5
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 [FEE REQUIRED}
[] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-6119
TRI-VALLEY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-061743
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Identification Number)
Organization)
230 South Montclair Street, Suite 101, Bakersfield, California 93309
(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 None
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such 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 $915,519.
As of December 31, 1997 18,922,248 common shares were issued and outstanding.
As of midnight April30, 1998 19,061,248 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$14,198,233.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS
- - ------------------
Tri-Valley Corporation, a Delaware corporation, herein referred to as
"Company," "Registrant," "Parent" or "Tri-Valley", is in the business of
exploring, acquiring and developing prospective and producing petroleum and
precious metals properties and interests therein. The wholly owned
subsidiary, Tri-Valley Oil & Gas Company ("TVOG") operates the oil & gas
activities. The precious metals activity is operated directly by the Parent,
Tri-Valley Corporation.
TVOG primarily generates its own exploration prospects from internal data, and
also screens submittals from other geologists and companies. TVOG enters
exploration co-ventures from time to time with major industry companies such
as Phillips Petroleum Company (Houston Regional Office), Occidental USA and
Texaco USA. Typically, TVOG will enter agreements to look for potential
projects to co-venture with another major oil company within a geographic area
of mutual interest ("AMI"). When TVOG proposes a potential project, or
"play," within the AMI, it offers the play to its potential co-venturers. The
co-venturers must then accept or reject up to 50% of the play under the terms
of the agreement involved, within a limited time period. TVOG is the operator
of these co-ventures.
In 1997, we incorporated a new subsidiary for the Company - Tri-Valley Power
Corporation. We intend to convert part of our gas production into electricity
by means of co-generation facilities. This will allow the Company to become a
fully integrated gas/power producer. The deregulation of the utilities
industry in California will enable Tri-Valley Power Corporation to market the
electricity in California, the seventh largest economy in the world.
In 1987, the Company acquired precious metals claims on Alaska state lands.
The Company has conducted exploration operations on these properties and has
reduced its original claims to a block of approximately 28,160 acres (44
square miles). In 1989, the Company recovered approximately 3,000 rough
ounces of gold and sold approximately 1,650 pure smelted ounces from a 30,000
ton bulk sample on a five acre area, denominated the Richardson Mining
property. The Company has conducted trenching, core drilling, bulk sampling
and assaying activities to date and has reason to believe that mineralization
exists to justify additional exploration and development activities. However,
to date, the Company has not identified probable mineral reserves on these
properties. During 1997, the Company expensed exploration costs of $2,860,776
associated with its work on these claims, which the Company had treated as
capitalized costs prior to 1997. See Properties-Precious Metals.
The Company filed for Chapter 11 Reorganization in January of 1996. The
reason for the filing was the Company's inability to arrange long term
financing prior to the maturity of short-term loans. During 1996 the Company
was able to raise several million dollars through private placement of its
stock to pay all outstanding obligations in full. Consequently, the Company
was dismissed from Chapter 11 November 1996.
ITEM 1. BUSINESS (CONTINUED)
- - --------------------
In 1996, the Company changed its fiscal year end from July 31 to December 31.
Tri-Valley has 5 full time employees.
Current Year
The company drilled and completed three additional wells in 1997. Two of the
wells were put on line and began producing in the summer of 1997. The third
well has been waiting on completion of a pipeline which the Company
anticipates completing by early summer of 1998.
In 1997 the Company expensed previously capitalized costs on its Alaska
properties. See Management's Discussion and Analysis of Operations-Precious
Metals.
Executive Officers of the Registrant
- - ----------------------------------------
F. Lynn Blystone - 62 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 organizational
management. He devotes full time to Tri-Valley Corporation.
Thomas J. Cunningham - 55 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 Chief Financial Officer on
February 1997, Mr. Cunningham has over 25 years experience in corporate
finance, Securities and Exchange Commission public company reporting,
shareholder relations, and employee benefits. In his career he served as
Staff Accountant for Forest Oil, Accounting
ITEM 1. BUSINESS (CONTINUED)
- - --------------------
Supervisor, for Tesoro Petroleum, Controller and Assistant Secretary for
Tucker Drilling Company, and as Executive Vice President, Chief Financial
Officer and Director for Star Resources, Inc. Most recently he was a
Management Consultant in finance, marketing and human resource matters
including employee benefit planning. He received his education in accounting
and business administration from Angelo State University, Texas.
ITEM 2. PROPERTIES
- - --------------------
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. The
Company's oil and gas operations are conducted from office space leased by
TVOG in Carpinteria, California. 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.
Oil and Gas Operations
- - -------------------------
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 also leases exploration acreage in the San Joaquin and Santa Maria
Valleys. 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 company has retained the services of Cecil Engineering, 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 oil and gas properties at
December 31, 1997. 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, because higher prices permit relatively higher-cost reserves to be
produced economically. Higher prices generally permit longer recovery, hence
larger reserves at higher values. Conversely, lower prices generally limit
recovery to lower-cost reserves, hence smaller reserves. 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.
The estimated future net recoverable oil and gas reserves from proved
developed properties as of December 31, 1997, December 31, 1996 and July 31,
1996 were as follows:
BBL MCF
--- -------
December 31, 1997 Condensate 224 Natural Gas 1,903,154
December 31, 1996 Condensate 644 Natural Gas 2,003,135
July 31, 1996 Condensate 442 Natural Gas 1,934,339
<PAGE>
ITEM 2. PROPERTIES (CONTINUED)
- - ---------------------------------
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 $1,757,195 at December 31, 1997, $1,394,701 at December 31, 1996,and
$1,126,910 at July 31, 1996. Reference is made to the unaudited supplemental
information of the consolidated financial statements for further information
on oil and gas reserves and estimated values.
The following table sets forth the net quantities of natural gas and crude oil
produced by Registrant during:
Transition
Year Ended Period Ended Year Ended
December 31, 1997 December 31, 1996 July 31, 1996
----------------- ----------------- -------------
Natural Gas (MCF) 323,879 111,261 272,931
Crude Oil (BBL) 225 70 210
The following table sets forth the average sales price and average production
(lifting) cost per unit of oil and gas produced by registrant during:
Transition
Year Ended Period Ended Year Ended
December 31, 1997 December 31, 1996 July 31, 1996
----------------- ----------------- -------------
Natural gas (per MCF) $2.40 $2.00 $2.00
Production Costs
(per MCF) .30 .10 .10
Net Profit per MCF $2.10 $1.90 $1.90
As of December 31, 1997, the Company had the following gross and net position
in wells and developed acreage:
Wells (1) Acres (2)
---------- ---------
Gross Net Gross Net
----- --- ----- ---
10 4.7 2192 645
(1) "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 and/or royalty interests therein by the Company.
(2) "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.
ITEM 2. PROPERTIES (CONTINUED)
- - --------------------
The following table sets forth the number of productive and dry exploratory
and development wells drilled by the Company during:
Transition
Year Ended Period Ended Year Ended
December 31, 1997 December 31, 1996 July 31, 1996
----------------- ----------------- -------------
Exploratory
Producing 1.0 1.0 1.0
Dry -0- -0- -0-
Total 1.0 1.0 1.0
Development
Producing 2.0 -0- -0-
Dry -0- -0- -0-
Total 2.0 -0- -0-
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.
The Company deals with both industry and sophisticated individual investors on
its oil and gas projects.
The Company continually screens geologically prospective acreage as to its
availability for leasing. Oil and gas prospects developed by the Company's
own staff and by other sources are regularly evaluated.
The following table sets forth information regarding undeveloped oil and gas
acreage in which the Company had an interest on December 31, 1997.
State Gross Acres Net Acres
----- ----------- ---------
California 8719 3158
In 1997, the Company acquired the worldwide database of San Carlos Oil & Gas
Corporation which also contains numerous California well logs, maps and other
geological data for cash and Tri-Valley stock. In 1997, the Company acquired
rights to over 20,000 miles of California seismic data from GEOONE for cash
and Tri-Valley stock. These databases enable Tri-Valley to rapidly evaluate
both exploration prospects and producing properties in every onshore basin in
California.
ITEM 2. PROPERTIES (CONTINUED)
- - --------------------
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.
Precious Metals
- - ----------------
The precious metals properties are located in interior Alaska. They are
comprised of leased claims solely on State open lands requiring annual
assessment work, and 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.
The following table sets forth the information regarding the acreage position
the Company has under lease in Alaska as of December 31, 1997:
State Gross Acres Net Acres
----- ----------- ---------
Alaska 24,000.00 23,300.00
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 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 its claims.
