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, 1998
[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: (661) 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 $977,892.
As of December 31, 1998 19,088,248 common shares were issued and outstanding. As
of February26, 1998, 19,088,248 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$6,910,870.
DOCUMENTS INCORPORATED BY REFERENCE
Articles of Incorporation
PART I
ITEM 1. BUSINESS
- ------------------
Tri-Valley Corporation, a Delaware corporation, is in the business of exploring,
acquiring and developing prospective and producing petroleum and precious metals
properties and interests therein. Our wholly owned subsidiary, Tri-Valley Oil &
Gas Company ("TVOG") operates the oil & gas activities. TVOG derives the
majority of its revenue from gas production. The precious metals activity is
operated directly by 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 7 full time employees.
The Company 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.
Current Year
Over 60 people attended the August 22, 1998 shareholder meeting in San
Francisco. An extensive question and answer period covered all aspects of the
Company's activities (However, no information was given that was not already
fully disclosed). Management continues to enjoy very strong support. Over 89%
(17,032,377 out of 19,063,248) of the issued and outstanding shares voted.
Management's slate of directors was reelected by a range of approximately 94% to
99% of the shares voting. The accounting corporation of Brown, Armstrong,
Randall & Reyes was approved as auditors by over 99%. The stock option plan for
employees and directors was approved by over 85% and the actions of the board of
directors since the previous shareholder meeting were ratified by over 96%.
The company drilled two additional wells in 1998. These wells are currently
being evaluated as to production capability. A third well, which had been
waiting on a pipeline hookup was put on line and began producing in October of
1998.
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, 1998. 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
ITEM 2. PROPERTIES (CONTINUED)
- ---------------------------------
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, 1998, December 31, 1997 and December 31, 1996 were
as follows:
BBL MCF
--- -----
December 31, 1998 Condensate 234 Natural Gas 1,434,499
December 31, 1997 Condensate 224 Natural Gas 1,903,154
December 31, 1996 Condensate 644 Natural Gas 2,003,135
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
$1,178,295 at December 31, 1998, $1,757,195 at December 31, 1997,and $1,394,701
at December 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 Year Ended Period Ended Year Ended
December 31, December 31, December 31, July 31,
1998 1997 1996 1996
---- ---- ----
Natural Gas (MCF) 277,946 323,879 111,261 272,931
Crude Oil (BBL) 137 225 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 Year Ended Period Ended Year Ended
December 31, December 31, December 31, July 31,
1998 1997 1996 1996
---- ---- ----
Natural gas (per MCF) $2.20 $2.40 $2.00 $2.00
Production Costs
(per MCF) .20 .30 .10 .10
Net Profit per MCF $2.00 $2.10 $1.90 $1.90
ITEM 2. PROPERTIES (CONTINUED)
- ---------------------------------
As of December 31, 1998, the Company had the following gross and net position in
wells and developed acreage:
Wells (1) Acres (2)
---------- ----------
Gross Net Gross Net
----- --- ----- ---
12 5.125 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.
(3) 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 following table sets forth the number of productive and dry exploratory and
development wells drilled by the Company during:
Transition
Year Ended Year Ended Period Ended Year Ended
December 31, December 31, December 31, July 31,
1998* 1997 1996 1996
---- ---- ----
Exploratory
Producing -0- 1.0 1.0 1.0
Dry -0- -0- -0- -0-
Total -0- 1.0 1.0 1.0
Development
Producing -0- 2.0 -0- -0-
Dry -0- -0- -0- -0-
Total -0- 2.0 -0- -0-
*Two exploratory wells were drilled in 1998. No determination has been made as
to the ability to commercially produce these wells.
The Company deals with both industry and sophisticated individual investors on
its oil and gas projects.
The Company continually screens oil and gas prospects developed by the Company's
own staff and by other sources for potential leasing.
ITEM 2. PROPERTIES (CONTINUED)
- ---------------------------------
The following table sets forth information regarding undeveloped oil and gas
acreage in which the Company had an interest on December 31, 1998.
State Gross Acres Net Acres
----- ----------- ---------
California 10,960 6,783
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.
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, 1998:
State Gross Acres Net Acres
----- ----------- ---------
Alaska 33,000.00 32,660.00
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. In 1997 and
1998, the Company conducted additional staking to bring its present land
position to approximately 33,000 acres (51.5 square miles). 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
ITEM 2. PROPERTIES (CONTINUED)
- --------------------
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 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 for the theft of trade secrets and illegal use of proprietary
information 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 evidentiary
stage of the trial has been concluded and the Company is waiting on the Judge's
ruling.
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 1998.
<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>
1998:
First Quarter $ 1.688 $ .91 $1.63 $1.02
Second Quarter $ .969 $ .53 $ .97 $ .69
Third Quarter $ .719 $ .31 $ .78 $ .59
Fourth Quarter $ .625 $ .19 $ .56 $ .38
</TABLE>
Bid Prices Asked Prices
----------- -------------
High Low High Low
---- --- ---- ---
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
As of December 31, 1998, the Company estimates that its common stock was held by
2,000 shareholders of record in 40 states and at least 4 foreign countries.
