SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003 Commission File No. 0-6119
TRI-VALLEY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 84-0617433
(State or other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
5555 BUSINESS PARK SOUTH, SUITE 200, BAKERSFIELD, CALIFORNIA 93309
(Address of Principal Executive Offices)
Registrant's Telephone Number Including Area Code:(661) 864-0500
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
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-K 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-K, if
applicable, or any amendment to this Form 10-K. [X]
The issuer's revenues for the most recent fiscal year were $7,609,245.
As of February19, 2004, 20,099,627 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$92,815,066.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Exhibit Index appears on page 45
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 1
Competition 1
Governmental Regulation 1
Environmental Issues 2
Employees 3
Available Information 3
ITEM 2. PROPERTIES 3
Oil and Gas Operations 3
Precious Metals 6
ITEM 3. LEGAL PROCEEDINGS 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS 8
Recent Sales of Unregistered Securities 8
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 9
Notice Regarding Forward-Looking Statements 9
Critical Accounting Policies 9
Overview 11
Natural Gas Activities 12
Petroleum Activities 12
Precious Metals Activity 13
Results of Operations 13
Comparison of Years Ended December 31,2003 and 2002 13
Balance Sheet 13
Revenues 14
Costs and Expenses 14
Comparison of Years Ended December 31,2002 and 2001 14
Balance Sheet 14
Revenues 14
Costs and Expenses 14
Financial Condition 15
Commitments 15
Operating Activities 15
Investing Activities 15
Financing Activities 15
Liquidity 15
ITEM 8. FINANCIAL STATEMENTS 19
Notes to Consolidated Financial Statements 24
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A CONTROLS AND PROCEDURES 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 52
ITEM 11. EXECUTIVE COMPENSATION 54
Employment Agreement with Our President 55
Aggregated 2003 Option Exercises and Year-End Values 55
Compensation of Directors 55
Performance Graph 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 57
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 57
ITEM 15. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K 58
SIGNATURES 59
16
PART I
------
ITEM 1. BUSINESS
------------------
Tri-Valley Corporation, a Delaware corporation formed in 1971, is in the
business of exploring, acquiring and developing prospective and producing
petroleum and precious metals properties and interests therein. Tri-Valley has
two wholly owned subsidiaries. Tri-Valley Oil & Gas Company ("TVOG") operates
the oil & gas activities. TVOG derives the majority of its revenue from sale of
oil and gas properties. Tri-Valley Power Corporation is the other wholly owned
subsidiary. However, this subsidiary is inactive at the present time. The
precious metals activity is operated directly by Tri-Valley Corporation.
Substantially all of our oil and gas reserves are located in northern
California.
TVOG primarily generates its own exploration prospects from its internal
database, and also screens prospect submittals from other geologists and
companies. TVOG generates these geological "plays" within a certain geographic
area of mutual interest. The prospect is then presented to potential
co-venturers. The company deals with both accredited individual investors and
energy industry companies. TVOG is the operator of these co-ventures.
In 1987, we acquired precious metals claims on Alaska state lands. We have
conducted exploration operations on these properties and have reduced our
original claims to a block of approximately 27,440 acres (42.9 square miles).
We have conducted trenching, core drilling, bulk sampling and assaying
activities to date and have reason to believe that mineralization exists to
justify additional exploration activities. However, to date, we have not
identified probable mineral reserves on these properties. There is no assurance
that a commercially viable mineral deposit exists on any of these
above-mentioned mineral properties. Further exploration is required before a
final evaluation as to the economic and legal feasibility can be determined.
We sell substantially all of our oil and gas production to ConocoPhillips.
Other gatherers of oil and gas production operate within our area of operations
in California, and we are confident that if ConocoPhillips ceased purchasing our
production we could find another purchaser on similar terms with no adverse
consequences to our income or operations.
Competition
-----------
The oil and gas industry is highly competitive in all its phases. Competition
is particularly intense with respect to the acquisition of desirable producing
properties, the acquisition of oil and gas prospects suitable for enhanced
production efforts, and the hiring of experienced personnel. Our competitors in
oil and gas acquisition, development, and production include the major oil
companies in addition to numerous independent oil and gas companies, individual
proprietors and drilling programs. Many of these competitors possess and employ
financial and personnel resources substantially greater than those which are
available to us and may be able to pay more for desirable producing properties
and prospects and to define, evaluate, bid for, and purchase a greater number of
producing properties and prospects than we can. Our financial or personnel
resources to generate reserves in the future will be dependent on our ability to
select and acquire suitable producing properties and prospects in competition
with these companies.