In 1991, Tri-Valley entered into 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. TsNIGRI has performed over 1,000 line
miles of ground traverses for geological, geochemical, biochemical,
hydrochemical sampling and geophysical profiles throughout 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. Based on the results of
this study of the Company's then 64 square mile lode gold claim block,
Tri-Valley management believes it prudent for continued development of this
precious metals segment of the Company.
In 1998, the Company retained the services of M. J. Bright and Associates, an
independent registered geologist based in Denver, Colorado to analyze the data
from one core drill site and surrounding trench samples at the Democrat Dike,
to estimate probable reserves. M. J. Bright delineated 141,500 tons grading
0.11 ounces per ton (opt) or about 15,000 ounces, beginning at surface to 80
feet subsurface. An additional 12,000 ounces is indicated from an additional
20 feet depth of 108,500 tons also grading 0.11 opt. for a total of over
27,000 probable ounces. This occurs in an area approximately 1,200 feet long,
250 feet deep and 300 to 600 feet wide. This represents approximately 12
million tons projected to grade about 0.06 opt. for a possible resource of
about
<PAGE>
ITEM 2. PROPERTIES (CONTINUED)
- - --------------------
720,000 ounces. The Company is undertaking further review and exploration of
the potential resources in this area.
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.
Environmental
- - -------------
The Company's energy operations are subject to a number of regulations
relating to environmental protection, as are all exploration and production
companies. However, the Company believes it is in full compliance with all
environmental related rules and regulations.
ITEM 3. LEGAL PROCEEDINGS
- - ----------------------------
Tri-Valley Oil and Gas Co. v. ABA Energy Corporation et al, No. C97-02561
(Superior Court of Contra Costa County, California). TVOG is the plaintiff in
a lawsuit against a former officer, his company and TVOG's consulting
geologist seeking damages and imposition of a constructive trust regarding
certain disputed oil and gas properties. The amount, if any, which TVOG might
recover is not determinable as of the date of this report. The case is set
for trial in June 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ---------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
<PAGE>
- - ------
PART II
-------
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
- - ------------------------------------------------------------------------------
HOLDER MATTERS
- - ---------------
Shares of Tri-Valley Corporation stock are traded over-the-counter on the
Electronic Bulletin Board under the symbol "TRIL". 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>
1997:
First Quarter. $ 2.938 $ .68 $3.00 $ .72
Second Quarter $ 1.688 $ 1.13 $1.81 $1.31
Third Quarter. $ 1.50 $ 1.13 $1.56 $1.22
Fourth Quarter $ 1.313 $ .88 $1.38 $ .97
</TABLE>
Bid Prices Asked Prices
----------- -------------
High Low High Low
---- --- ---- ---
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
As of December 31, 1997, the Company estimates that its common stock was held
by 2000 shareholders of record 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. As of 3/20/98, the Company had
15 market makers for our stock. In 1997, trading volume exceeded 14.2 million
shares.
Recent Sales of unregistered Securities
- - -------------------------------------------
During the last quarter of 1997 428,500 "A" warrants were exercised at $.50
each, and 12,500 "B" warrants were exercised at $1.00 each. The exercise of
these warrants resulted in 441,000 new shares to be issued. These warrants
were exercised by 8 individuals. The warrants were originally issued prior to
1997 in privately negotiated transactions exempt from registration under
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated by
the Securities and Exchange Commission.
<PAGE>
- - ------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------------------------
Notice Regarding Forward-Looking Statements
- - ----------------------------------------------
This report contains forward-looking statements. The words, "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "could," "may,"
"foresee," and similar expressions are intended to identify forward-looking
statements. These statements include information regarding expected
development of the Company's business, lending activities, relationship with
customers, and development in the oil and gas industry. Should one or more of
these risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated.
Computer Uncertainties for the Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches.
Accordingly, as of December 31, 1997, the Company has examined the computer
software and hardware and is confident it will accommodate the "Year 2000"
issue. The funds spent on this investigation were minimal.
General
The company in its 35 year history has been primarily an exploration and
production company. However, in the last 11 years the Company has also been
involved in exploring gold mining claims in Alaska.
Natural Gas Activities
In 1997 Tri-Valley Oil & Gas Company, the wholly owned subsidiary of
Tri-Valley Corporation discovered two new large gas pools in the Tracy gas
field. Drilling the Pimentel No. 1-15 discovered the new gas pools. The well
is waiting for a pipeline hook-up. The Company has been negotiating with
Pacific Gas & Electric to acquire a portion of pipeline that is in place.
Hook-up is expected in the late spring of 1998
Two development wells were drilled and completed in 1997, the Martins-Severin
No. 6 and the Webb Tract No.2. These new wells added significantly to the
Company's cash flow.
The Company sells a percentage of production on a fixed contract price and the
remainder at the monthly spot price. This allows the Company to spread the
risk to both pricing scenarios. Tri-Valley is continuing a capital formation
program that it began last year. This will give the Company the liquidity
and flexibility to take advantage of opportunities for acquisitions as they
are discovered. The Company is aggressively looking for such acquisition
possibilities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
(CONTINUED)
Our hydrocarbon reserves were valued by independent engineers at a net present
value of $1,757,195 at December 31, 1997, an increase of $362,494 from
December 31, 1996 after taking into account 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 the cost of
obtaining them rather than the actual future net revenue from producing them.
Tri-Valley arranges to be carried in the test wells on prospects. Therefore,
it incurs very little cost and very little value of discovered reserves appear
on the balance sheet despite the fact that reserves are a very important value
to the Company,
Precious Metals Activity
The Company implemented a core and reverse circulation drilling program for
the three most advanced targets on its Richardson, Alaska lode gold
exploration project during the summer season of 1997. The purpose was to
drill for potential resources at the John Mitchell Lode at the Democrat Dike
and drill infer geologic resources at the Banner/Buckeye and Buck/Shamrock
anomalies. Due to drill breakdowns, the footage was insufficient to attain
the objectives. The Company intends to begin processing a bulk sample of
100,000 tons of its pre-crushed ore in the next few months.
The price of gold has fluctuated in the last 12 months from a high of $349.00
per oz. to a low of $278.30 per oz. However, the Company believes it can
produce the gold at a cost that will still allow a significant profit.
During 1997, the Securities and Exchange Commission staff reconsidered
existing accounting practices for mineral expenditures by United States junior
mining companies. They now interpret generally accepted accounting policy for
junior mining companies to permit capitalization of acquisition, exploration
and development costs only after persuasive engineering evidence is obtained
to support recoverability of these costs (ideally upon determination of proven
and/or probable reserves based upon dense drilling samples and feasibility
studies by a recognized independent engineer). Although the Company has
performed drilling samples and additional tests, management has chosen to
follow the more conservative method of accounting by expensing the previously
capitalized gold mineral costs as a cumulative effect of a change in
accounting principle in the consolidated statement of operations.
Telecommunications
- - ------------------
During 1997 Tri-Valley Corporation continued its' due diligence to try and
acquire the assets of five telecommunication partnerships. In May of 1997 the
Company loaned the partnership $125,000 dollars, which is secured by property,
on a 6 month note which was subsequently extended for an additional period of
time. This note is now in default. While the Company remains interested in
acquiring these assets, negotiations have been inactive for several months and
questions about the value of the assets under consideration have arisen. The
Company cannot presently estimate the value of these assets or the price, if
any, at which they could be acquired and has hired an independent appraiser to
furnish an estimate before proceeding.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
(CONTINUED)
Financial Condition
The Company continued to strengthen its financial condition during 1997 in
part due to the exercise of warrants. Further, the price of gas averaged
$2.15 per MCF for the year. New production from the Webb Tract No. 2, and the
Martins-Severin No. 6 aided in revenue increase.
As the Company is usually carried for its interest in test wells, the risk to
the company is greatly reduced.
Working capital as of December 31, 1997 was $889,889 up from $169,219 for the
year ending December 31, 1996. This increase was due in large part to
additional paid in capital from the exercise of warrants and increased cash
flow from new gas production.
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1997 and 1996
Balance Sheet
- - --------------
The Company had $2,778,592 cash on hand at December 31, 1997, compared to
$834,365 as of December 31, 1996. This was due to advances of $1,845,064 from
joint venture partners for their share of a well the Company, as Operator,
will drill. Receivables at December 31, 1997 are $696,758 compared to
$278,110 at December 31, 1996. This $418,648 increase is due to gas sales the
Company had made at the end of December 1997. Of the $696,758 receivables,
$605,431 is payable to joint interest partners. On December 31, 1997, the
Company held a note receivable of $125,000 for a loan the Company made to the
telecommunications partnership in May 1997. This loan is now in default.