The Company historically has paid no dividends, and at this time does not plan
to pay any dividends in the immediate future. Rather, the Company strives to
add share value through discovery success. As of 3/05/99, the Company had 14
market makers for our stock. In 1998, trading volume exceeded 9.5 million
shares.
Recent Sales of unregistered Securities
- -------------------------------------------
During 1998, 123,000 "B" warrants were exercised at $1.00 each. The exercise of
these warrants resulted in 123,000 new shares issued. These warrants were
exercised by 6 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. There were 13,000 shares issued at $0.50 each and 5,000
issued at $0.75 each from the exercise of stock options held by two directors
and one employee. Additionally, 25,000 shares were sold to an individual in
private placement at a price of $0.50 per share exempt under Section 4(2) of the
Securities Act of 1933.
<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. The Company
has examined the computer software and is confident it will accommodate the
"Year 2000" issue. Additionally, the Company is contacting its appropriate
vendors to determine if they are equipped to handle the Year 2000 issue. The
Company expects to have all the responses from these vendors by the end of the
second quarter of its fiscal year 1999. The funds spent on this determination
are less than fifty dollars.
Natural Gas Activities
In 1997 Tri-Valley Oil & Gas Company, the wholly owned subsidiary of Tri-Valley
Corporation drilled the Pimentel 1-15. The well had been waiting for a pipeline
hook-up until it was hooked up and began producing in October 1998.
The Company generally sells a percentage of production on a fixed contract price
and the remainder at the monthly spot price. However, for 1999 the Company
believes that continued weakness in the oil and gas sector will persist.
Therefore the Company is selling 100% on a fixed price contract.
Our hydrocarbon reserves were valued by independent engineers at a net present
value of $1,178,295 at December 31, 1998, a decrease of $578,900 from December
31, 1997 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 price of gold has fluctuated in the last 12 months from a high of $314.50
per oz. to a low of $274.60 per oz. However, the Company believes it can
produce the gold at a cost that will still allow a significant profit.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (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 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.
Subsequent Activities
- ----------------------
On March 22, 1999, Tri-Valley and Placer Dome U.S., Inc., executed a definitive
agreement for PDUS to explore, develop and mine approximately 36 square miles of
Tri-Valley's 50.5-square mile claim block at Richardson, Alaska.
Terms of the agreement called for PDUS to expend a minimum of US$6.5 million in
work on the property and partially reimburse Tri-Valley for some of its previous
exploration, all within five years, in order for PDUS to earn 51% interest in
the property PDUS may earn an additional 29% interest by completing a bankable
feasibility study on no less than 750,000 ounces of gold and enacting a positive
production decision on same. Tri-Valley estimates such a study could cost in
excess of US$10 million
Tri-Valley believes the PDUS exploration acreage hosts a massive gold-bearing
zone system related to the pluton underlying Buck Mountain and the Buckeye Creek
on the flank where samples grading high values of gold (1.5 opt), tellurium,
bismuth and tungsten with weaker arsenic values were found.
Tri-Valley retained approximately 14.5 square miles for its own account,
including a potentially high grade dike system and high grade creek as well as
placer rights over the entire 51.5 square miles of claims and prospecting sites.
Telecommunications
Tri-Valley Corporation continued its due diligence in 1998 to try to 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1998 and 1997
Balance Sheet
- --------------
The Company had $191,226 cash on hand at December 31, 1998 compared to
$2,778,592 as of December 31, 1997. This decrease was the result of the Company
spending $1,710,032 that had been advanced to the Company from the joint
interest partners for their participation in wells to be drilled during the year
1998. Accounts receivable are down for the year ended December 31, 1998 by
$389,185 due to less drilling activity by the Company in 1998. The Company has
a note receivable for a loan the Company made to the telecommunications
partnership. This loan is now in default and has been reclassified as a
non-current asset. However, the Company believes the collatteral for this loan
is more than sufficient to satisfy this debt. Trade accounts payable are
$507,730 greater for the year ended December 31, 1998 from the same period last
year due in large part to the costs associated with the lawsuit.
Revenues
Oil and Gas sales increased to $833,380 for the period ended December 31, 1998
from $753,466 for the year ended December 31, 1997. This increase of $79,914
was due to two wells drilled in 1997 that produced for only part of the year in
1997. However, they produced for an entire year in 1998. Gas prices were
favorable for 1998, the result of the Company selling its gas partially on a
fixed price contract and a portion on the spot market. However, for 1999, the
Company is selling on a fixed contract basis only as the Company is not
convinced that gas prices for 1999 will remain strong. Interest income was down
$29,259. This was due to fewer funds available to the company to invest in
interest bearing accounts, as has been the case in preceding years. Other
income was up $11,718 from increased overhead charges, which was the result of
more well being operated.
