
Total Long-Term Portion of Notes and
Contracts Payable 37,608 916,757
-------------- ---------------
OTHER LIABILITIES
Investor Payable 662,680 -
-------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value:
25,000,000 shares authorized;
14,102,473 and 8,027,248 issued and
outstanding at December 31, 1996
and July 31, 1996, respectively 141,024 80,272
Less: Common stock in treasury, at cost,
156,925 shares (28,639) (28,639)
Capital in excess of par value 5,495,726 3,772,753
Accumulated deficit (2,517,241) (2,424,219)
-------------- ---------------
Total Shareholders' Equity 3,090,870 1,400,167
-------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 4,736,443 $ 3,949,375
============== ===============
</TABLE>
<PAGE>
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Transition Period Ended
December 31, Year Ended
1996 July 31, 1996
-------------- ---------------
<S> <C> <C> <C>
REVENUES
Sale of oil and gas $ 470,300 $ 872,386
Precious metals revenue - -
Interest income 4,221 6,861
-------------- ---------------
474,521 879,247
-------------- ---------------
COST AND EXPENSES
Leases sold, relinquished and impaired - 27,593
Oil and gas leases 82,481 259,673
General and administrative 424,576 764,799
Depreciation, depletion and amortization 23,448 53,453
Interest 35,438 89,487
-------------- ---------------
565,943 1,195,005
-------------- ---------------
LOSS BEFORE INCOME TAXES (91,422) (315,758)
TAX PROVISION (Note 5) 1,600 1,600
-------------- ---------------
NET LOSS $ (93,022) $ (317,358)
============== ===============
NET LOSS PER COMMON SHARE $ (.01) $ (.04)
============== ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,191,230 7,452,248
============== ===============
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital
in
Par Excess of Accumulated Treasury Preferred Options
Shares Value Par Value Deficit Stock Stock Outstanding
---------- -------- ----------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 7,337,248 $ 73,372 $3,284,653 $ (2,106,861) $ (28,639) $ 300,000 $ 191,000
Issuance of common stock
to investors 390,000 3,900 191,100 - - - (191,100)
Transfer of preferred
stock to common 300,000 3,000 297,000 - - (300,000) -
Net loss - - - (317,358) - - -
---------- -------- ----------- ------------- ---------- ----------- -------------
Balance at July 31, 1996 8,027,248 80,272 3,772,753 (2,424,219) (28,639) - -
Issuance of common stock
to investors 6,075,225 60,752 2,100,186 - - - -
Stock issuance costs - - (377,213) - - - -
Net loss - - - (93,022) - - -
---------- -------- ----------- ------------- ---------- ----------- -------------
Balance at December 31, 1996 14,102,473 $141,024 $5,495,726 $ (2,517,241) $ (28,639) $ - $ -
========== ======== =========== ============= ========== =========== =============
Stock
Shareholders'
Equity
---------------
<S> <C>
Balance at July 31, 1995 $ 1,713,625
Issuance of common stock
to investors 3,900
Transfer of preferred
stock to common -
Net loss (317,358)
---------------
Balance at July 31, 1996 1,400,167
Issuance of common stock
to investors 2,160,938
Stock issuance costs (377,213)
Net loss (93,022)
---------------
Balance at December 31, 1996 $ 3,090,870
===============
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements.
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
December 31, 1996 July 31, 1996
------------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (93,022) $ (317,358)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation, depletion and amortization 23,448 53,453
(Increase) decrease in accounts receivable (524) 17,784
Decrease (increase) in prepaid expenses - 8,812
Decrease (increase) in deposits (1,000) 39,241
Increase (decrease) in trade accounts payable (168,491) 100,687
Increase (decrease) in amounts payable to joint
venture participants and related parties (29,932) 86,521
(Decrease) increase in advances from joint
venture participants (286,885) (144,399)
(Decrease) increase in accrued expenses and
other liabilities (134,908) (7,742)
Impairment, dry hole and other disposals of
property and equipment - 27,593
------------------- ---------------
Net Cash Used by Operating Activities (691,314) (135,408)
------------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (145,718) (240,955)
Investment in partnerships (27,834) -
------------------- ---------------
Net Cash Used by Investing Activities (173,552) (240,955)
------------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt - 1,038,000
Principal payments on long-term debt (946,099) (635,317)
Proceeds from issuance of common stock 60,752 3,900
Investor payable 662,680 -
Additional paid in capital 1,722,974 -
------------------- ---------------
Net Cash Provided by Financing Activities 1,500,307 406,583
------------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 635,441 30,220
CASH AT BEGINNING OF YEAR 258,924 228,704
------------------- ---------------
CASH AT END OF YEAR $ 894,365 $ 258,924
=================== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 35,438 $ 85,487
=================== ===============
Income taxes paid $ 1,600 $ 1,600
=================== ===============
</TABLE>
<PAGE>
<PAGE>
TRI-VALLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 AND JULY 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
This summary of significant accounting policies of Tri-Valley Corporation is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's
management, which is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial statements.
Business Combinations
- ----------------------
The information contained in the financial statements and accompanying notes
is that of Tri-Valley Corporation with which the subsidiary company
(Tri-Valley Oil & Gas Co.) has been consolidated.
Fiscal Year Change
- --------------------
Effective March 10, 1997, the Company changed its fiscal year-end from July 31
to December 31. Accordingly, the consolidated financial statement include the
results of operations for the transition period, which are not necessarily
indicative of operations for a full year.
Results for the comparable prior year are summarized below.