Revenues
Sales of oil and gas increased to $753,466 for the period ended December 31,
1997 from $533,072 for the year ended December 31, 1996. This increase of
$220,394 was due to the additional production of the Webb Tract No. 2 and the
Martins-Severin No. 6. Other income of $66,167 is from operating overhead.
This had previously been included in Oil and Gas Sales. Gas prices remained
favorable during this last year and the Company anticipates prices holding
firm. Interest income increased from $4,221 for the year ended December 31,
1996 to $95,886 for the year ended December 31, 1997. This was due to the
Company depositing the increased cash on hand into higher interest bearing
accounts.
Costs and Expenses
Costs and expenses were greater in the year ended December 31, 1997 due to
increased lease operating expenses resulting from the Company's increased
drilling activity. General administrative expenses increased due to
additional staff and the President starting to again take full salary. He had
taken a reduced salary for the comparable period in 1996. Accounting fees
were greater due to the Company's attempted stock underwriting, which was
withdrawn due to market conditions. Depletion and Depreciation increased
significantly due to reserve evaluation by the reservoir engineer. Legal
expenses were up due to the lawsuit.See Item 3. Legal Proceedings.
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
<PAGE>
TRI-VALLEY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Brown Armstrong Randall & Reyes,
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . 15
-------
Consolidated Balance Sheets at December 31, 1997,
December 31, 1996 and July 31, 1996 . . . . . . . . . . . . . . . 16-17
-------
Consolidated Statements of Operations for the Year Ended
December 31, 1997, Transition Period Ended December 31, 1996
and the Year Ended July 31, 1996. . . . . . . . . . . . . . . . . 18
-------
Consolidated Statements of Shareholders' Equity for the
Year Ended December 31, 1997, the Transition Period Ended
December 31, 1996 and for the Year Ended July 31, 1996. . . . . . 19-20
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1997, the Transition Period Ended December 31, 1996
and for the Year Ended July 31, 1996. . . . . . . . . . . . . . . 21-22
-------
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 23-43
-------
Supplemental Information about Oil and Gas Producing Activities
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
- - ------------------------------------------------------------------- -------
</TABLE>
16
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, 1997, December 31, 1996 and July 31, 1996, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1997, 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, 1997, December 31, 1996 and July 31, 1996, and
the results of its consolidated operations and its cash flows for the year
ended December 31, 1997, the five month transition period ended December 31,
1996, and for the year ended July 31, 1996, in conformity with generally
accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, in 1997 the
Company changed its method of accounting for gold mineral exploration and
development costs.
BROWN ARMSTRONG RANDALL & REYES
ACCOUNTANCY CORPORATION
Bakersfield, California
March 6, 1998
TRI-VALLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
------------- -------------- ---------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . $ 2,778,592 $ 834,365 $ 258,924
Accounts receivable, trade. . . . . . . . . . 696,758 278,110 277,586
Note receivable . . . . . . . . . . . . . . . 125,000 -_______2,029 -
------------- --------------
Prepaid expenses. . . . . . . . . . . . . . . 2,029 2,029
------------- --------------
Total Current Assets . . . . . . . . . . . 3,602,379 1,114,504 538,539
------------- -------------- ---------------
PROPERTY AND EQUIPMENT, NET
(Notes 1 and 2)
821,614 3,182,860 3,085,825
------------- -------------- ---------------
OTHER ASSETS
Deposits. . . . . . . . . . . . . . . . . . . 100,000 62,000 61,000
Restricted cash - escrow account. . . . . . . - 60,000 -
Acquisition costs (Note 1). . . . . . . . . . 119,007 29,753 -
Investments in partnerships (Note 1). . . . . 8,421 20,682 (7,152)
Well Database (net of accumulated of $1,539
At December 31, 1997) . . . . . . . . . . . 93,111 - -
Goodwill (net of accumulated amortization
Of $178,055 at December 31, 1997, $167,209
At December 31, 1996, and $162,690 at
July 31, 1996 (Note 1). . . . . . . . . . . 255,798 266,644 271,163
Other . . . . . . . . . . . . . . . . . . . . 13,908
-------------
- -
------------- --------------
Total Other Assets . . . . . . . . . . . . 590,245 439,079 325,011
------------- -------------- ---------------
TOTAL ASSETS . . . . . . . . . . . . . . . $ 5,014,238 $ 4,736,443 $ 3,949,375
- - ------------------------------------------------ ============= ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
18
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Notes and contracts payable (Note 3). . . . . . . $ 90,667 $ 11,042 $ 77,992
Trade accounts payable. . . . . . . . . . . . . . 74,796 57,566 226,057
Amounts payable to joint venture participants . . 605,431 484,008 505,690
Advances from joint venture participants. . . . . 1,845,064 196,527 483,412
Due to related parties. . . . . . . . . . . . . . 96,532 196,142 204,392
Accrued expenses and other liabilities. . . . . . - - 134,908
-------------- -------------- ---------------
Total Current Liabilities. . . . . . . . . . . 2,712,490 945,285 1,632,451
-------------- -------------- ---------------
LONG-TERM PORTION OF NOTES AND
CONTRACTS PAYABLE
Notes payable . . . . . . . . . . . . . . . . . . 13,950 37,608 16,757
Convertible notes payable . . . . . . . . . . . . - - 900,000
-------------- -------------- ---------------
Total Long-Term Portion of Notes and
Contracts Payable. . . . . . . . . . . . . . 13,950 37,608 916,757
-------------- -------------- ---------------
OTHER LIABILITIES
Investor payable. . . . . . . . . . . . . . . . . 103,000 662,680 -
-------------- -------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 50,000,000 shares
authorized; 18,922,248, 14,102,473, and
8,027,248 issued and outstanding at
December 31, 1997, December 31, 1996 and
July 31, 1996, respectively. . . . . . . . . . . 18,922 141,024 80,272
Less: common stock in treasury, at cost,
156,925 shares . . . . . . . . . . . . . . . . . (28,639) (28,639) (28,639)
Capital in excess of par value. . . . . . . . . . 8,048,331 5,495,726 3,772,753
Accumulated deficit . . . . . . . . . . . . . . . (5,853,816) (2,517,241) (2,424,219)
-------------- -------------- ---------------
Total Shareholders' Equity . . . . . . . . . . 2,184,798 3,090,870 1,400,167
-------------- -------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY . . . . . . . . . . . . $ 5,014,238 $ 4,736,443 $ 3,949,375
- - ---------------------------------------------------- ============== ============== ===============
</TABLE>
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31,1996
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Sale of oil and gas . . . . . . . . . . . . $ 753,466 $ 470,300 $ 872,386
Interest income . . . . . . . . . . . . . . 95,886 4,221 6,861
Other income. . . . . . . . . . . . . . . . 66,167 - -
-------------- -------------- --------------
915,519 474,521 879,247
-------------- -------------- --------------
COST AND EXPENSES
Leases sold, relinquished and impaired. . . - - 27,593
Oil and gas leases. . . . . . . . . . . . . 145,443 82,481 259,673
General and administrative. . . . . . . . . 1,076,565 424,576 764,799
Depreciation, depletion and amortization. . 152,490 23,448 53,453
Interest. . . . . . . . . . . . . . . . . . 15,220 35,438 89,487
-------------- -------------- --------------
1,389,718 565,943 1,195,005
-------------- -------------- --------------
LOSS BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE . . . . . . . (474,199) (91,422) (315,758)
TAX PROVISION (Note 5) . . . . . . . . . . . . 1,600 1,600 1,600
-------------- -------------- --------------
NET LOSS BEFORE CHANGE IN
ACCOUNTING PRINCIPLE . . . . . . . . . . . . (475,799) (93,022) (317,358)
CHANGE IN ACCOUNTING PRINCIPLE
Cumulative effect of change in gold mineral
Exploration and development costs method
of accounting (Note 1) . . . . . . . . . . (2,860,776) - -
-------------- -------------- --------------
NET LOSS . . . . . . . . . . . . . . . . . . . $ (3,336,575) $ (93,022) $ (317,358)
============== ============== ==============
NET LOSS PER COMMON SHARE. . . . . . . . . . . $ (.19) $ (.01) $ (.04)
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING . . . . . . . . . . . . . . . . . 17,261,723 10,191,230 7,452,248
- - ---------------------------------------------- ============== ============== ==============
</TABLE>
(Continued on next page)
19
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in
Excess of Accumulated Treasury Preferred Options Shareholders'
Shares Par Value Par Value Deficit Stock Stock Outstanding Equity
----------- ------------ ----------- ------------ --------- --------------- ------------- -----------
<S> <C> <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 $1,713,625
----------- ------------ ----------- ------------ --------- --------------- ------------- -----------
Issuance of
common stock
to investors. . 390,000 3,900 191,100 - - - (191,000) 3,900
Transfer of
preferred stock
to common . . . 300,000 3,000 297,000 - - (300,000) - -
Net loss . . . . (317,358)
-----------
- - - (317,358) - - -
----------- ------------ ----------- ------------ --------- --------------- -------------
Balance at
July 31, 1996 . 8,027,248 80,2725 3,772,753 (2,424,219) (28,639) 1,400,167 - 1,400,167
----------- ------------ ----------- ------------ --------- --------------- ------------- -----------
Issuance of
common stock
to investors. . 6,075,225 60,752 2,100,186 - - - - 2,160,938
Stock issuance
costs . . . . . - - (377,213) - - - - (377,213)