Costs and Expenses
- --------------------
Cost and expenses were up $597,630 from last year due in part to mining costs of
$228,707 which are now being expensed. These costs had been capitalized in
prior years. These costs were made up of lessor payments, option payments to
one lessor, a reservoir engineer report and costs of negotiating a joint venture
agreement with Placer Dome USA. General and administrative costs increased
$432,616 over last year primarily due to legal expenses related to the lawsuit
between TVOG and ABA Energy Corporation, et al. See item 3. Legal Proceedings.
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 14
-------
Consolidated Balance Sheets at December 31, 1998 and 1997 15-16
-------
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 17
-------
Consolidated Statements of Shareholders' Equity for the 18
Years Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 19-20
-------
Notes to Consolidated Financial Statements 21-38
-------
Supplemental Information about Oil and Gas Producing Activities
(Unaudited) 39
- ---------------------------------------------------------------- -------
</TABLE>
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, 1998 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 consolidated financial statements referred to above present
fairly in all material respects, the financial position of Tri-Valley
Corporation at December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended, 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
February 26, 1999
The accompanying notes are an integral part of these financial documents.
15
TRI-VALLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998___ 1997___
----------- --------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 191,226 $ 2,778,592
Accounts receivable, trade 307,573 696,758
Note receivable - 125,000
Prepaid expenses 2,029 2,029
----------- --------------------
Total Current Assets 500,828 3,602,379
----------- --------------------
PROPERTY AND EQUIPMENT, NET
(Notes 1 and 2) 1,038,237 821,614
----------- --------------------
OTHER ASSETS
Deposits 100,000 100,000
Note Receivable 125,000 -
Acquisition costs (Note 1) 183,342 119,007
Investments in partnerships (Note 1) 10,686 8,421
Well Database (net of accumulated of $31,550
And $1,539 at December 31, 1998 and
1997, respectively) 61,561 93,111
Goodwill (net of accumulated amortization
Of $188,901 at December 31, 1998, $178,055
At December 31, 1997 (Note 1) 244,952 255,798
Other 13,913 13,908
----------- --------------------
Total Other Assets 739,454 590,245
----------- --------------------
TOTAL ASSETS $ 2,278,519 $ 5,014,238
- -------------------------------------------------------------------------- =========== ====================
The accompanying notes are an integral part of these financial documents.
16
LIABILITIES AND SHAREHOLDERS' EQUITY
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Notes and contracts payable (Note 3)
Trade accounts payable $ 9,641 $ 90,667
Amounts payable to joint venture participants 582,533 74,796
Advances from joint venture participants 244,664 605,431
Due to related parties 135,032 1,845,064
5,712 96,532
------------ -------------
Total Current Liabilities 977,582 2,712,490
------------ -------------
LONG-TERM PORTION OF NOTES AND
CONTRACTS PAYABLE
Notes payable (Note 3) 8,527 13,950
- -------------------------------------------------------------------------- ------------ -------------
OTHER LIABILITIES
Investor payable -- 103,000
- -------------------------------------------------------------------------- ------------ -------------
SHAREHOLDERS' EQUITY
Common stock, $.001 par value; 50,000,000 shares
authorized; 19,088,248, 18,922,248,
issued and outstanding at December 31, 1998,
and 1997, respectively 19,088 18,922
Less: common stock in treasury, at cost,
172,925 and 156,925 shares at
December 31, 1998 and 1997 respectively (41,061) (28,639)
Capital in excess of par value 8,177,655 8,048,331
Accumulated deficit (6,863,272) (5,853,816)
------------ -------------
Total Shareholders' Equity 1,292,410 2,184,798
------------ -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,278,519 $ 5,014,238
- -------------------------------------------------------------------------- ============ =============
The accompanying notes are an integral part of these financial documents.
17
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
REVENUES
Sale of oil and gas $ 833,380 $ 753,466
Interest income 66,627 95,886
Other income 77,885 66,167
------------ ------------
977,892 915,519
------------ ------------
COST AND EXPENSES
Mining exploration costs 228,707 -
Oil and gas leases 108,810 145,443
General and administrative 1,509,181 1,076,565
Depreciation, depletion and amortization 135,955 152,490
Interest 4,695 15,220
------------ ------------
1,987,348 1,389,718
------------ ------------
LOSS BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE (1,009,456) (474,199)
TAX PROVISION (Note 5) __ - 1,600
------------ ------------
NET LOSS BEFORE CHANGE IN
ACCOUNTING PRINCIPLE
(1,009,456) (475,799)
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
$(1,009,456) $(3,336,572)
============ ============
NET LOSS BEFORE CHANGES IN
ACCOUNTING PRINCIPLES PER COMMON
SHARE $ (.05) $ (.03)
============ ============
CHANGE IN ACCOUNTING PRINCIPLE PER
COMMON SHARE $ - $ (.17)
============ ============
NET LOSS PER COMMON SHARE $ (.05) $ (.19)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 18,887,870 17,261,723
- -------------------------------------------------------------------------- ============ ============
The accompanying notes are an integral part of these financial documents.