Governmental Regulation
------------------------
Domestic exploration for the production and sale of oil and gas is extensively
regulated at both the federal and state levels. Legislation affecting the oil
and gas industry is under constant review for amendment or expansion, frequently
increasing the regulatory burden. Also, numerous departments and agencies, both
federal and state, are authorized by statute to issue, and have issued, rules
and regulations affecting the oil and gas industry which often are difficult and
costly to comply with and which carry substantial penalties for noncompliance.
State statutes and regulations require permits for drilling operations, drilling
bonds, and reports concerning operations. Most states in which we will operate
also have statutes and regulations governing conservation matters, including the
unitization or pooling of properties and the establishment of maximum rates of
production from wells. Many state statutes and regulations may limit the rate
at which oil and gas could otherwise be produced from acquired properties. Some
states have also enacted statutes prescribing ceiling prices for natural gas
sold within their states. Our operations are also subject to numerous laws and
regulations governing plugging and abandonment, the discharge of materials into
the environment or otherwise relating to environmental protection. The heavy
regulatory burden on the oil and gas industry increases its costs of doing
business and consequently affects its profitability. We cannot be sure that a
change in such laws, rules, regulations, or interpretations, will not harm our
financial condition or operating results.
Environmental Issues
---------------------
Mining Activities
Mining activities in the United States are subject to federal and state laws and
regulations covering mining safety and environmental quality. However, because
we do not have active mining operations at present, these regulations have
little impact on our current activities. In 2003, 2002 and 2001, the regulatory
requirements had no significant effect on our precious metals activity as we
continued our exploration efforts.
Should we seek to develop our precious metals claims, development efforts would
require compliance with mining laws and regulations. State and federal laws
impose minimum safety standards to protect workers in the construction and
development of mines and conduct of mining operations. Mining activities are
subject to environmental regulation of the output of mines, particularly in the
storage and disposal of waste from mining operations. Environmental regulations
restrict the storage, use and disposal of both the materials used in mining
operations and the waste contained in mineral ore, all of which contain toxic
materials that would damage the surrounding land and ground water if not
carefully handled.
In addition, federal and state regulations call for reclamation of land which
has been altered by mining activities. These regulations may require
significant expenditures to clean up a mining site during and after mining.
Before we could begin actual mining operations on our claims, we would have to
develop a feasibility study which would, among other things, address the
potential costs of labor, safety and environmental regulation on any proposed
mining activity. We do not expect to begin a feasibility study in 2004 and do
not expect to incur any significant regulatory costs or liabilities in
connection with government regulation of our claims.
Energy Operations
Our energy operations are subject to risks of fire, explosions, blow-outs, pipe
failure, abnormally pressured formations and environmental hazards, such as oil
spills, natural gas leaks, ruptures or discharges of toxic gases, the occurrence
of any of which could result in substantial losses due to injury or loss of
life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. In
accordance with customary industry practice, we maintain insurance against these
kinds of risks, but we cannot be sure that our level of insurance will cover all
losses in the event of a drilling or production catastrophe. Insurance is not
available for all operational risks, such as risks that we will drill a dry
hole, fail in an attempt to complete a well or have problems maintaining
production from existing wells.
Oil and gas activities can result in liability under federal, state, and local
environmental regulations for activities involving, among other things, water
pollution and hazardous waste transport, storage, and disposal. Such liability
can attach not only to the operator of record of the well, but also to other
parties that may be deemed to be current or prior operators or owners of the
wells or the equipment involved. Numerous governmental agencies issue rules and
regulations to implement and enforce such laws, which are often difficult and
costly to comply with and which carry substantial administrative, civil and
criminal penalties and in some cases injunctive relief for failure to comply.
Some laws, rules and regulations relating to the protection of the environment
may, in certain circumstances, impose "strict liability" for environmental
contamination. These laws render a person or company liable for environmental
and natural resource damages, cleanup costs and, in the case of oil spills in
certain states, consequential damages without regard to negligence or fault.
Other laws, rules and regulations may require the rate of oil and gas production
to be below the economically optimal rate or may even prohibit exploration or
production activities in environmentally sensitive areas. In addition, state
laws often require some form of remedial action, such as closure of inactive
pits and plugging of abandoned wells, to prevent pollution from former or
suspended operations.