<TABLE>
<CAPTION>
Five Months Ended
December 31, 1995
-------------------
<S> <C>
Revenues $ 292,666
Operating income (48,117)
Provision for income taxes (1,600)
Net loss (49,717)
Net loss per common share (.01)
</TABLE>
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Chapter 11 Reorganization
- ---------------------------
On January 30, 1996, Tri-Valley Corporation ("TVC") and its wholly owned
subsidiary, Tri-Valley Oil & Gas Co. ("TVOG"), filed voluntary petitions in
the United States Bankruptcy Court (the "Bankruptcy Court") for the Eastern
District of California sitting in Fresno seeking to reorganize under Chapter
11 of the Federal Bankruptcy Code (the "Code"). The chapter 11 cases of TVC
and TVOG were substantially consolidated under TVC, and TVC continues to file
consolidated tax and SEC reports.
During the process of developing a Plan, management was able to infuse the
Company with capital from new investors and increased production. The
Company, citing the influx of capital, filed a motion to be dismissed from
bankruptcy. On November 1, 1996, the court granted the motion and dismissed
the case. Prior to this dismissal, the Company operated as a
debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code. During
this period, all Company obligations were subject to compromise. These
financial statements, however, do not reflect any adjustment or disclosure
since no plan of reorganization was actually filed and/or confirmed by the
Bankruptcy Court, and all major obligations which were subject to compromise
were, subsequent to year end, paid 100 cents on the dollar.
History and Business Activity
- --------------------------------
Historically an oil and gas exploration and production company, emphasizing
the Sacramento Valley natural gas province, the Company added precious metals
exploration in fiscal 1987. The Company conducts its oil and gas business
primarily through its 33 year old wholly owned oil and gas subsidiary,
Tri-Valley Oil & Gas Company ("TVOG"). TVOG is engaged in the exploration,
acquisition and production of oil and gas properties. At present, the
precious metals exploration activities are conducted directly by the parent,
Tri-Valley Corporation ("TVC"). TVC has traditionally sought acquisition or
merger opportunities within and outside of petroleum and mineral industries.
Basis of Accounting
- ---------------------
The Company prepares its financial statements using the accrual basis of
accounting in conformity with generally accepted accounting principles
consistently applied. Oil and gas and mining activities are recorded using
the successful efforts method of accounting. See discussion below.
Substantially all of the Company's exploration, development and production
activities are conducted jointly with others and, accordingly, the financial
statements reflect only the Company's proportionate interest in such
activities.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Cash Equivalent and Short-Term Investments
- ----------------------------------------------
Cash equivalents consist of highly liquid debt instruments such as
certificates of deposit, commercial paper, and money market accounts purchased
with an original maturity date of three months or less.
Restricted Cash
- ----------------
The Company maintains four cash accounts which have been classified as
restricted cash. The operating account, with balances of $283,843 and $189,609
at December 31, 1996 and July 31, 1996, respectively, consist of the
production revenues received by the operating company for payment to the well
project investors minus any lifting costs. The Webb Pipeline account, having
balances of $298,626 and $0 at December 31, 1996 and July 31, 1996,
respectively, is required by the Webb-Tract project agreement to be used for
construction of the Webb-Tract pipeline. The Company also maintains a money
market account which is used to accumulate investors money for various
drilling projects. The account balances at December 31, 1996 and July 31,
1996, were $143,529 and $33,240, respectively. Finally, the Company was
required, while in bankruptcy, to maintain an escrow account totalling $60,000
for potential allowable legal fees payable to the counsel of the Committee of
Equity Security Holders. This dispute was settled subsequent to the balance
sheet date for approximately $29,000 consisting of legal fees and expenses.
Total restricted cash was $785,998 and $222,849 at December 31, 1996 and July
31, 1996, respectively. Unrestricted cash was $108,367 and $36,075 at December
31, 1996 and July 31, 1996, respectively.
Goodwill
- --------
The consolidated financial statements include the net assets purchased of
Tri-Valley Corporation's wholly owned subsidiary. Net assets are carried at
their fair market value at the acquisition date. The excess of acquisition
costs over the fair value of assets acquired is included in and has been
allocated to goodwill. Goodwill of $433,853 is being amortized on a
straight-line basis over 40 years. The carrying amount of goodwill is
evaluated periodically. Factors used in the evaluation include anticipated
cash flows from operating and non-operating mineral properties, as the
goodwill originally attached to extractive industry properties. Tri-Valley
Corporation has not established an allowance for the impairment of goodwill
which may be realized should the Company be acquired or merged with another
organization.
Acquisition Costs
- ------------------
The Company is preparing to propose acquisition of 26 wireless communication
licenses held by five partnerships by exchanging TVC unregistered stock for
partnership interests. The cost associated with this potential acquisition is
currently being capitalized. In the event the acquisition is not consummated,
these costs will be charged to operations.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Drilling Agreements/Joint Ventures
- ------------------------------------
Tri-Valley frequently participates in drilling agreements whereby it acts as
operator of drilling and producing activities. As operator, TVOG is
contingently liable for the activities of these ventures. The Company owns a
carried interest and/or overriding royalty interest in such ventures, earning
a working interest at payout.
Receivables from and amounts payable to these related parties (as well as
other related parties) have been segregated in the accompanying financial
statements. Transactions with these parties are within the ordinary course of
business.