18
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Capital in
Excess of Accumulated Treasury Shareholders'
Shares Par Value Par Value Deficit Stock Equity
---------- ----------- ------------ ------------ ------------ -----------
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
Issuance of
common stock
to investors 166,000 166 145,584 - (12,422) 133,328
Stock issuance -
Costs - - ( 16,260) - - ( 16,260)
Net loss - - (1,009,456) - (1,009,456)
---------- ----------- ------------ ------------ ------------ ------------
Balance at
December 31,
1998 19,088,248 $ 19,088 $ 8,177,655 $(6,863,272) $ (41,061) $1,292,410
========== =========== ============ ============ ============ ===========
(Continued on next page)
19
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,009,456) $(3,336,575)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation, depletion and amortization 135,955 152,490
Stock issued for services rendered - 133,000
Impairment, dry hole and other disposals of
property and equipment - 2,860,776
Changes in operating capital:
(Increase) decrease in accounts receivable 389,185 (418,648)
(Increase) in deposits and other assets (5) (38,000)
Increase in trade accounts payable 507,737 17,231
Increase (decrease) in amounts payable to
joint venture participants and related parties (451,587) 21,813
------------ ------------
Net Cash (Used) Generated by Operating Activities (428,171) (607,913)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable - (125,000)
Capital expenditures (374,517) (824,944)
Investment in partnerships (2,265) 12,257
------------ ------------
Net Cash Used by Investing Activities (376,782) (937,687)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in advances from joint
Ventures participants (1,710,032) 1,648,537
Restricted cash - escrow account - 60,000
Principal payments on long-term debt (86,449) (55,476)
Proceeds from issuance of common stock 63 48,185
Investor payable 103,000
Additional paid in capital 42,687 2,060,700
Purchase of treasury stock (12,422) -
Stock issuance costs (16,260) (375,119)
------------ ------------
Net Cash Provided by Financing Activities (1,782,413) 3,489,827
------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS (2,587,366) 1,944,227
CASH AT BEGINNING OF YEAR 2,778,592 834,365
------------ ------------
CASH AT END OF YEAR $ 191,226 $ 2,778,592
- ------------------------------------------------------------------------- ============ ============
The accompanying notes are an integral part of these financial documents.
20
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ --------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid $ 4,695 $ 15,220
============ ==========
Income taxes paid $ - $ 1,600
============ ==========
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Issuance of common stock for services rendered $ - $ 133,000
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 $ 103,000 $ 662,680
Increase in paid in capital due to change in par
value of common stock $ - $ 170,300
42
TRI-VALLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
24
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.
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 year 1987. The Company conducts its oil and gas business
primarily through its 5-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.NOTE 1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
--------------------------------------------
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.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Drilling Agreements/Joint Ventures(Continued)
- ------------------------------------
Receivables from and amounts payable to these related parties (as well as other
related parties) have been segregated in the accompanying financial statements.
In the event the Company has expended funds for a project in an amount greater
than the original contribution from investors, these costs offset advances from
other projects on the consolidated balance sheet until such time as the
investors contribute more monies to fund these projects. The Company had three
projects at December 31, 1998 and 1997, that had "over" expended funds in the
amounts of $552,179 and $112,374, respectively. Transactions with these parties
are within the ordinary course of business.
Oil and Gas Property and Equipment (Successful Efforts)
- --------------------------------------------------------------
The Company accounts for its oil and gas exploration and development costs on
the successful efforts method. Under this method, costs to acquire mineral
interests in oil and gas properties, to drill and complete exploratory wells
that find proved reserves and to drill and complete development wells are
capitalized. Exploratory dry-hole costs, geological and geophysical costs and
costs of carrying and retaining unproved properties are expensed when incurred.
Depletion, depreciation and amortization of oil and gas producing properties are
computed on an aggregate basis using the units-of-production method.
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and/or Long-Lived Assets to be Disposed of." This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. It establishes guidelines for determining recoverability based
on future net cash flows from the use of the asset and for the measurement of
the impairment loss. Impairment loss under SFAS No. 121 is calculated as the
difference between the carrying amount of the asset and its fair value. Any
impairment loss is recorded in the current period in which the recognition
criteria are first applied and met. Under the successful efforts method of
accounting for oil and gas operations, the Company periodically assessed its
proved properties for impairments by comparing the aggregate net book carrying
amount of all proved properties with their aggregate future net cash flows. The
new statement requires that the impairment review be performed on the lowest
level of asset groupings for which there are identifiable cash flows. In the
case of the Company, this results in a property by property impairment review.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Oil and Gas Property and Equipment (Successful Efforts) (Continued)
- --------------------------------------------------------------
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.
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.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
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.
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.