Net loss . . . . - - - (93,022) - - - (93,022)
- - ---------------- ----------- ------------ ----------- ------------ --------- --------------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
20
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in
Excess of Accumulated Treasury Preferred Options Shareholders'
Shares Par Value Par Value Deficit Stock Stock Outstanding Equity
---------- ------------- ----------- ------------ --------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996. . . . . 14,102,743 141,024 5,495,726 (2,517,241) (28,639) - - 3,090,870
---------- ------------- ----------- ------------ --------- -------------- ------------- ------------
Issuance of
common stock
to investors. 4,819,505 48,198 2,890,867 - - - - 2,939,065
Stock issuance
costs . . . . - - (508,562) - - - (508,562)
Change due to
decrease in
par value. . - (170,300) 170,300 - - - - -
Net loss . . . - - - (3,336,575) - - - (3,336,575)
---------- ------------- ----------- ------------ --------- -------------- ------------- ------------
Balance at
December 31,
1997. . . . . 18,922,248 $ 18,922 $8,048,331 $(5,853,816) $(28,639) $ - $ - $ 2,184,798
- - -------------- ========== ============= =========== ============ ========= ============== ============= ============
</TABLE>
(Continued on next page)
21
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (3,336,575) $ (93,022) $ (317,358)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation, depletion and amortization
Stock issued for services rendered . . . . . . . 152,490 23,448 53,453
Impairment, dry hole and other disposals of. . . 133,000 147,938 -
property and equipment
Changes in operating capital:. . . . . . . . . . 2,860,776 - 27,593
(Increase) decrease in accounts receivable
(Increase) decrease in prepaid expenses. . . . . (418,648) (524) 17,784
(Increase) decrease in deposits. . . . . . . . . - - 8,812
Increase (decrease) in trade accounts payable. . (38,000) (1,000) 39,241
Increase (decrease) in amounts payable to. . . . 17,231 (168,491) 100,687
joint venture participants and related parties
Increase (decrease) in advances from joint . . . 21,813 (29,932) 86,521
venture participants
Increase (decrease) in accrued expenses and. . . 1,648,537 (286,885) (144,399)
other liabilities
Net Cash (Used) Generated by Operating Activities. . . . - (120,845) 27,593
-------------- -------------- ---------------
1,040,624 (529,313) (135,408)
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable. . . . . . . . . . . . . . . . . . . (125,000) - -
Capital expenditures . . . . . . . . . . . . . . . . (824,944) (145,718) (240,955)
Investment in partnerships . . . . . . . . . . . . . 12,257 (27,834) -
-------------- -------------- ---------------
Net Cash Used by Investing Activities. . . . . . . . . . (937,687) (173,552) (240,955)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash - escrow account . . . . . . . . . . 60,000 (60,000) -
Proceeds from issuance of debt . . . . . . . . . . . - - 1,038,000
Principal payments on long-term debt . . . . . . . . (55,476) (946,099) (635,317)
Proceeds from issuance of common stock . . . . . . . 48,185 58,122 3,900
Investor payable . . . . . . . . . . . . . . . . . . 103,000 662,680 -
Additional paid in capital . . . . . . . . . . . . . 2,060,700 1,806,941 -
Stock issuance costs . . . . . . . . . . . . . . . . (375,119) (243,338) -
-------------- -------------- ---------------
Net Cash Provided by Financing Activities. . . . . . . . 1,841,290 1,278,306 406,583
-------------- -------------- ---------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . 1,944,227 575,441 30,220
CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . 834,365 258,924 228,704
-------------- -------------- ---------------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . $ 2,778,592 $ 834,365 $ 258,924
- - -------------------------------------------------------- ============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
22
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
------------- ------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . $ 15,220 $ 35,438 $ 85,487
============= ============= ==============
Income taxes paid. . . . . . . . . . . . . . . . $ 1,600 $ 1,600 $ 1,600
============= ============= ==============
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Issuance of common stock for services rendered . $ 133,000 $ 147,938 $ -
Issuance of debt to satisfy stock issuance cost. 133,443 - -
Issuance of common stock for well database . . . 12,500 - -
Conversion of debt to common stock . . . . . . . 22,000 - -
Conversion of investor payable to common stock . 662,680 - -
Increase in paid in capital due to change in par
value of common stock. . . . . . . . . . . . . 170,300 - -
- - ---------------------------------------------------- ------------- ------------- --------------
</TABLE>
48
TRI-VALLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, DECEMBER 31, 1996 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.
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 upon
probable and proven reserves for mining and proven reserves for oil and gas
properties. Depletion will be provided on mining properties when they become
commercial.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Fiscal Year Change
- - --------------------
Effective March 10, 1997, the Company changed its fiscal year-end from July 31
to December 31. Accordingly, the consolidated financial statements 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 transition period are summarized below.
<TABLE>
<CAPTION>
Twelve Months Five Months
Ended Ended
December 31, 1996 December 31, 1995
Unaudited Unaudited
------------------- -------------------
<S> <C> <C>
Revenues . . . . . . . . . $ 544,249 $ 262,666
Operating loss . . . . . . (196,040) (48,117)
Provision for income taxes (1,600) (1,600)
Net Loss . . . . . . . . . 197,640 (49,717)
Net Loss Per Common Share. (.01) (.01)
</TABLE>
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.
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. 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 paid 100 cents on the dollar.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
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 34 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 in the form of joint venture agreements with others
and, accordingly, the financial statements reflect only the Company's
proportionate interest in these joint ventures.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
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
the licenses. The costs associated with the potential license acquisitions are
currently being capitalized. In the event the acquisition is not consummated,
these costs will be charged to operations.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Oil and Gas Property and Equipment (Successful Efforts) (Continued)
- - --------------------------------------------------------------
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.
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 discounted 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.
Gold Mineral Property
- - -----------------------
In prior years, all costs related to mineral properties with economic
development potential, including mineral claim acquisition costs and
exploration and development expenditures were deferred until the related
mineral claims achieved commercial production. At such time, the costs would
be amortized against income from future mining operations. All grassroots
exploration costs, which are costs incurred while probing for prospective
developmental sites, are charged to expense as incurred.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Gold Mineral Property (Continued)
- - -----------------------
During 1997, the Securities and Exchange Commission staff reconsidered
existing accounting practices for mineral expenditures by United States junior
mining companies. They now interpret generally accepted accounting policy for
junior mining companies to permit capitalization of acquisition, exploration
and development costs only after persuasive engineering evidence is obtained
to support recoverability of these costs (ideally upon determination of proven
and/or probable reserves based upon dense drilling samples and feasibility
studies by a recognized independent engineer). Although the Company has
performed drilling samples, and an independent engineer has deemed the gold
properties contain profitable reserves in excess of property costs incurred
through December 31, 1997, management has chosen to follow the more
conservative method of accounting by expensing the previously capitalized gold
mineral costs as a cumulative effect of a change in accounting principle in
the consolidated statement of operations.
Capitalization of Interest
- - ----------------------------
Interest cost is capitalized on construction and development programs until
placed into operation.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
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 or periods
presented.
Reclassification
- - ----------------
Certain amounts in the financial statements have been reclassified to be
consistent and comparable from year-to-year.
Accounting Pronouncements
- - --------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its components in the
Company's financial statements. Comprehensive income includes all changes in
the Company's equity except investments by and distributions to owners and
includes, among other things, foreign currency translation adjustments. In
June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments be
included in interim reports issued to shareholders. Both these statements are
effective for financial statements for periods beginning after December 15,
1997. As both SFAS Nos. 130 and 131 establish standards for reporting and
display, the Company does not expect the adoption of these statements to have
a material impact on its financial condition or results of operations.