The federal Comprehensive Environmental Response, Compensation and Liability
Act, or CERCLA, also known as the "Superfund" law, imposes liability, without
regard to fault, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the current
or prior owner or operator of the disposal site or sites where the release
occurred and companies that transported, disposed or arranged for the transport
or disposal of the hazardous substances found at the site. Persons who are or
were responsible for releases of hazardous substances under CERCLA may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for the federal or state
government to pursue such claims. It is also not uncommon for neighboring
landowners and other third parties to file claims for personal injury or
property or natural resource damages allegedly caused by the hazardous
substances released into the environment. Under CERCLA, certain oil and gas
materials and products are, by definition, excluded from the term "hazardous
substances." At least two federal courts have held that certain wastes
associated with the production of crude oil may be classified as hazardous
substances under CERCLA. Similarly, under the federal Resource, Conservation
and Recovery Act, or RCRA, which governs the generation, treatment, storage and
disposal of "solid wastes" and "hazardous wastes," certain oil and gas materials
and wastes are exempt from the definition of "hazardous wastes." This exemption
continues to be subject to judicial interpretation and increasingly stringent
state interpretation. During the normal course of operations on properties in
which we have an interest, exempt and non-exempt wastes, including hazardous
wastes, that are subject to RCRA and comparable state statutes and implementing
regulations are generated or have been generated in the past. The federal
Environmental Protection Agency and various state agencies continue to
promulgate regulations that limit the disposal and permitting options for
certain hazardous and non-hazardous wastes.
Compliance with environmental requirements, including financial assurance
requirements and the costs associated with the cleanup of any spill, could have
a material adverse effect on our capital expenditures or earnings. These laws
and regulations have not had a material affect on our capital expenditures or
earnings to date. Nevertheless, changes in environmental laws have the
potential to adversely affect operations. At this time, we have no plans to
make any material capital expenditures for environmental control facilities.
Employees
---------
We had a total of five full-time employees, one part-time bookkeeper, and two
consultants on December 31, 2003.
Available Information
----------------------
We file annual, annual and period reports, proxy statements and other
information with the Securities and Exchange Commission using SEC's EDGAR
system. The SEC maintains a site on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding us and other registrants that file reports electronically with the
SEC. You may read and copy any materials that we file with the SEC at its
Public Reference Room at 450 5th Street, N.W., Washington, D.C. 20549. Our
common stock is listed on the American Stock Exchange, under the symbol TIV.
Please call the SEC at 1-800-SEC-0330 for further information about their public
reference rooms. Our website is located at http://www.tri-valleycorp.com.
We furnish our shareholders with a copy of our annual report on Form 10-K, which
contains audited financial statements, and such other reports as we, from time
to time, deem appropriate or as may be required by law. We use the calendar
year as our fiscal year.
ITEM 2. PROPERTIES
--------------------
Our headquarters and administrative offices are located at 5555 Business Park
South, Suite 200, Bakersfield, California 93309. We lease approximately 4,500
square feet of office space at that location. Our principal properties consist
of proven and unproven oil and gas properties, mining claims on unproven
precious metals properties, maps and geologic records related to prospective oil
and gas and unproven precious metal properties, office and other equipment.
TVOG has a worldwide geologic library with data on every continent except
Antarctica including over 700 leads and prospects in California, our present
area of emphasis.
Oil and Gas Operations
-------------------------
The oil and gas properties in which we hold interests are primarily located in
the area of central California known as the Sacramento Valley. We also lease
exploration acreage in the San Joaquin and Santa Maria Valleys. We contract
for the drilling of all wells and do not own any drilling equipment, bulk
storage facilities, or refineries. We do own a small segment of pipeline at
Tracy, California.
We have retained the services of Cecil Engineering, an independent engineer
qualified to estimate our net share of proved developed oil and gas reserves on
all of our oil and gas properties at December 31, 2003 for SEC filing. We do not
include any undeveloped reserves in these reserve studies. Only proved
developed reserves are listed in our reserve report. Price is a material factor
in our stated reserves, because higher prices permit relatively higher-cost
reserves to be produced economically. Higher prices generally permit longer
recovery, hence larger reserves at higher values. Conversely, lower prices
generally limit recovery to lower-cost reserves, hence smaller reserves. The
process of estimating oil and gas reserve quantities is inherently imprecise.
Ascribing monetary values to those reserves, therefore, yields imprecise
estimated data at best.