New Accounting Pronouncements
- -------------------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income. Comprehensive income is the same as net
income for all years presented.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and
Related Information. This statement requires the Company to report income/loss,
revenue, expense and assets by business segment including information regarding
the revenues derived from specific products and services and about the countries
in which the Company is operating. The statement also requires that the Company
report descriptive information about the way that operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the Company's general-purpose financial statements and changes in
the measurement of segments amounts from period to period. As noted above, this
statement establishes standards for reporting and display and has no material
effect on the Company's financial condition or results of operations.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
New Accounting Pronouncements (Continued)
- -------------------------------
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132 (SFAS 132), Employers'
Disclosures about Pensions and other Post-retirement Benefits. This statement
standardizes the disclosure requirements for pension and other post-retirement
benefits. The Company typically does not offer the types of benefit programs
that fall under the guidelines of this statement.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or liabilities
in the statement of financial position and measurement of those instruments at
fair value. The statement is effective for fiscal years beginning after June
15, 1999. Management has not determined what impact this standard, when
adopted, will have on the Company's financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
------------------------
Oil and gas properties, and equipment and fixtures consist of the following:
December 31, December 31,
1998 1997
-------- --------
Oil and Gas - California
- ----------------------------------------
Proved properties, net of accumulated
depletion of $444,686 and $378,899 at
December 31, 1998 and 1997,respectively $254,267 $332,914
Unproved properties 698,319 399,818
-------- --------
Total Oil and Gas Properties $952,586 $732,732
- ---------------------------------------- ======== ========
</TABLE>
NOTE 2 - PROPERTY AND EQUIPMENT (Continued)
------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---------- --------
<S> <C> <C>
Other Property and Equipment
- ----------------------------------------------
Land 11,281 11,281
Building net of accumulated depreciation
$7,238 and $6,110 at December 31,
1998 and 1997, respectively 37,886 39,014
Office equipment, vehicle, and leasehold
Improvements net of accumulated
Depreciation of $110,099 and $97,998 at
December 31, 1998 and 1997, respectively 36,484 38,587
---------- --------
Total Other Property and Equipment 85,651 88,882
---------- --------
Property and Equipment (Net) $1,038,237 $821,614
- ---------------------------------------------- ========== ========
</TABLE>
NOTE 3 - NOTES AND CONTRACTS PAYABLE
------------------------------
Long-term debt is summarized below:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------- -------
<S> <C> <C>
Note payable to National Bank of Alaska
dated August 27, 1992; secured by
property; payable in monthly
installments of $539 including interest.
Interest rate at 12.00%, December 31, 1998,
and 1997. $13,594 $18,092
------- -------
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
------- -------
Note payable to principal shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $4,354,
including interest. - 33,811
------- -------
</TABLE>
NOTE 3 - NOTES AND CONTRACTS PAYABLE (Continued)
------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------- --------
<S> <C> <C>
Note payable to principal shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $771,
including interest. - 6,712
------- --------
Note payable to principal shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $542,
including interest. - 4,716
------- --------
Note payable to principal shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $2,167,
including interest. - 20,893
------- --------
Note payable to principal shareholder, dated
June 28, 1997; unsecured; interest at 8.00%;
payable in monthly installments of $1,496,
including interest. - 15,819
------- --------
18,168 104,617
Less current portion 9,641 90,667
------- --------
Long-Term Portion of Notes and Contracts
Payable $ 8,527 $ 13,950
- ---------------------------------------------- ======= ========
</TABLE>
Maturities of long-term debt for the five years succeeding December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
- -------------
1999 9,641
2000 5,709
2001 2,818
Thereafter -
$18,168
- ------------- =======
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
----------------------------
The following are known to the Company to be the only beneficial owners of 5% or
more of the Company's outstanding common stock at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Ownership Shares Percentage
---------------- ----------
Dennis Vaughan 1,033,200 5.4%
Albert C. Kutcher 1,303,900 6.8%
</TABLE>
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>
Year Ended Year Ended
December 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
Partnership income, net of expenses $258,520 $255,192
- ----------------------------------- ======== ========
</TABLE>
Due to related parties of $5,712 and $96,532 payable to F. Lynn Blystone at
December 31, 1998 and 1997, respectively.
On March 22, 1997, the directors were granted 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 shares were
appropriately discounted to $0.74 per share.
On August 8, 1997, the board of directors awarded F. Lynn Blystone, CEO and
President of the Company, 40,000 shares of unregistered, restricted common stock
for cumulative compensation over the previous four years 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.
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
----------------------------
During fiscal year 1997, the Company paid a principle shareholder of Tri-Valley
Corporation $322,000 for services rendered related to the issuance of stock.
These transactions are recorded as stock issuance costs which are a component of
shareholder's equity.
On December 22, 1997, the Company received a promissory note in the amount of
$3,750 from F. Lynn Blystone. Interest is payable at 10% per annum, in full
with principal on June 22, 1999. This note was received in consideration for
5,000 shares of stock purchased via stock options.