Oil and Gas Property and Equipment (Successful Efforts)
- --------------------------------------------------------------
The Company accounts for its oil and gas exploration and development costs on
the successful efforts method. Under this method, costs to acquire mineral
interests in oil and gas properties, to drill and complete exploratory wells
that find proved reserves and to drill and complete development wells are
capitalized. Exploratory dry-hole costs, geological and geophysical costs and
costs of carrying and retaining unproved properties are expensed when
incurred. Depletion, depreciation and amortization of oil and gas producing
properties are computed on an aggregate basis using the units-of-production
method.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and/or Long-Lived Assets to be Disposed
of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. It establishes guidelines for determining
recoverability based on future net cash flows from the use of the asset and
for the measurement of the impairment loss. Impairment loss under SFAS No. 121
is calculated as the difference between the carrying amount of the asset and
its fair value. Any impairment loss is recorded in the current period in which
the recognition criteria are first applied and met. Under the successful
efforts method of accounting for oil and gas operations, the Company
periodically assessed its proved properties for impairments by comparing the
aggregate net book carrying amount of all proved properties with their
aggregate future net cash flows. The new statement requires that the
impairment review be performed on the lowest level of asset groupings for
which there are identifiable cash flows. In the case of the Company, this
results in a property by property impairment review.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Oil and Gas Property and Equipment (Successful Efforts) (Continued)
- --------------------------------------------------------------
The Company adopted SFAS No. 121 in the first quarter of 1996. Impairment loss
on the oil and gas properties is calculated as the difference between the
asset book carrying amounts and future undiscounted net cash flow projections,
giving consideration to recent prices, pricing trends and estimated reserve
quantities. These projections represent the Company's best estimate of fair
value based on the information available.
Upon the sale of oil and gas reserves in place, costs less accumulated
amortization of such property are removed from the accounts and resulting gain
or loss on sale is reflected in operations. Upon abandonment of properties,
the reserves are deemed fully depleted and any unamortized costs are recorded
in the statement of operations under leases sold, relinquished and impaired.
Mineral Property
- -----------------
All costs related to mineral properties with development potential, including
mineral claim acquisition costs and exploration and development expenditures
are deferred until the related mineral claims are abandoned, sold or achieve
commercial production. At that time, the costs will be either amortized
against income from future mining operations or written off. Grassroots
exploration costs are charged to expense as incurred.
The amount shown for mineral properties and development represents costs to
date and does not necessarily reflect present or future values. The full
recovery of the above mentioned deferred cost depends on a combination of
different factors, including (i) future metal prices (ii) the results of
future exploration, and discovery and development of ore reserves and (iii) to
the extent necessary, the procurement of additional capital and financing to
carry out future activities. The carrying amount of mineral properties,
proved and unproved, is evaluated at least annually and reduced if these
properties are impaired.
Capitalization of Interest
- ----------------------------
Interest cost is capitalized on construction and development programs until
placed into operation.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Properties and Equipment
- --------------------------
Properties and equipment are depreciated using the straight-line method over
the following estimated useful lives:
Office furniture and fixtures 3 - 7 years
Building 40 years
Leasehold improvements are amortized over the life of the lease (3 years).
Maintenance and repairs, which neither materially add to the value of the
property nor appreciably prolong its life, are charged to expense as incurred.
Gains or losses on dispositions of property and equipment other than oil and
gas are reflected in operations.
Concentration of Credit Risk
- -------------------------------
The Company sells oil, gas and natural gas liquids to various oil and gas
purchasers primarily in the northern California region. Credit is extended
based on an evaluation of the customer's financial condition, and generally
collateral is not required. Transactions with major customers are discussed
in detail in Note 6.
The Company places its temporary cash investments with high credit quality
financial institutions and limits the amount of credit exposure to any one
financial institution.
Derivative Financial Instruments and Fair Value Disclosure (SFAS 119)
- -----------------------------------------------------------------------------
In October 1994, the Financial Accounting Standards Board issued SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." The provisions of SFAS 119 are effective for financial
statements issued for years ending after December 15, 1994, for entities whose
total assets exceed $150 million. For those entities whose total assets are
less than $150 million at December 15, 1994, the provisions of SFAS 119 are
effective for years ended after December 15, 1995. SFAS 119 requires
disclosures about derivative financial instruments and other financial
instruments with similar characteristics. The provisions of this statement
should not have a significant effect on the Company's financial position since
the Company does not have any derivative financial instrument investments.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Fair Values of Financial Instruments
- ----------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
For the purpose of this statement, the carrying amounts of the Company's
instruments approximate their fair market values.
Income Taxes
- -------------
On January 1, 1994, the Company began accounting for income taxes in
accordance with SFAS No. 109 which became effective for the year ended July
31, 1994. There was no material affect on the financial statements upon
adoption. Pursuant to SFAS No. 109, income taxes are provided based on the
liability method of accounting. The provision for income taxes is based on
pretax financial accounting income. Deferred tax assets and liabilities are
recognized for future expected tax consequences of temporary differences
between income tax and financial reporting, and principally, relate to
differences in the tax bases of assets and liabilities and their reported
amounts, using enacted tax rates in effect for the year in which differences
are expected to reverse. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Net Income (Loss) Per Common Share
- ---------------------------------------
The calculation of net income/loss per common share is based on the weighted
average number of common stock shares outstanding during each period. The
effect of convertible preferred stock and warrants on the net income/loss per
share ratio is considered anti-dilutive and was not included in the
computation of earnings per common share for any of the years presented.