Our estimated future net recoverable oil and gas reserves from proved developed
properties as of December 31, 2003, December 31, 2002 and December 31, 2001 were
as follows:
BBL MCF
--- ---
December 31, 2003 Condensate 150 Natural Gas 1,319,887
December 31, 2002 Condensate 150 Natural Gas 1,492,245
December 31, 2001 Condensate 164 Natural Gas 1,684,757
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 our proved developed oil and gas reserves, discounted at 10%, was
$2,270,632 at December 31, 2003, $2,224,270 at December 31, 2002, and $1,005,010
at December 31, 2001. The unaudited supplemental information attached to the
consolidated financial statements provides more information on oil and gas
reserves and estimated values.
The following table sets forth the net quantities of natural gas and crude oil
that we produced during:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
Natural Gas (MCF) 162,314 232,578 230,392
Crude Oil (BBL) 25 29 14
The following table sets forth our average sales price and average production
(lifting) cost per unit of oil and gas produced during:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
Gas (Mcf) Oil (Bbl*) Gas (Mcf) Oil (Bbl*) Gas (Mcf) Oil
(Bbl*)
Sales Price $5.07 29.46 $3.07 $19.13 $6.93 $22.32
Production Costs $0.78 0 $0.98 0 $0.40 0
Net Profit $4.29 29.46 $2.09 $19.13 $6.53 $22.32
* Amount represents total sales price of associated condensate, unable to
determine price per barrel.
As of December 31, 2003 we had the following gross and net position in wells and
developed acreage:
Wells (1) Acres (2)
--------- ---------
Gross Net Gross Net
11 4.537 2,192 645
(1) "Gross" wells represent the total number of producing wells in which we
have a working interest. "Net" wells represent the number of gross producing
wells multiplied by the percentages of the working interests which we own. "Net
wells" recognizes only those wells in which we hold an earned working interest.
Working interests earned at payout have not been included.
(2) "Gross" acres represent the total acres in which we have a working
interest; "net" acres represent the aggregate of the working interests which we
own in the gross acres.
The following table sets forth the number of productive and dry exploratory and
development wells which we drilled during:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
Exploratory
Producing -0- -0- -0-
Recompleting 1 -0-
Dry 2 1
Total -0- 3 1
Development
Producing -0- -0- -0-
Dry -0- -0- -0-
Total -0- -0- -0-
We drilled 4 wells in 2003, which are being evaluated. No final decisions have
been made as to the results.
The following table sets forth information regarding undeveloped oil and gas
acreage in which we had an interest on December 31, 2003:
State Gross Acres Net Acres
----- ----------- ---------
California 36,271 32,384
Nevada 21,737 21,737
Some of our 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. In the next three years, the following lease
gross acreage expires:
Expires in 2004 3,376 acres
Expires in 2005 7,151 acres
Expires in 2006 4,260 acres
Precious Metals
----------------
The precious metals properties are located in interior Alaska. They are
comprised of 626 40-acre claims and 15 160-acre claims, of which 104 claims are
leased from others, all are located solely on State owned lands requiring annual
assessment work, and an annual per claim fee. All fees are current.
The mining claim block covers about 42.9 square miles or 27,740 acres of land,
all of which is owned by the State of Alaska. The claims lie within T-5-6-7 S,
R 5-6-7-8 E, Fairbanks Meridian (Plate 1), immediately north of the Richardson
Highway, an all-weather paved highway that connects Fairbanks, Alaska, with
points south and east. Fairbanks is approximately 65 miles northwest of
Richardson, and Delta Junction, also on the highway, is about 30 miles to the
southeast. The Trans Alaska Pipeline corridor is near the northeastern edge of
the claim block and the service road along the pipeline provides access to the
claims from the north. Numerous good to fair dirt roads traverse the claims.
The following table sets forth the information regarding the acreage position we
have under lease in Alaska as of December 31, 2003:
State Gross Acres Net Acres
----- ----------- ---------
Alaska 27,740 26,946
Mineral properties claimed on open state land require minimum annual assessment
work of $100 worth per State of Alaska claim. Expenditures on the Richardson,
Alaska acreage have already carried forward annual assessment requirements more
than four years on all its claims. We have no Federal claims.
We have had a joint scientific research agreement with TsNIGRI, the Central
Research Institute of Geological Prospecting for Base and Precious Metals, based
in Moscow, Russia since 1991. The proprietary technology they use for
evaluating large areas of covered sub-arctic terrain has been impressive and
encouraging to our efforts. Minute amounts of gold have been found in samples
at 60 locations along a 20-mile swath and over 1,000 samples have been assayed
by Bondar-Clegg, a respected assay house. We believe we have a great potential
and intend to continue our exploration of these properties.