NOTE 5 - INCOME TAXES
-------------
At December 31, 1998, the Company had available net operating loss carry
forwards for financial statements and federal income tax purposes of
approximately $3,790,000. These loss carryforwards expire between 1999 and 2013.
The components of the net deferred tax assets were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 1,280,000 $ 765,000
Satutory depletion carryforwards 200,000 775,000
------------ ------------
Total Deferred Tax Assets 1,480,000 1,540,000
------------ ------------
Valuation Allowance (1,480,000) (1,540,000)
------------ ------------
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:
December 31, 1997 96,091 350,689 283,749 37,097
December 31, 1998 * 777,688 * 55,692
- -------------------- ------ ------- ------- ------
</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 adopted SFAS No. 131, Disclosure About Segments of an Enterprise and
Related Information ("SFAS 131") in 1998 which changes the way the Company
reports information about its operating segments.
The Company identifies reportable segments by product and country, although the
Company currently does not have foreign country segments. The Company includes
revenues from both external customers and revenues from transactions with other
operating segments in its measure of segment profit or loss. The Company also
includes interest revenue and expense, DD&A, and other operating expenses in its
measure of segment profit or loss.
The accounting policies of the reportable segments are the same as those
described in the Summary of Significant Accounting Principles (See Note 1).
NOTE 7 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS (Continued)
--------------------------------------------------------
The Company's operations are classified into two principal industry segments.
There was no activity in the power generation segment. Following is a summary
of segmented information for 1998 and 1997:
<TABLE>
<CAPTION>
Oil and Gas Precious Metals Total
------------- ----------------- ------------
<S> <C> <C> <C>
Year Ended December 31, 1998
Revenues from External Customers $ 833,380 $ - $ 833,380
============= ================= ============
Interest Revenue $ 66,627 $ - $ 66,627
============= ================= ============
Interest Expense $ 4,695 $ - $ 4,695
============= ================= ============
Expenditures for Segment Assets $ 310,182 $ - $ 310,182
============= ================= ============
Depreciation, Depletion and Amortization $ 135,955 $ - $ 135,955
============= ================= ============
Total Assets $ 2,307,703 $ - $ 2,307,703
============= ================= ============
Income (Loss) Before Taxes $ (780,749) $ (228,707) $(1,009,456)
Income Taxes - - -
------------- ----------------- ------------
Net Loss $ (780,749) $ (228,707) $(1,009,456)
============= ================= ============
Year Ended December 31, 1997
Revenues from External Customers $ 753,466 $ - $ 753,466
============= ================= ============
Interest Revenue $ 95,886 $ - $ 95,886
============= ================= ============
Interest Expense $ 15,220 $ - $ 15,220
============= ================= ============
Expenditures for Segment Assets $ 154,027 $ - $ 154,027
============= ================= ============
Depreciation, Depletion and Amortization $ 151,362 $ 1,128 $ 152,490
============= ================= ============
Total Assets $ 4,975,224 $ 39,014 $ 5,014,238
============= ================= ============
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)
============= ================= ============
</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, 1998 and
1997, and the transition period ended December 31, 1996 is shown below:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise
of Shares Price
---------- ------
<S> <C> <C>
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
Granted -
Exercised 13,000 $ 0.50
Canceled -
----------
Outstanding at December 31, 1998 556,000 $ 0.69
==========
Exercisable at December 31, 1998 556,000 $ 0.69
==========
Available for Issuance at December 31, 1998 1,000,000
- ------------------------------------------- ==========
</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>
0.50 296,000 3.61 296,000
0.55 160,000 .75 160,000
1.50 100.000 1.00 100,000
--------------------- ----------------
556,000 556,000
=============== =====================
</TABLE>
Leases
- ------
The Company conducts its operations from leased facilities. The leases, are
classified as operating leases and expired on January 1, 1998 and February 1,
1999. They now continue on a month to month basis.
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.
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.
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.
NOTE 9 - COMMON STOCK (Continued)
-------------
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>
Year Ended Year Ended
December 31, December 31,
1998 1997
----------- ----------
<S> <C> <C>
Outstanding "A" warrants beginning - 1,372,000
Additional granted - -
Exercised during period - (1,372,000)
---- -------------------------
Outstanding "A" warrants at end of period - -
==== =========================
Outstanding "B" warrants beginning -
Additional granted - 1,365,000
Exercised during period - - (814,000)
Expired during period - (551,000)
---- -------------------------
Outstanding "B" warrants at end of period - -
==== =========================
Outstanding "C" warrants beginning - 1,365,000
Additional granted - -
Exercised during period - (501,000)
Expired during period - (864,000)
---- -------------------------
Outstanding "C" warrants at end of period - -
- ----------------------------------------- ==== =========================
</TABLE>
NOTE 11 - INVESTOR PAYABLE
-----------------
The Company had investor payables totaling $103,000 at December 31, 1997. This
payable was 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 during 1998 reducing these payables to zero.