Reclassification
- ----------------
Certain amounts in the financial statements have been reclassified to be
consistent and comparable from year-to-year.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
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, liabilities and disclosures at the
date of the financial statements as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the depreciation, depletion and amortization
account balance. Depreciation, depletion and amortization is based on units of
production.
NOTE 2 - PROPERTY AND EQUIPMENT
------------------------
Oil and gas properties, and equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
------------- -------------
<S> <C> <C>
Oil and Gas - California
- --------------------------------------------------------------
Proved properties, net of accumulated
depletion of $250,396 at December 31,
1996 and $233,259 at July 31, 1996 $259,709 $ 276,846
Unproved properties 483,287 695,861
------------- -------------
Total Oil and Gas Properties 742,996 972,707
------------- -------------
</TABLE>
<PAGE>
NOTE 2 - PROPERTY AND EQUIPMENT
------------------------
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
------------- --------------
<S> <C> <C>
A summary of other property and
- ----------------------------------------
equipment follows:
- ----------------------------------------
Mining prospects 2,376,005 2,057,732
Land 11,281 11,281
Building net of accumulated
depreciation of $4,982 at
December 31, 1996 and $4,512
at July 31, 1996 40,142 40,612
Office equipment and leasehold
improvements net of accumulated
depreciation of $87,524 at
December 31, 1996 and $86,203 at
July 31, 1996 12,436 3,493
------------- --------------
Total Other Property and Equipment 2,439,864 2,113,118
------------- --------------
Property and Equipment (Net) $ 3,182,860 $ 3,085,825
============= ==============
</TABLE>
NOTE 3 - NOTES AND CONTRACTS PAYABLE
------------------------------
Long-term debt is summarized below:
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
------------- --------------
<S> <C> <C>
Note payable to National Bank of Alaska
dated August 27, 1992; secured by
property; payable in monthly
installments of $539 including interest.
Interest rate at 12.00%, December 31,
1996 and July 31, 1996. $ 22,076 $ 23,225
Note payable to Bandera Land Company
dated December 4, 1992; unsecured;
interest at 10.00%, December 31, 1996
and July 31, 1996; interest only payable
on outstanding balance. - 17,950
</TABLE>
<PAGE>
NOTE 3 - NOTES AND CONTRACTS PAYABLE (Continued)
------------------------------
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
------------ -------------
<S> <C> <C>
Note payable to Edgar Moss dated -
February 1, 1994; unsecured; no
stated interest. - 11,000
Note payable to Edgar Moss dated
February 22, 1995; unsecured; interest
at 7.20%, monthly interest payable
with principal balance due August 22,
1995. - 16,000
Note payable to Laurence B. Flood dated
September 16, 1995; unsecured; interest
at 10.00%, monthly interest payable
in cash or Tri-Valley Corporation
unregistered common stock at $.30 per
share, principal balance due September 16,
1999. 7,000 7,000
Note payable to Laurence B. Flood dated
July 19, 1995; unsecured; interest at 10.00%,
monthly interest payable in cash or Tri-
Valley Corporation unregistered common
stock at $.30 per share, principal balance
due July 19, 1999. 15,000 15,000
Note payable to Imperial Premium Finance,
Inc., dated June 9, 1996; secured by
contractual policy; interest at 12.00%;
payable in monthly installments of
$680 including interest. 4,574 4,574
Note payable to Mayal Inwald, dated
May 4, 1996; unsecured; interest at
10.00%; interest only on outstanding
balance with principal due May 4,
1998. Convertible to common stock.(*) - 150,000
</TABLE>
<PAGE>
NOTE 3 - NOTES AND CONTRACTS PAYABLE (Continued)
------------------------------
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
------------ --------------
<S> <C> <C> <C>
Note payable to Behrooz Sarafraz, dated
July 19, 1996; secured by property;
convertible to common stock, interest
at 10.00%; monthly interest payable
with principal due July 19, 1998.(*) - 750,000
------------ --------------
48,650 994,749
Less current portion 11,042 77,992
------------ --------------
Long-Term Portion of Notes and Contracts
Payable $ 37,608 $ 916,757
= ============ ==============
</TABLE>
(*) During the transition period, these notes were converted to common
stock in accordance with the terms of the original agreements (Note 10).
Maturities of long-term debt for the five years succeeding December 31, 1996
are as follows:
<TABLE>
<CAPTION>
December 31,
- ------------
<C> <S> <C>
1997 $11,042
1998 6,468
1999 28,468
2000 2,672
Thereafter -
-------
48,650
=======
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
----------------------------
The following is known to the Company to be the only beneficial owner of 5% or
more of the Company's outstanding common stock at December 31, 1996:
<TABLE>
<CAPTION>
Ownership
Shares Percentage
------ ----------
<S> <C> <C> <C> <C>
Dennis Vaughn 967,200 6.61%
</TABLE>
<PAGE>
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
----------------------------
Tri-Valley is a general partner and operator of the Tri-Valley Oil & Gas
exploration Programs 1971-1 and Martins-Severin Partnerships. Income derived
from these activities follows:
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
------------ --------------
<S> <C> <C> <C>
Partnership income, net of
expenses $ 89,742 $ 286,500
= ============ ==============
</TABLE>
On December 4, 1992, the Company entered into an agreement to borrow $15,000
from Bandera Land Company which is owned by F. Lynn Blystone and other members
of the Blystone Family. Interest at 10.0% is payable on the outstanding
balance with no stated due date. The balance outstanding at December 31, 1996,
and July 31, 1996 was $0 and $17,950, respectively.