NOTE 2 - PROPERTY AND EQUIPMENT
------------------------
Oil and gas properties, and equipment and fixtures consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996 July 31, 1996
------------- ------------- --------------
<S> <C> <C> <C>
Oil and Gas - California
- - -----------------------------------------
Proved properties, net of accumulated
depletion of $378,899 at December 31,
1997, $250,396 at December 31, 1996 and
$233,259 at July 31, 1996 . . . . . . . $ 332,914 $ 259,709 $ 276,846
Unproved properties . . . . . . . . . . . 399,818 483,287 695,861
------------- ------------- --------------
Total Oil and Gas Properties. . . . $ 732,732 $ 742,996 $ 972,707
- - ----------------------------------------- ============= ============= ==============
</TABLE>
NOTE 2 - PROPERTY AND EQUIPMENT (Continued)
------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996 July 31, 1996
------------- ------------- --------------
<S> <C> <C> <C>
Other Property and Equipment
- - ----------------------------------------------
Mining prospects . . . . . . . . . . . . . - 2,376,005 2,057,732
Land . . . . . . . . . . . . . . . . . . . 11,281 11,281 11,281
Building net of accumulated depreciation
$611,045 at December 31, 1997, $4,982
at December 31, 1996 and $4,512 at
July 31, 1996. . . . . . . . . . . . . . 39,014 40,142 40,612
Office equipment, vehicle, and leasehold
improvements net of accumulated
depreciation of $97,998 at December 31,
1997, $87,524 at December 31, 1996 and
$86,203 at July 31, 1996 . . . . . . . . 38,587 12,436 3,493
------------- ------------- --------------
Total Other Property and Equipment . . 88,882 2,530,057 2,113,118
------------- ------------- --------------
Property and Equipment (Net) . . . . . . . . . $ 821,614 $ 3,182,860 $ 3,085,825
- - ---------------------------------------------- ============= ============= ==============
</TABLE>
NOTE 3 - NOTES AND CONTRACTS PAYABLE
------------------------------
Long-term debt is summarized below:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996 July 31, 1996
------------- ------------- --------------
<S> <C> <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, 1997,
December 31, 1996, and July 31, 1996. . . . $ 18,092 $ 22,076 $ 23,225
------------- ------------- --------------
Note payable to Bandera Land Company
dated December 4, 1992; unsecured;
interest at 10.00%, December 31, 1997,
December 31, 1996, and July 31, 1996;
interest only payable on outstanding
balance.. . . . . . . . . . . . . . . . . . - - 17,950
- - --------------------------------------------- ------------- ------------- --------------
</TABLE>
NOTE 3 - NOTES AND CONTRACTS PAYABLE (Continued)
------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996 July 31, 1996
------------ ------------ -------------
<S> <C> <C> <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, 1997; secured by
contractual policy; interest at 12.00%;
payable in monthly installments of
$680 including interest. . . . . . . . . . . . 4,574 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
------------ ------------ -------------
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
- - ------------------------------------------------ ------------ ------------ -------------
</TABLE>
NOTE 3 - NOTES AND CONTRACTS PAYABLE (Continued)
------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996 July 31, 1996
------------- ------------- --------------
<S> <C> <C> <C>
Note payable to principle shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $4,354,
including interest.. . . . . . . . . . . . . 33,811 - -
------------- ------------- --------------
Note payable to principle shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $771,
including interest.. . . . . . . . . . . . . 6,712 - -
------------- ------------- --------------
Note payable to principle shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $542,
including interest.. . . . . . . . . . . . . 4,716 - -
------------- ------------- --------------
Note payable to principle shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $2,167,
including interest.. . . . . . . . . . . . . 20,893 - -
------------- ------------- --------------
Note payable to principle shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $1,496,
including interest.. . . . . . . . . . . . . 15,819 - -
------------- ------------- --------------
104,617 48,650 994,749
Less current portion . . . . . . . . . . . . . 90,667 11,042 77,992
------------- ------------- --------------
Long-Term Portion of Notes and Contracts
Payable. . . . . . . . . . . . . . . . . . . $ 13,950 $ 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).
NOTE 3 - NOTES AND CONTRACTS PAYABLE (Continued)
------------------------------
Maturities of long-term debt for the five years succeeding December 31, 1997
are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
- - -------------
1998. . . . . $90,667
1999. . . . . 5,067
2000. . . . . 5,709
2001. . . . . 3,174
Thereafter. . -
-------
104,617
=============
</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, 1997:
Ownership Shares Percentage
---------------- ----------
Dennis Vaughan 967,200 5.11%
-------------- ------- -----
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
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
------------- ------------- --------------
<S> <C> <C> <C>
Partnership income, net of expenses $ 255,192 $ 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, 1997,
December 31, 1996, and July 31, 1996 was $0, $0 and $17,950, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
----------------------------
On September 16, 1995 and July 19, 1995, the Company entered into agreements
to borrow $9,000 and $15,000, respectively, 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 notes were due to mature on September
16 and July 19, 1999, respectively. Other terms of the agreements involve the
following:
- Principal amount convertible into TVC unregistered common stock at
$.25 per share at any time.
- Options on 7,000 and 15,000 shares of TVC unregistered shares at $.50
per share exercisable through September 16 and July 19, 1999, respectively.
- 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.
On August 21, 1997, these notes were paid in full with the issuance of 88,000
shares of unregistered, restricted common stock at $.25 per share.
Due to related parties of $96,532, $196,142 and $204,392 at December 31, 1997,
December 31, 1996 and July 31, 1996, respectively, consist of payroll payable
to F. Lynn Blystone.
On March 22, 1997, the directors voted to award themselves 10,000 shares of
stock each in lieu of services rendered to the Company. The shares were
awarded at a price of $1.86 per share. Due to the restricted nature of the
shares, the Company has recognized the commitment in the financial statements
at a discount ($1.12 per share).
On August 8, 1997, as provided for in his employment contract, the board of
directors awarded F. Lynn Blystone, CEO and President of the Company, 40,000
shares of unregistered, restricted common stock for compensation for services
rendered to the Company. The shares were awarded at a price of $1.375 per
share (trading value at the date of the transaction) and were appropriately
discounted to $.55 per share due to their restricted nature.
On June 28, 1997, the Company recorded five notes payable to a principle
shareholder of Tri-Valley Corporation common stock for services rendered
related to the issuance of stock. At December 31, 1997, the aggregate amount
of the notes payable was $81,951 (see Note 3). The principle balances totaling
$133,400, were recorded as stock issuance costs which are a component of
shareholder's equity.
During fiscal year 1997, the Company paid a principle shareholder of
Tri-Valley Corporation $322,000 for finder fees related to the issuance of
stock. These transactions are recorded as stock issuance costs which are a
component of shareholder's equity.
NOTE 5 - INCOME TAXES
-------------
At December 31, 1997, the Company had available net operating loss
carryforwards for financial statements and federal income tax purposes of
approximately $6,200,000. These loss carryforwards are between 1998 and 2012.
The components of the net deferred tax assets were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996 July 31, 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 765,000 $ 782,000 $ 629,000
Satutory depletion carryforwards 775,000 660,000 620,000
-------------- -------------- ---------------
Total Deferred Tax Assets. . . . . 1,540,000 1,442,000 1,249,000
-------------- -------------- ---------------
Valuation Allowance. . . . . . . . (1,540,000) (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 carry forwards due to the uncertainty of
future utilization.
NOTE 6 - MAJOR CUSTOMERS
----------------
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>
A B C Other
------- ------- ------- -------
<S> <C> <C> <C> <C>
Period Ended:
July 31, 1996 . . 153,862 403,366 * 109,810
December 31, 1996 95,408 * 187,492 9,701
December 31, 1997 96,091 350,689 283,749 37,097
- - -------------------- ------- ------- ------- -------
</TABLE>
* Not a major source during the period.
All oil and gas sales have occurred in the northern California gas market.