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, 1998 and
1997. 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>
Year Ended Year Ended
December 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Aggregate capitalized costs:
Proved properties $ 698,953 $ 711,813
Unproved properties 698,319 399,818
Accumulated depletion, depreciation and
amortization (444,686) (378,899)
---------- ----------
Net capitalized costs $ 952,586 $ 732,732
- ----------------------------------------- ========== ==========
</TABLE>
The following sets forth costs incurred for oil and gas property acquisition,
exploration and development activities, whether capitalized or expensed, during:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
-------- -------
<S> <C> <C>
Acquisition of producing
properties and productive
and non-productive acreage $298,501 $33,566
- ---------------------------- ======== =======
</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>
Year Ended Year Ended
December 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Sales to unaffiliated parties $ 833,380 $ 767,626
Production costs (108,810) (97,546)
Depletion, depreciation and
amortization (80,330) (128,503)
---------- ----------
644,240 541,577
Income tax expenses (219,042) (184,136)
---------- ----------
Results of operations from activities before
extraordinary items (excluding blending
operations, corporate overhead and
interest costs) $ 425,198 $ 357,441
- --------------------------------------------- ========== ==========
</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, 1998 and 1997, and changes
in such quantities during each of the years then ended, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
--------- ----------
Oil Gas Oil Gas
(BBL) (MCF) (BBL) (MCF)
----- ----- ----- -----
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year 224 1,903,154 644 2,003,135
Revisions of previous estimates Extensions, discoveries and 147 (190,709) (274) (273,214)
other additions - - 79 497,112
Production (137) (277,946) (225) (323,879)
----- ---------- ----- ----------
End of year 234 1,434,499 224 1,903,154
===== ========== ===== ==========
Proved developed reserves:
Beginning of year 224 1,903,154 644 2,003,135
===== ========== ===== ==========
End of year 234 1,434,499 224 1,903,154
===== ========== ===== ==========
</TABLE>
Standardized measure of discounted future net cash flows relating to proved oil
- --------------------------------------------------------------------------------
and as reserves
- -------------
A standardized measure of discounted future net cash flows is presented below
for the year ended December 31, 1998 and 1997.
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>
Year Ended Year Ended
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Future cash in flows $2,999,514 $4,166,677
Future production and development costs (956,472) (990,987)
Future income tax expenses (59,166) (380,077)
----------- -----------
Future net cash flows 1,983,876 2,795,613
----------- -----------
10% annual discount for estimated timing
of cash flows 805,581 1,038,418
----------- -----------
Standardized measure of discounted future
net cash flow $1,178,295 $1,757,195
- ----------------------------------------- =========== ===========
</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.
51
Changes in standardized measure of discounted future net cash flow from proved
- --------------------------------------------------------------------------------
reserve quantities (Continued)
- -------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Standardized measure - beginning of period $1,757,195 $1,394,701
----------- -----------
Sales of oil and gas produced, net of production costs (724,570) (670,080)
----------- -----------
Revisions of estimates of reserves provided in
in prior years:
Net changes in prices and production costs 34,516 149,033
Revisions of previous quantity estimates (285,184) (614,464)
Extensions, discoveries and improved recovery - 1,123,473
----------- -----------
Accretion of discount 175,720 139,470
Changes in production rates (timing) and other (100,292) 114,268
----------- -----------
Net change in income taxes 320,910 120,794
----------- -----------
Net increase (578,900) 362,494
----------- -----------
Standardized measure - end of period $1,178,295 $1,757,195
- ------------------------------------------------------ =========== ===========
</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 63 1974 President,
Chief Executive
Officer
Dennis P. Lockhart 52 1982 None
Milton J. Carlson 69 1985 None
Earl H. Biestline 83 1992 None
Loren J. Miller(1) 54 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 63 President and Chief Executive Officer,
TVC (October 9, 1981)
CEO TVOG (October 9, 1981)
Pres. and CEO TVPC (December 11, 1997)
Thomas J. Cunningham 56 Treasurer and Chief Financial Officer
TVC/TVOG (February 28, 1997)
TVPC (December 11, 1997)
Secretary TVC/TVOG/TVPC
(December 21, 1998)
Joseph R. Kandle 56 President TVOG (December 21, 1998)
<PAGE>
- ------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
- ------------------------------------------------------------------
F. LYNN BLYSTONE - 63 President and Chief Executive Officer of 1974
- ---------------------
Tri-Valley Corporation and Tri-Valley Power
Corporation, and CEO of Tri-Valley Oil & Gas
Company, which are two wholly owned
subsidiaries of Tri-Valley Corporation,
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 - 52 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 - 69 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.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
- ------------------------------------------------------------------
LOREN J. MILLER, CPA - 54 Controller, Petro America, Inc. 1992
- -------------------------
Treasurer, Jankovich Company
San Pedro, 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. - 83 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 - 56 Secretary, Treasurer and Chief Financial 1997
- --------------------------
Officer of Tri-Valley Corporation, and its
wholly owned subsidiaries, Tri-Valley Oil &
Gas Company and Tri-Valley Power
Corporation, Bakersfield, California
Named as Tri-Valley Corporation's Treasurer and Chief Financial Officer on
February 1997, and as Corporate Secretary on December 21, 1998, 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.