On July 19, 1995, the Company entered into an agreement to borrow $15,000 from
Laurence B. Flood, a shareholder of the Company. Interest at 10% is payable
every two months in cash or Tri-Valley Corporation unregistered common stock
at $.30 per share at the sole discretion of the Company. The note matures on
July 19, 1999. Other terms of the agreement involve the following:
Principal amount convertible into TVC unregistered common stock at $.30
per share at any time.
Options on 15,000 shares of TVC unregistered shares at $.50 per share
exercisable through July 19, 1999.
TVC may force exercise of said options if the market quotes a bid price
of $1.00 per share or higher for at least twenty consecutive trading days.
Due to related parties of $196,142 and $204,392 at December 31, 1996 and July
31, 1996, respectively, consist of payroll payable to F. Lynn Blystone.
<PAGE>
NOTE 5 - INCOME TAXES
-------------
At December 31, 1996, the Company had available net operating loss
carryforwards for financial statements and federal income tax purposes of
approximately $2,300,000. These loss carryforwards expire between 1998 and
2012.
The components of the net deferred tax assets were as follows:
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
-------------- ---------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 782,000 $ 629,000
Statutory depletion carryforwards 660,000 620,000
-------------- ---------------
Total Deferred Tax Assets 1,442,000 1,249,000
-------------- ---------------
Valuation Allowance (1,442,000) (1,249,000)
-------------- ---------------
Net Deferred Tax Assets $ - $ -
============== ===============
</TABLE>
A full valuation allowance has been established for the deferred tax assets
generated by net operating loss carryforwards due to the uncertainty of future
utilization.
NOTE 6 - MAJOR CUSTOMER
---------------
Oil and Gas
- -------------
The Company received in excess of 10% of its revenue from various sources (oil
and gas sales and mineral royalties) as follows:
<TABLE>
<CAPTION>
Company
-------
A B C D Other
------- ------- ------- - -------
<S> <C> <C> <C> <C> <C>
Period Ended:
July 31, 1996 153,862 403,366 * * 109,810
December 31,
1996 95,408 * 187,492 * 9,701
</TABLE>
* Not a major source during the year.
All oil and gas sales have occurred in the northern California gas market.
<PAGE>
NOTE 7 - EMPLOYEE OVERRIDING ROYALTY PAYABLE
--------------------------------------
From time to time the Company negotiates an overriding royalty for the benefit
of its employees on plays it sells to third parties. The override is
effective only on producing properties. Distribution was originally determined
by the Tri-Valley CEO, but in 1992 and 1993, the compensation committee of the
Board of Directors of the Company determined shares of specific officers and
the CEO determined the rest. Subsequent to July 31, 1990, the Company and the
Company's employees participated in one of the major gas discoveries in the
Sacramento Valley in some years. From an old farmout, TVOG retained a 2% ORRI
and the employees retained a 1.5% ORRI.
Further gas discoveries in 1990, 1991, 1993 and 1995 temporarily increased the
employee override revenue. As industry conditions limited the amount of
interest the Company could keep in its deals, the employee override became a
less effective bonus program and management terminated it on new leases. An
employee/officer of the Company instituted legal proceedings to claim an
additional share of undistributed employer overriding royalty from the period
September 1991 to August 1992. This case was settled prior to the bankruptcy
filing for an amount immaterial to the Company (see Note 9).
The financial statements at July 31, 1995, included a liability for unpaid
employee overriding royalty of $77,884. This liability was eliminated in the
second quarter of fiscal year 1996, when the case was settled for a diminimus
amount. The program was terminated on January 1, 1996, with an effective date
of December 1, 1995 which resulted in addition to income of $73,884 in the
second quarter ending January 31, 1996.
NOTE 8 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
--------------------------------------------------------
The Company's operations are classified into two principal industry segments.
Following is a summary of segmented information for 1996:
<TABLE>
<CAPTION>
Oil and Precious
Gas Metals Total
--------- -------- ---------
<S> <C> <C> <C> <C>
Transition Period Ended
December 31, 1996
Total Revenues $470,300 $ - $470,300
========= = ======== =========
Income (Loss) Before Taxes $(91,422) $ - $(91,422)
Income Taxes 1,600 - 1,600
--------- -------- ---------
Net Income (Loss) $(93,022) $ - $(93,022)
========= = ======== =========
</TABLE>
<PAGE>
NOTE 8 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
--------------------------------------------------------
(Continued)
<TABLE>
<CAPTION>
Oil and Precious
Gas Metals Total
----------- ---------- -----------
<S> <C> <C> <C>
Property, Plant and
Equipment Additions, Net
of Deletions $ (212,575) $ 318,273 $ 105,698
=========== ========== ===========
Depreciation, Depletion and
Amortization $ 23,448 $ - $ 23,448
=========== ========== ===========
Total Assets $2,315,313 $2,421,130 $4,736,443
=========== ========== ===========
Year Ended July 31, 1996
Total Revenues $ 879,247 $ - $ 879,247
=========== ========== ===========
Income (Loss) Before Taxes $ (315,758) $ - $ (315,757)
Income Taxes 1,600 - 1,600
----------- ---------- -----------
Net Income (Loss) $ (317,358) $ - $ (317,358)
=========== ========== ===========
Property, Plant and
Equipment Additions, Net $ (305,288) $ 429,615 $ 124,322
=========== ========== ===========
Depreciation, Depletion and
Amortization $ 53,453 $ - $ 53,453
=========== ========== ===========
Total Assets $1,839,750 $2,109,625 $3,949,375
=========== ========== ===========
</TABLE>
NOTE 9 - COMMITMENTS
-----------
On May 2, 1992, the Board of Directors approved the following compensatory
stock option plans for directors, officers and employees:
Outside directors - awarded purchase options for up to 30,000 shares
each at $.50 per share and an additional 40,000 shares each at $.55 per share,
with an expiration date of September 14, 1995. The expiration date was
extended to September 14, 1997, by the Board of Directors.