NOTE 7 - 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 1997 and 1996:
<TABLE>
<CAPTION>
Oil and Gas Precious Metals Total
------------- ----------------- ------------
<S> <C> <C> <C>
Year Ended December 31, 1997
Total Revenues. . . . . . . . . . . . . . $ 867,622 $ - $ 867,622
============= ================= ============
Loss Before Taxes and Change in Accounting
Principle . . . . . . . . . . . . . . . . . $ (474,199) $ - $ (474,199)
Income Taxes. . . . . . . . . . . . . . . . . 1,600 - 1,600
Change in Accounting Principle. . . . . . . . - (2,860,776) (2,860,776)
------------- ----------------- ------------
Net Loss. . . . . . . . . . . . . . . . . . . $ (475,799) $ (2,860,776) $(3,336,575)
============= ================= ============
Property, Plant and Equipment Additions,
Net of Deletions. . . . . . . . . . . . . . $ 14,759 $ (2,376,005) $(2,361,246)
============= ================= ============
Depreciation, Depletion and Amortization. . . $ 151,362 $ 1,128 $ 152,490
============= ================= ============
Total Assets. . . . . . . . . . . . . . . $ 4,975,224 $ 39,014 $ 5,014,238
============= ================= ============
Transition Period Ended December 31, 1996
Total Revenues. . . . . . . . . . . . . . . $ 474,521 $ - $ 474,521
============= ================= ============
Income (Loss) Before Taxes. . . . . . . . . . $ (91,422) $ - $ (91,422)
Income Taxes. . . . . . . . . . . . . . . . . 1,600 - 1,600
------------- ----------------- ------------
Net Income (Loss) . . . . . . . . . . . . . . $ (93,022) $ - $ (93,022)
============= ================= ============
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 8 - COMMITMENTS
-----------
Employee Stock Options
- - ------------------------
The Company has a nonqualified stock option plan, which provides for the
granting of options to key employees, consultants, and nonemployee directors
of the Company. The option price, number of shares and grant date are
determined at the discretion of the Company's board of directors. Options
granted under the plan are exercisable for a period also to be determined by
the board of directors.
The Company has elected to account for the stock option plan under Accounting
Principles Board Opinion NO. 25, "Accounting for Stock Issued for Employees,:"
and related interpretations. Accordingly, no compensation expense has been
recognized for the stock option.
Had compensation expense for the stock plan been determined based on the fair
value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss would have been increased by
$258,030 in 1997. The weighted average fair value of the options granted
during 1997 was estimated using the Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
Grant Date August 19, 1997 December 6, 1997
---------------- -----------------
<S> <C> <C>
Shares granted . . . . . 200,000 100,000
Risk-free interest rate. 7.5% 7.5%
Expected life (years). . 5 2
Expected volatility. . . 83.1% 83.1%
Expected dividends . . . - -
- - ------------------------ ---------------- -----------------
</TABLE>
NOTE 8 - COMMITMENTS (Continued)
-----------
Employee Stock Options (Continued)
- - ------------------------
A summary of option transactions during the year ended December 31, 1997, the
transition period ended December 31, 1996, and the year ended July 31, 1996 is
shown below:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise
of Shares Price
---------- ---------
<S> <C> <C>
Outstanding at August 1, 1995 . . . . . . . 425,000 $ 0.53
Granted . . . . . . . . . . . . . . . . . -
Exercised . . . . . . . . . . . . . . . . -
Canceled. . . . . . . . . . . . . . . . . (70,000) $ 0.52
---------- ---------
Outstanding at July 31, 1996. . . . . . . . 355,000 $ 0.52
Granted . . . . . . . . . . . . . . . . . -
Exercised . . . . . . . . . . . . . . . . -
Canceled. . . . . . . . . . . . . . . . . -
----------
Outstanding at December 31, 1996. . . . . . 355,000 $ 0.52
Granted . . . . . . . . . . . . . . . . . 300,000 $ 0.83
Exercised . . . . . . . . . . . . . . . . (16,000) $ 0.58
Canceled. . . . . . . . . . . . . . . . . (70,000) $ 0.52
---------- ---------
Outstanding at December 31, 1997. . . . . . 569,000 $ 0.69
==========
Exercisable at December 31, 1997. . . . . . 569,000 $ 0.69
==========
Available for Issuance at December 31, 1997 -
- - ------------------------------------------- ==========
</TABLE>
NOTE 8 - COMMITMENTS (Continued)
-----------
Employee Stock Options (Continued)
- - ------------------------
<TABLE>
<CAPTION>
Weighted-Average
Remaining Contractual
Number of Shares Life of Shares Number of Shares
Exercise Price Outstanding Outstanding Exercisable
- - --------------- --------------------- -------------- ----------------
<S> <C> <C> <C>
0.50 . . . . . 309,000 3.49 309,000
0.55 . . . . . 160,000 .75 160,000
1.50 . . . . . 100.000 2.00 100,000
--------------------- ----------------
569,000 . . . . 569,000
=============== =====================
</TABLE>
Leases
- - ------
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,
1998, 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, 1997:
<TABLE>
<CAPTION>
<S> <C>
December 31, 1998 $14,850
- - ----------------- =======
</TABLE>
Litigation
- - ----------
The Company is engaged in an on-going lawsuit in the Contra Costa County
Superior Court. Company management, as plaintiff, is seeking to recover
damages incurred from a breech of contract and fiduciary responsibilities by a
former officer and a consulting geologist. Its outcome is unknown at this
time.
NOTE 8 - COMMITMENTS (Continued)
-----------
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.
NOTE 9 - 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 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 (see Note 11.) The warrants are
required to be exercised within one year from the issue or they become void.
Also, during the transition period, an additional 460,000 "units" were sold,
also at $1 per "unit". Other stock transactions occurring during the period
included 110,000 "A" warrants issued at $0.30 per share, 2,080,000 shares
purchased at $0.25 per share, and 222,225 shares issued at $0.45 per share.
The Company also issued shares for services rendered. These shares were
recorded at the trading value of the stock on November 13, 1996, the day the
services were deemed to be rendered. The value of the issuance on that date
was $147,938. The Company received $2,013,001 of new capital during the
transition period as a result of these transactions.
NOTE 9 - COMMON STOCK (Continued)
-------------
During fiscal year 1997, the investors exercised the remaining 1,372,000 "A"
warrants outstanding at various prices, 814,000 "B" warrants at $1.00 per
share, and 501,000 "C" warrants at $1.50 per share. The Company received an
additional $2,590,790 in additional capital from the exercise of these
warrants.
During fiscal year 1997, the Company issued an aggregate 90,000 shares of
unregistered, restricted common stock to officers and directors for
compensation. These issuances were valued at fair market based upon the open
market closing price as of the date of each transaction and were discounted
appropriately due to their restricted nature. These transactions were
cumulatively valued at approximately $78,000 and are reflected as a component
of general and administrative expenses in the accompanying consolidated
statement of operations.
During fiscal year 1997, the Company issued an aggregate 100,000 shares of
unregistered, restricted common stock to various shareholders for consulting
services. These issuances were valued at the fair market value as of the date
of each respective transaction and were discounted appropriately due to their
restricted nature. These transactions were cumulatively valued at
approximately $55,000 and are reflected as a component of general and
administrative expenses in the accompanying consolidated statement of
operations.
On July 21, 1997, the Company issued 25,000 shares of unregistered, restricted
common stock to Geoone for rights to their geological database. This issuance
was valued at the fair market value as of the date of the transaction and was
discounted appropriately due to its restricted nature. This transaction was
cumulatively valued at approximately $12,500 and was capitalized as a
component of the well database asset in the accompanying consolidated balance
sheet.
On August 21, 1997, the Company issued 88,000 shares of unregistered,
restricted common stock to Lawrence Flood for payment of a note payable. This
issuance was valued at the balance of the note payable, $22,000, on the date
of the transaction. This issuance paid the note payable due to Flood in full.
NOTE 10 - WARRANTS
--------
Changes in common stock warrants were as follows:
<TABLE>
<CAPTION>
For the Five
Months
Year Ended Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
------------------------- ------------- -------------
<S> <C> <C> <C>
Outstanding "A" warrants beginning. . . . 1,372,000 1,800,000 -
Additional granted. . . . . . . . . . . . - 930,000 1,800,000
Exercised during period . . . . . . . . . (1,372,000) (1,358,000) -
------------------------- ------------- -------------
Outstanding "A" warrants at end of period - 1,372,000 1,372,000
========================= ============= =============
Outstanding "B" warrants beginning. . . . 1,365,000 900,000 -
Additional granted. . . . . . . . . . . . - (814,000) 465,000 900,000
Exercised during period . . . . . . . . . (551,000) - -
-------------------------
Expired during period . . . . . . . . . . - -
------------------------- -------------
-
=========================
Outstanding "B" warrants at end of period 1,365,000 900,000
========================= =============
Outstanding "C" warrants beginning. . . . 1,365,000 900,000 -
Additional granted. . . . . . . . . . . . - 465,000 900,000
Exercised during period . . . . . . . . . (501,000) - -
Expired during period . . . . . . . . . . (864,000) - -
------------------------- ------------- -------------
Outstanding "C" warrants at end of period - 1,365,000 900,000
- - ----------------------------------------- ========================= ============= =============
</TABLE>
NOTE 11 - INVESTOR PAYABLE
-----------------
The Company had investor payables totaling $103,000 and $662,680 at December
31, 1997 and 1996, respectively. These payable were incurred because the
Company received cash from investors to exercise and purchase stock before
year end, however, the shares were not issued until after year end. At
December 31, 1997, the unissued common stock consisted of 1,248,000 "A"
warrants exercised at various prices and 575,775 shares purchased at $.45 per
share. At December 31, 1997, unissued common stock consisted of 103,000 "B"
warrants exercised at $1.00 per share. All unissued shares were subsequently
issued after year end reducing these payables to zero.