JOSEPH R. KANDLE - 56 President and Chief Operating Officer 1998
- ------------------------
Tri-Valley Oil & Gas Company, wholly
owned subsidiary of Tri-Valley Corporation
Bakersfield, California
Mr. Kandle was named as President of Tri-Valley Oil & Gas Co. February 1,
1999 after having joined Tri-Valley Oil & Gas on June 1, 1998, as Vice President
- - Engineering. Mr. Kandle is a 1965 graduate of the Montana school of mines
with a B.S. degree in Petroleum Engineering. Mr. Kandle has 34 years of
experience in drilling, production, and operations starting with Mobil in 1965
where he specialized in deep drilling. After Mobil, he has held positions of
V.P. & Chief Engineer of Great Basins Petroleum, V.P. - Engineering with Star
Resources and V.P.- Engineering with Atlantic Oil Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 and Securities and Exchange
Commission regulations require that the Company's directors, certain officers,
and greater than 10 percent shareholders must file reports of ownership and
changes in ownership with the SEC and must furnish the Company with copies of
all such reports they file. Based solely on the information furnished to the
Company, we believe that no person failed to file required Section 16(a) reports
on a timely basis during or in respect of 1997.
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, 1998, 1997, and 1996.
Long Term
Compensation
Annual Compensation Awards
------------------- ------
(a) (b) ( c ) (d) (e)
Other Securities
Name Period Covered Salary Compensation Underlying Options
---- -------------- ------ ------------ ------------------
F. Lynn FYE 12/31/98 $156,000(1)
Blystone, CEO FYE 12/31/97 $197,660(1) 195,000(2)
FYE 12/31/96 $ 72,626(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 1998 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 1998.
( A ) ( B ) ( C )
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options/SARs at
Options/SARs at FY-End (#) FY-End ($)*
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
F. Lynn Blystone 100,000/0 0/0
ITEM 10. EXECUTIVE COMPENSATION(CONTINUED)
- ----------------------------------
( A ) ( B ) ( C )
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options/SARs at
Options/SARs at FY-End (#) FY-End ($)*
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
Dennis P. Lockhart 30,000/0 0/0
40,000/0 0/0
Milton J. Carlson 30,000/0 0/0
40,000/0 0/0
Loren J. Miller 30,000/0 0/0
40,000/0 0/0
Earl H. Beistlin e 20,000/0 0/0
40,000/0 0/0
*Based on a fair market value of $0.50 per share, which was the closing bid
price of the Company's Common Stock in the Nasdaq National Market System on
December 31, 1998.
Compensation of Directors
- ---------------------------
The Company compensates non-employee directors for their service on the board of
directors. No directors received any stock options in 1998. The following
tables sets forth information regarding the cash compensation paid to outside
directors in 1998.
(A) (B)
NAME FEES
---- ----
Earl Beistline $1,350
Milton Carlson $2,322
Dennis P. Lockhart $2,510
Loren J. Miller $1,834
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
As of December 31, 1998, there were 19,088,248 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
---------------- ------ -----
Albert C. Kutcher
12052 Linda Flora Drive
Ojai, CA 93023 1,303,900 6.8%
Dennis Vaughan
2298 Featherhill Road
Santa Barbara, CA 93108 1,033,200 5.4%
The following table sets forth the beneficial ownership of the Company's common
stock as of December 31, 1998 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 512,409(3) 2.7%
Dennis P. Lockhart 122,091(3) *
Milton J. Carlson 129,000(3) *
Loren J. Miller 95,300(3) *
Earl H. Beistline 78,000(3) *
Total group (all directors and
- ------------
Executive officers - 5 persons) 936,800(3) 4.9%
*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 69,000; Loren J. Miller 70,000 and Earl H. Beistline 58,000.
F. Lynn Blystone has 100,000.
(2) Based on total outstanding shares of 19,088,248 as of December 31, 1998.
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
- - None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 23, 1999 By:_/s/ F. Lynn Blystone
F. Lynn Blystone
President, Chief Executive Officer and
Director
March 19, 1999 By:__/s/ Thomas J. Cunningham
Thomas J. Cunningham
Sec., Treas., 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:
March 19, 1999 By:__/s/ Dennis P. Lockhart
Dennis P. Lockhart, Director
March 17, 1999 By:__/s/ Milton J. Carlson
Milton J. Carlson, Director
March 19, 1999 By:__/s/ Earl H. Beistline
Earl H. Beistline, Director
March 23, 1999 By:__/s/ Loren J. Miller
Loren J. Miller, Director