Officer - awarded purchase options for up to 100,000 shares at $.50 per
share.
On August 29, 1992, the Board of Directors of Tri-Valley Corporation awarded
to Blystone, an employee, the option to purchase 100,000 shares of Tri-Valley
Corporation stock at $.50 per share with such option price increasing to $.60
per share on any outstanding options effective September 14, 1992, and to $.75
per share on any outstanding options on September 14, 1994. Any stock
purchases through this option will be unregistered common stock and subject to
Rule 144. The option will be effective only while Blystone is employed by
Tri-Valley and shall terminate in any event, September 14, 1997.
<PAGE>
NOTE 9 - COMMITMENTS (Continued)
-----------
The Company conducts its operations from leased facilities. The lease, which
is for one year, is classified as an operating lease and expires on July 1,
1997, with two one year options to renew.
The following is a schedule, by years, of future minimum rental payments
required under this lease as of December 31, 1996:
December 31, 1997 $ 14,850
==========
Litigation
- ----------
Unless otherwise noted, since the Company filed Chapter 11 petitions,
prosecutions of all pre-petition claims against the Company were stayed by the
automatic stay imposed by the Code. Management, during the bankruptcy
proceedings, was able to come to terms with all parties who, prior to the
filing of the petition, had a claim against the Company. In general, the
following lawsuits sought damages that, at the current standing, have been
resolved through settlement. Management does not know of any other pending or
threatening litigation which exists at this time.
The lawsuit pending between the Company and Carl Mitchell for payment of
advance royalties allegedly due the Estate of John R. Mitchell on the
Richardson, Alaska property as well as a reimbursement of certain expenses
allegedly incurred for the benefit of the Richardson property was settled for
$80,000. No other claim exists at the report date in relation to this subject.
Subsequent to December 31, 1995, a lawsuit between the Company and Helen L.
O'Brien, former TVC\TVOG vice president and secretary-treasurer concerning her
claim for additional compensation from the Employee Overriding Royalty Program
was settled (see Note 7). The settlement amount is not material to the
Company.
Contingencies
- -------------
The Company is subject to possible loss contingencies pursuant to federal,
state and local environmental laws and regulations. These include existing and
potential obligations to investigate the effects of the release of certain
hydro-carbons or other substances at various sites; to remediate or restore
these sites; and to compensate others for damages and to make other payments
as required by law or regulation. These obligations relate to sites owned by
the Company or others, and are associated with past and present oil and gas
operations. The amount of such obligations is indeterminate and will depend on
such factors as the unknown nature and extent of contamination, the unknown
timing, extent and method of remedial actions which may be required, the
determination of the Company's liability in proportion to other responsible
parties, and the state of the law.
<PAGE>
NOTE 10 - COMMON STOCK
-------------
On April 21, 1995, the Company's Board resolved that common stock of
Tri-Valley Corporation be increased from 15,000,000 shares authorized to
25,000,000 shares. On March 22, 1997, the shareholders unanimously ratified
this increase plus an additional 25,000,000 shares bringing the total shares
authorized to 50,000,000. In addition, the shareholders also approved a
decrease in the par value of each share from $0.01 to $0.001.
Prior to July 31, 1996, new investors contributed $900,000 in the form of
convertible notes payable. The first $150,000 was approved by the Bankruptcy
Court on April 25, 1996, secured by a note with a stated interest rate of 10%,
interest only for two years, with the outstanding balance due and payable at
the end of two years. The remaining $750,000 was also secured by a note with a
stated interest rate of 10%, interest only for two years, with the outstanding
balance due and payable in two years. During the transition period, both the
above loans were converted to Tri-Valley Corporation common stock. The lenders
converted the debt by using an exchange rate of one "unit" for each dollar due
and payable with each unit consisting of 2.5 shares of Tri-Valley common stock
plus four warrants. The warrants are transferable and consist of two "A"
warrants exercisable at $0.50 each, one "B" warrant exercisable at $1 each,
and one "C" warrant exercisable at $1.50 each. The warrants are required to be
exercised within one year from the issue or they become void.
During the transition period, the Company received an additional $1,080,001
through the issuance of stock. This investment consisted of 2,080,000 shares
sold at $0.25 per share, 100,001 sold at $0.45 per share, and 460,000 "units"
bought at $1 per unit. Each "unit" is identical to the "units" previously
mentioned. At the balance sheet date $2,620,000 "A" warrants, 1,435,000 "B"
warrants, and 1,368,000 "C" warrants remain to be issued.
In addition to the 110,000 "A" warrants which were exercised and issued prior
to December 31, 1996, 1,360,000 "A" warrants were exercised prior to December
31, 1996, at various prices for a total investment of $453,075, however, these
warrants will not be issued until after the shareholders meeting on March 22,
1997 (see Note 11).
NOTE 11 - INVESTOR PAYABLE
-----------------
As of the balance sheet date, the Company had an investor payable totaling
$662,680. This is money which the Company had received from investors for
common stock, which, as of the transition period's end, had not been issued.