NOTE 12 -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, 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 approved by the shareholders.
NOTE 13 - POTENTIAL ACQUISITIONS
-----------------------
The Company is presently investigating the viability of acquiring 26 wireless
communication licenses held by five partnerships and is currently performing
due diligence relating to this potential transaction. All costs associated
with the possible acquisition have been capitalized in accordance with
generally accepted accounting principles.
NOTE 14 - SUBSEQUENT EVENTS
------------------
Subsequent to year end, the Company purchased a telecommunications tower
belonging to Northeast Telecom, Inc. for $50,000 from the U.S. Trustee of the
Chapter 7 bankruptcy of Northeast Telecom, Inc. The Company intends to rent
antennae space on the tower to various telecommunications customers in the
area. The tower can hold up to twenty antennae, and management has estimated
that potential rental revenue should be roughly equivalent to $800 per
antennae per month.
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 year ended December
31, 1997, 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.
Capitalized costs relating to oil and gas producing activities and related
accumulated depletion, depreciation and amortization at December 31, 1997 are
as follow:
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Aggregate capitalized costs:
Proved properties . . . . . . . . . . . $ 711,813 $ 510,106 $ 510,106
Unproved properties . . . . . . . . . . 399,818 483,287 695,861
Accumulated depletion, depreciation and
amortization. . . . . . . . . . . . . (378,899) (250,396) (233,259)
-------------- -------------- ---------------
Net capitalized costs . . . . . . . . . . $ 732,732 $ 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:
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
------------- ------------- --------------
<S> <C> <C> <C>
Acquisition of producing
properties and productive
and non-productive acreage $ 33,566 $ 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
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Sales to unaffiliated parties . . . . . . . . $ 767,626 $ 470,300 $ 872,386
Production costs. . . . . . . . . . . . . . . (97,546) (82,481) (259,673)
Depletion, depreciation and
amortization . . . . . . . . . . . . . . . . (128,503) (18,929) (42,607)
-------------- -------------- ---------------
541,577 368,890 570,106
Income tax expenses . . . . . . . . . . . . . (184,136) (125,412) (193,837)
-------------- -------------- ---------------
Results of operations from activities before
extraordinary items (excluding blending
operations, corporate overhead and
interest costs). . . . . . . . . . . . . . $ 357,441 $ 243,478 $ 376,269
- - --------------------------------------------- ============== ============== ===============
</TABLE>
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, 1997, December 31, and
July 31, 1996, and changes in such quantities during each of the years then
ended, were as follows:
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
------------- ------------- --------------
Oil Gas Oil Gas Oil
(BBL) (MCF) (BBL) (MCF) (BBL)
- - ------------------------------------------------------------ ------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . 644 2,003,135 442 1,934,339 180,057
Revisions of previous estimates Extensions, discoveries and. (274) (273,214) 272 (97)
other additions. . . . . . . . . . . . . . . . . . . . . . -
Production . . . . . . . . . . . . . . . . . . . . . . . . . 79 497,112 - (111,261)
-------------------
(225) (323,879) (70) (210)
------------- ------------- -------------- -------------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . . 2,003,135
=============
224 1,903,154 644 442
============= ============= ============== ===================
Proved developed reserves:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . 644 2,003,135 442 1,934,339
============= ============= ============== ===================
End of year. . . . . . . . . . . . . . . . . . . . . . . . . 224 1,903,154 644 2,003,135
============= ============= ============== ===================
Oil Gas
(BBL) (MCF)
- - ------------------------------------------------------------ ----------
<S> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . 367 1,888,231
Revisions of previous estimates Extensions, discoveries and. (206,836)
other additions
Production . . . . . . . . . . . . . . . . . . . . . . . . . 382 525,475
(272,531)
----------
End of year
1,934,339
==========
Proved developed reserves:
Beginning of year. . . . . . . . . . . . . . . . . . . . . . 367 1,888,231
========== =========
End of year. . . . . . . . . . . . . . . . . . . . . . . . . 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 year ended December 31, 1997, 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.
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
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Future cash in flows. . . . . . . . . . . $ 4,166,677 $ 3,098,724 $ 2,989,560
Future production and development costs . (990,987) (660,118) (608,480)
Future income tax expenses. . . . . . . . (380,077) (259,282) (674,158)
-------------- -------------- ---------------
Future net cash flows . . . . . . . . . . 2,795,613 2,179,324 1,706,922
-------------- -------------- ---------------
10% annual discount for estimated timing
of cash flows . . . . . . . . . . . . . 1,038,418 784,623 580,012
-------------- -------------- ---------------
Standardized measure of discounted future
net cash flow . . . . . . . . . . . . . $ 1,757,195 $ 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.
57
Changes in standardized measure of discounted future net cash flow from proved
- - ------------------------------------------------------------------------------
reserve quantities (Continued)
- - -------------------
<TABLE>
<CAPTION>
Transition
Year Ended Period Ended
December 31, December 31, Year Ended
1997 1996 July 31, 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Standardized measure - beginning of period . . . . . . $ 1,394,701 $ 1,126,910 $ 835,771
-------------- -------------- ---------------
Sales of oil and gas produced, net of production costs (670,080) (387,819) (612,715)
-------------- -------------- ---------------
Revisions of estimates of reserves provided in
in prior years:
Net changes in prices and production costs . . . . 149,033 (195,368) 985,846
Revisions of previous quantity estimates . . . . . . . (614,464) 342,108 (390,920)
Extensions, discoveries and improved recovery. . . . . 1,123,473 - 933,148
-------------- -------------- ---------------
Accretion of discount. . . . . . . . . . . . . . . . . 139,470 112,691 83,577
Changes in production rates (timing) and other . . . . 114,268 18,697 (118,400)
-------------- -------------- ---------------
Net change in income taxes . . . . . . . . . . . . . . 120,794 414,876 (589,397)
-------------- -------------- ---------------
Net increase . . . . . . . . . . . . . . . . . . . . . 362,494 267,791 291,139
-------------- -------------- ---------------
Standardized measure - end of period . . . . . . . . . $ 1,757,195 $ 1,394,701 $ 1,126,910
- - ------------------------------------------------------ ============== ============== ===============
</TABLE>
<PAGE>
------
PART III
--------
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- - -------------------------------------------------------------------
None.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - ------------------------------------------------------------------
The following information is furnished with respect to each director:
Year First
Elected as Position With
Name of Director Age Director * Company
- - ------------------ --- ----------
F. Lynn Blystone 62 1974 President,
Chief Executive
Officer
Dennis P. Lockhart 51 1982 None
Milton J. Carlson 68 1985 None
Earl H. Biestline 82 1992 None
Loren J. Miller(1) 53 1992 None
* - Term as director continues until his successor is duly elected upon
annual shareholders meeting or duly appointed during the interim.
(1)- Audit Representative
The following is a list of Tri-Valley executive officers, their ages and their
positions and offices:
Name Age Position and Date Elected to Position
- - ---- --- -------------------------------------
F. Lynn Blystone 62 President and Chief Executive Officer,
TVC/TVOG/TVPC (October 9, 1981)
Thomas J. Cunningham 55 Treasurer and Chief Financial
Officer
TVC/TVOG/TVPC (February 28, 1997)
<PAGE>
- - ------
F. LYNN BLYSTONE - 62 President and Chief Executive Officer 1974
- - ----------------------
Tri-Valley Corporation, and its wholly
Owned subsidiary, Tri-Valley Oil & Gas
Co., 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 Whittler College, California, he did
graduate work at George Williams College, Illinois in organization management.
He gives full time to Tri-Valley.
DENNIS P. LOCKHART - 51 President 1982
- - ---------------------------
Heller International Group, Inc.
Chicago, Illinois
After service as a corporate banking officer of Citibank since 1971, most
recently as vice President in the Central and South America Group
responsible for debt-to-equity conversions, Mr. Lockhart has become president
of Heller International, an old line firm
now owned by Fuji Bank Group. Heller provides financing in 20 countries.