The unissued common stock consists of 1,360,500 "A" warrants exercised at
various prices and 575,775 shares purchased at $0.45 per share. Subsequent to
the year end, 310,775 of the $0.45 stock was issued. The balance of these
warrants and shares will be issued subsequent to the shareholders meeting on
March 22, 1997.
<PAGE>
NOTE 12 - SUBSEQUENT EVENTS - SHAREHOLDER MEETING
-------------------------------------------
On March 22, 1997, Tri-Valley held its annual shareholders meeting in Santa
Barbara, California. The shareholders were presented with four items on the
proxy to vote on. Management's slate of directors, and increase of stock
authorization from 15 million to 50 million shares, the independent
accountants, and ratification of the boards past actions were the four items
on the ballot, and they were all unanimously approved by the shareholders.
<PAGE>
TRI-VALLEY CORPORATION
SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
The following estimates of proved oil and gas reserves, both developed and
undeveloped, represent interests owned by the Company located solely in the
United States. Proved reserves represent estimated quantities of crude oil
and natural gas which geological and engineering data demonstrate to be
reasonably certain to be recoverable in the future from known reservoirs under
existing economic and operating conditions. Proved developed oil and gas
reserves are reserves that can be expected to be recovered through existing
wells, with existing equipment and operating methods. Proved undeveloped oil
and gas reserves are reserves that are expected to be recovered from new wells
on undrilled acreage, or from existing wells for which relatively major
expenditures are required for completion.
Disclosures of oil and gas reserves which follow are based on estimates
prepared by independent engineering consultants for the transition period
ended December 31, 1996 and for the year ended July 31, 1996. Such analyses
are subject to numerous uncertainties inherent in the estimation of quantities
of proved reserves and in the projection of future rates of production and the
timing of development expenditures. These estimates do not include probable or
possible reserves.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the Securities and Exchange
Commission ("SEC"). Because of unpredictable variances in expenses and capital
forecasts, crude oil and natural gas price changes, largely influenced and
controlled by U.S. and foreign government actions, and the fact that the basis
for such estimates vary significantly, management believes the usefulness of
these projections is limited. Estimates of future net cash flows presented do
not represent management's assessment of future profitability or future cash
flows to the Company. Management's investment and operating decisions are
based upon reserve estimates that include proved reserves prescribed by the
SEC as well as probable reserves, and upon different price and cost
assumptions from those used here.
It should be recognized that applying current costs and prices and a 10
percent standard discount rate does not convey absolute value. The discounted
amounts arrived at are only one measure of the value of proved reserves.
<PAGE>
<PAGE>
Capitalized costs relating to oil and gas producing activities and related
accumulated depletion, depreciation and amortization at July 31 are as follow:
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
-------------- ---------------
<S> <C> <C>
Aggregate capitalized costs:
Proved properties $ 510,106 $ 510,106
Unproved properties 483,287 695,861
Accumulated depletion,
depreciation and amortization (250,396) (233,259)
-------------- ---------------
Net capitalized costs $ 742,997 $ 972,708
============== ===============
</TABLE>
The following sets forth costs incurred for oil and gas property acquisition,
exploration and development activities, whether capitalized or expensed,
during 1996:
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
-------------- --------------
<S> <C> <C>
Acquisition of producing
properties and productive
and non-productive acreage $ (212,574) $ 112,703
============== ==============
</TABLE>
Results of operations from oil and gas producing activities
- -------------------------------------------------------------------
The results of operations from oil and gas producing activities are as
follows:
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
-------------- ---------------
<S> <C> <C>
Sales to unaffiliated parties $ 470,300 $ 872,386
Production costs (82,481) (259,673)
Depletion, depreciation and
amortization (18,929) (42,607)
-------------- ---------------
368,890 570,106
Income tax expenses (125,412) (193,837)
-------------- ---------------
Results of operations from activities before
extraordinary items (excluding blending
operations, corporate overhead and
interest costs) $ 243,478 $ 376,269
============== ===============
</TABLE>
<PAGE>
<PAGE>
Changes in estimated reserve quantities
- -------------------------------------------
The net interest in estimated quantities of proved developed and undeveloped
reserves of crude oil and natural gas at December 31, and July 31, 1996, and
changes in such quantities during each of the years then ended, were as
follows:
<TABLE>
<CAPTION>
Transition
Period Ended Year Ended
December 31, 1996 July 31, 1996
------------------ --------------
Oil Gas Oil Gas
(BBL) (MCF) (BBL) (MCF)
----- ------------------ ----- --------------
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year 442 1,934,339 367 1,888,231
Revisions of previous
estimates 272 180,057 (97) (206,836)
Extensions, discoveries
and other additions - - 382 525,475
Production (70) (111,261) (210) (272,531)
----- ------------------ ----- --------------
End of year 644 2,003,135 442 1,934,339
===== ================== ===== ==============
Proved developed reserves:
Beginning of year 442 1,934,339 367 1,888,231
===== ================== ===== ==============
End of year 644 2,003,135 442 1,934,339
===== ================== ===== ==============
</TABLE>
Standardized measure of discounted future net cash flows relating to proved
- ------------------------------------------------------------------------------
oil and
- --------
gas reserves
- -------------
A standardized measure of discounted future net cash flows is presented below
for the transition period ended December 31, 1996 and the year ended July 31,
1996.
The future net cash inflows are developed as follows:
(1) Estimates are made of quantities of proved reserves and the future
periods during which they are expected to be produced based on year-end
economic conditions.
(2) The estimated future production of proved reserves is priced on the
basis of year-end prices.
(3) The resulting future gross revenue streams are reduced by estimated
future costs to develop and to produce proved reserves, based on year end cost
estimates.
(4) The resulting future net revenue streams are reduced to present value
amounts by applying a ten percent discount.
<PAGE>
Standardized measure of discounted future net cash flows relating to proved
- ------------------------------------------------------------------------------
oil and
- --------
gas reserves (Continued)
- -------------
Disclosure of principal components of the standardized measure of discounted
future net cash flows provides information concerning the factors involved in
making the calculation. In addition, the disclosure of both undiscounted and
discounted net cash flows provides a measure of comparing proved oil and gas
reserves both with and without an estimate of production timing. The
standardized measure of discounted future net cash flows relating to proved
reserves reflects income taxes.
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
-------------- ---------------
<S> <C> <C>
Future cash in flows $ 3,098,724 $ 2,989,560
Future production and
development costs (660,118) (608,480)
Future income tax expenses (259,282) (674,158)
-------------- ---------------
Future net cash flows 2,179,324 1,706,922
10% annual discount for
estimated timing of cash
flows 784,623 580,012
-------------- ---------------
Standardized measure of
discounted future net
cash flow $ 1,394,701 $ 1,126,910
============== ===============
</TABLE>
Changes in standardized measure of discounted future net cash flow from proved
- ------------------------------------------------------------------------------
reserve quantities
- -------------------
This statement discloses the sources of changes in the standardized measure
from year to year. The amount reported as "Net changes in prices and
production costs" represents the present value of changes in prices and
production costs multiplied by estimates of proved reserves as of the
beginning of the year. The "accretion of discount" was computed by
multiplying the ten percent discount factor by the standardized measure as of
the beginning of the year. The "Sales of oil and gas produced, net of
production costs" is expressed in actual dollar amounts. "Revisions of
previous quantity estimates" is expressed at year-end prices. The "Net change
in income taxes" is computed as the change in present value of future income
taxes.
<PAGE>
Changes in standardized measure of discounted future net cash flow from proved
- ------------------------------------------------------------------------------
reserve quantities (Continued)
- -------------------
<TABLE>
<CAPTION>
Transition
Period Ended
December 31, Year Ended
1996 July 31, 1996
-------------- ---------------
<S> <C> <C> <C>
Standardized measure -
beginning of period $ 1,126,910 $ 835,771
-------------- ---------------
Sales of oil and gas produced,
net of production costs (387,819) (612,715)
Revisions of estimates of reserves
provided in prior years:
Net changes in prices and
production costs (195,368) 985,846
Revisions of previous quantity
estimates 342,108 (390,920)
Extensions, discoveries and improved
recovery - 993,148
Accretion of discount 93,994 (94,823)
Net change in income taxes 414,876 (589,397)
-------------- ---------------
Net increase 267,791 291,139
-------------- ---------------
Standardized measure - end of period $1,394,701 $ 1,126,910
========== ================
</TABLE>
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
- -------------------------------------------------------
DISCLOSURE
- ----------
None.
<PAGE>
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------------
The section entitled "Approve Management's Slate of Directors" appearing in
the Registrant's proxy statement for the annual meeting of stockholders held
on March 22, 1997, sets forth certain information with respect to the
directors of the Registrant and is incorporated herein by reference. Certain
information with respect to persons who are or may be deemed to be executive
officers of the Registrant is set forth under the caption "Executive Officers
of the Registrant" in Part I of this report.
ITEM 10. EXECUTIVE COMPENSATION
- ----------------------------------
The section entitled "Compensation of Officers and Directors" appearing in the
registrant's proxy statement for the annual meeting of stockholders held on
March 22, 1997, sets forth certain information with respect to the
compensation of management of the Registrant and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- ---------------------------------------------------------------
AND MANAGEMENT
- ---------------
The sections entitled "Voting Securities and Rights" and "Approve Management's
Slate of Directors" appearing in the Registrant's proxy statement for the
annual meeting of stockholders held on March 22, 1997, set forth certain
information with respect to the ownership for the Registrant's Common Stock
and are incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------
(a) None.
<PAGE>
PART IV
-------
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND
- ------------------------------------------------------------
REPORTS ON FORM 8-K
- ----------------------
(a) EXHIBITS
--------
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K
----------------------
J. Bruce Carruthers II, director, resigned January 26, 1996.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 31, 1997 By:
F. Lynn Blystone
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates included:
March 31, 1997 By:
Dennis P. Lockhart,
Director
March 31, 1997 By:
Terrance L. Stringer,
Director
March 31, 1997 By:
Milton J. Carlson,
Director
March 31, 1997 By:
Earl H. Beistline,
Director
March 31, 1997 By:
Loren Miller,
Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> AUG-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 894,365
<SECURITIES> 0
<RECEIVABLES> 278,110
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,174,504
<PP&E> 3,182,860
<DEPRECIATION> 23,448
<TOTAL-ASSETS> 4,736,443
<CURRENT-LIABILITIES> 945,285
<BONDS> 0
0
0
<COMMON> 141,024
<OTHER-SE> (28,639)
<TOTAL-LIABILITY-AND-EQUITY> 4,736,443
<SALES> 470,300
<TOTAL-REVENUES> 474,521
<CGS> 82,481
<TOTAL-COSTS> 82,481
<OTHER-EXPENSES> 448,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,438
<INCOME-PRETAX> (91,422)
<INCOME-TAX> (1,600)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (93,022)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