While with Citibank, Mr. Lockhart served the bank's international operations
in Jedda and Riyahd, Saudi Arabia; Athens, Greece; Beirut, Lebanon; and as
executive vice president of Iranian's Bank of Tehran, Iran. He then served as
vice president and regional executive for corporate banking in the seven
southeastern states and Puerto Rico for Citicorp (USA) Inc. A graduate of
Stanford University, he has an M.A. from John Hopkins University.
MILTON J. CARLSON - 68 Investor, Kalispell, Montana
- - --------------------------
1985
- - ---
Mr. Carlson is a principal in Earthsong Corporation which, in part,
consults on environmental matters and performs environmental audits for
government agencies and public and private concerns. Until its merger with
another firm, Mr. Carlson formerly was vice president and corporate secretary
of Union Sugar Company, a $100 million unit of Sara Lee Corporation. He was
involved in representing industrial end users of energy tthrough the
California Manufacturers Association as the former chairman of the CMA
steering committee of the standing energy and environmental committees. Mr.
Carlson was also the energy and environmental representative with Sara Lee
energy advisory group and monitored related matters before the California
Public Utilities Commission and Energy Commission as well as serving as the
legislative representative in Sacramento and Washington, D.C. Mr. Carlson
attended the University of Colorado at Boulder and the University of Denver.
LOREN J. MILLER, CPA - 53 Controller 1992
- - -----------------------------
Petro America, Inc.
Long Beach, California
Mr. Miller has served in a treasury and chief financial officer capacity
as Vice president successively of Hershey Oil Corporation and Mock Resources,
Inc. Prior to that he was vice president and general manager of Tosco
Production Finance Corporation and formerly a senior auditor with Touche Ross
& Co. He is experienced in exploration, production, product trading, refining
and distribution as well as corporate finance. He holds a B.S. in accounting
and a M.B.A. in finance from the University of Southern California.
EARL H. BEISTLINE, LLD. - 82 Mining Consultant
- - ---------------------------------
1992
- - ---
Fairbanks, Alaska
Dr. Beistline is a past chairman of the Alaska State Minerals Commission
and Dean Emeritus of the School of Mineral Industry of the University of
Alaska. Born in Juneau, he has achieved a special position in Alaska during
its transition from territorial status into statehood. He has numerous honors
from local, state and federal governments, academia, professional and civic
organizations and the mineral industry. An active miner in the Central-Circle
Mining District, Dr. Beistline also serves as a director of one of the state's
primary companies, Usibelli Coal Mines, Inc. He holds a Bachelor of Mining
Engineering, Engineer of Mines and Honorary Doctor of Law degree from the
University of Alaska.
THOMAS J. CUNNINGHAM - 55 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 Chief Financial Officer
on February 1997, Mr. Cunningham has over 25 years experience in corporate
finance, Securities and Exchange Commission public company reporting
shareholder relations, and employee benefits. In his career he served as
Staff Accountant for Forest Oil, Accounting Company, and as Executive Vice
President, Chief Financial Officer and Director for Star Resources, Inc. Most
recently he was a Management Consultant in finance, marketing and human
resource matters including employee benefit planning. He received his
education in accounting and business administration from Angelo State
University, Texas.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
- - ----------------------------------
The following table summarizes the compensation of the chairman of the board
and the president of the Company and its subsidiaries, F. Lynn Blystone, for
the fiscal year ended December 31, 1997, and for the fiscal years ended July
31, 1996, and 1995.
Long Term
Compensation
Annual Compensation Awards
------------------- ------
(a) (b) ( c ) (d) (e)
Other Securities
Name Period Covered Salary Compensation
---- -------------- ------ ------------
Underlying Options
------------------
F. Lynn FYE 12/31/97 $197,660(1)
195,000(2)
Blystone, CEO 5 Mo. Ended 12/31/96
$42,250(1)
FYE 7/31/96 $49,610(1)
FYE 7/31/95 $43,750(1)
(1) Includes salary that was deferred when Mr. Blystone took a reduced
salary in 1996.
(2) 95,000 options expired unexercised in December, 1997.
Aggregated 1997 Option Exercises and Year-End Values
- - ----------------------------------------------------------
The following table summarizes the number and value of all unexercised stock
options held by the Named Officers and Directors at the end of 1997.
( A ) ( B ) ( C )
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options/SARs at
Options/SARs at FY-End (#) FY-End ($)*
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
F. Lynn Blystone 100,000/0 0/0
Dennis P. Lockhart 30,000/0 $18,750/0
40,000/0 $23,000/0
Milton J. Carlson 30,000/0 $18,750/0
40,000/0 $23,000/0
Loren J. Miller 30,000/0 $18,750/0
40,000/0 $23,000/0
Earl H. Beistline 20,000/0 $12,500/0
40,000/0 $23,000/0
ITEM 10. EXECUTIVE COMPENSATION(CONTINUED)
- - ----------------------------------
*Based on a fair market value of $1.125 per share, which was the closing
bid price of the Company's Common Stock in the Nasdaq National Market System
on December 31, 1997.
Compensation of Directors
- - ---------------------------
The Company compensates non-employee directors for their service on the board
of directors. No directors received any stock options in 1997. The following
tables sets forth information regarding the cash compensation paid to outside
directors in 1997.
(A) (B)
NAME FEES
---- ----
Earl Beistline $3,800
Milton Carlson $3,800
Dennis P. Lockhart $3,450
Loren J. Miller $3,800
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - ------------------------------------------------------------------------------
As of December 31, 1997, there were 18,922,248 shares of the Company's common
stock outstanding. The following persons were known by the Company to be the
beneficial owners of more than 5% of such outstanding common stock:
Number of Percent of
Name and Address Shares Total
---------------- ------ -----
Dennis Vaughan
2298 Featherhill Road
Santa Barbara, CA 93108 1,033,200 5.6%
The following table sets forth the beneficial ownership of the Company's
common stock as of December 31, 1997 by each director, by each of the
executive officers named in Item 11, and by all executive officers and
directors as a group:
Number of Percent of
Directors Shares(1) Total(2)
--------- --------- --------
F. Lynn Blystone 498,909 (3) 2.6%
Dennis P. Lockhart 122,091 *
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- - --------------------------------------------------------------------
MANAGEMENT(CONTINUED)
- - -----------------
Number of Percent of
Directors Shares(1) Total(2)
--------- --------- --------
Milton J. Carlson 129,000 *
Loren J. Miller 95,300 *
Earl H. Beistline 78,000 *
Total group (all directors and
- - ------------
Executive officers - 5 persons) 923,300 4.8%
*Less than 1%
(1) Includes shares which the listed shareholder has the right to acquire,
from options, before September 30, 1998 as follows: Dennis P. Lockhart
70,000; Milton J. Carlson 70,000; Loren J. Miller 70,000 and Earl H. Beistline
60,000. F. Lynn Blystone has 100,000.
(2) Based on total outstanding shares of 18,922,248 as of December 31,
1997. The persons named herein have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them,
subject to community property laws where applicable.
(3) Includes 23,400 shares held in the name of Bandera Land Company, Inc.,
a family corporation of which Mr. Blystone is the president.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - -------------------------------------------------------------
None.
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
- - ---------------------------------------------------------
(a) Exhibits.
Exhibit
Number Description of Exhibit Page
------ ---------------------- ----
3 Articles of Incorporation *
*Included as exhibit in the Registrant's Registration Statement and is hereby
incorporated by reference herein.
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K(CONTINUED)
- - ---------------------------------------------------------
(b) Reports on Form 8-K
- - - October 2, 1997 the Company filed an 8-K to report it had put on
production two wells which increased monthly gas production by 68%.
- - - December 5, 1997 the Company filed and 8-K to report its withdrawal of a
registration for a public stock offering.
<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.
___May 14__________, 1998 By:_/s/ F. Lynn Blystone____________________
F. Lynn Blystone
President, Chief Executive Officer and
Director
___May 21__________, 1998 By:__/s/ Thomas J. Cunningham________________
Thomas J. Cunningham
Treasurer, Chief Financial Officer
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:
__May 22___________, 1998 By:__/s/ Dennis P. Lockhart__________________
Dennis P. Lockhart, Director
__May 15___________, 1998 By:__/s/ Milton J. Carlson___________________
Milton J. Carlson, Director
_May 19____________, 1998 By:__/s/ Earl H. Beistline___________________
Earl H. Beistline, Director
_May 21____________, 1998 By:__/s/ Loren J. Miller____________________
Loren J. Miller, Director