We intend to continue our exploration efforts for precious metals on our claim
block in Richardson, Alaska. With the help of TsNIGRI, we have explored and
evaluated this property during the summer months, due to the constraints of the
weather in the winter months. This work will consist of field activity which
includes drilling bore holes, mapping and other geological work.
ITEM 3. LEGAL PROCEEDINGS
----------------------------
On November 7, 2002 a judgment of $141,500 was awarded to Armstrong Petroleum
against Tri-Valley Corporation. This was the result of a lawsuit that was filed
against Tri-Valley alleging a breach of contract. Armstrong and Tri-Valley
disagreed on the amount of royalties that were due Armstrong. Tri-Valley filed
an appeal of this judgment. On March 24, 2004, the appellate court affirmed the
decision of the trial court. We are considering whether to appeal the appellate
court judgment to the California Supreme Court. Tri-Valley Corporation created
a cash reserve for this judgment in 2002 when this verdict was awarded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------------------------
We held our annual meeting on October 20, 2003. At the meeting, the
shareholders re-elected all of the six directors who were recommended by the
board. They also approved the appointment of Brown Armstrong as our independent
accountants.
The shareholder votes were as follows:
Measure #1 - Election of Directors
FOR AGAINST ABSTAIN
F. Lynn Blystone 18,983,671 63,873
Milton J. Carlson 18,966,646 80,898
C. Chase Hoffman 18,986,146 61,398
Dennis P. Lockhart 18,986,646 60,898
Loren J. Miller 18,986,796 60,748
Harold J. Noyes 18,986,646 60,898
Measure #2 - Appoint Brown Armstrong as the Company's independent accountants.
FOR AGAINST ABSTAIN
18,972,416 75,128
PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
--------------------------------------------------------------------------------
HOLDER MATTERS
---------------
As of October 29, 2003, shares of Tri-Valley Corporation stock are traded on the
American Stock Exchange under the symbol "TIV". Prior to that, shares had been
traded over-the-counter on the Electronic Bulletin Board under the symbol
"TRIL." The following table shows the high and low sales prices reported on
AMEX from 10/29/03 to year end, and the high and low bid and asked prices of
Tri-Valley stock for the quarterly periods indicated as reported by the OTC
Stock Journal:
Bid Prices Asked Prices
---------- ------------
High Low High Low
---- --- ---- ---
2003
----
Fourth Quarter $6.20 $3.44 $6.75 $3.35
Third Quarter $3.74 $2.90 $3.93 $2.95
Second Quarter $3.79 $1.21 $4.20 $1.21
First Quarter $1.60 $1.25 $1.67 $1.21
2002
----
Fourth Quarter $2.14 $1.31 $2.25 $1.31
Third Quarter $2.45 $1.13 $2.65 $1.13
Second Quarter $1.60 $1.14 $1.75 $1.10
First Quarter $1.67 $1.14 $1.75 $1.10
As of December 31, 2003, we estimate that our common stock was held by
approximately 4,500 shareholders in 40 states and at least 4 foreign countries.
We historically have paid no dividends, and at this time do not plan to pay any
dividends in the immediate future. Rather, we strive to add share value through
discovery success. In 2003 trading volume exceeded 12.2 million shares.
Recent Sales of Unregistered Securities
-------------------------------------------
During 2003 we issued 104,000 shares of common stock without registration under
the Securities Act of 1933. One former employee and one private individual
exercised stock options for 20,000 and 10,000 shares respectively. The exercise
price of the stock options was $0.50 per share, and the options were exercised
on five occasions when the closing price of our common stock varied between
$1.51 and $4.85 per share. 3,000 shares were sold to a private individual for
$1.35 per share. 71,000 shares were awarded to three officers, five directors
and a consultant for service. The shares issued pursuant to the exercise of
options were issued in privately negotiated transactions in reliance on the
exemption contained in Section 4(2) of the Securities Act.
From September thru October 2003, we sold 255,387 shares of common stock
pursuant to the exercise of warrants previously issued to Swartz Private Equity,
an accredited investor, as part of a private equity line investment agreement
dated February 2002, between our company and Swartz. The issuance of our stock
upon exercise of the warrants was made in reliance on the exemption contained in
Regulation D under the Securities Act of 1933. We had previously registered the
resale of the stock by Swartz under the Securities Act of 1933 on a Form S-2
registration statement, and, accordingly, the shares issued to Swartz were not
subject to restrictions on transfer imposed by the Securities Act of 1933.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
-----------------------------------------------
Year Ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ----
Income Statement Data:
Revenues $ 7,609,245 $ 6,284,908 $ 2,130,187 $
2,197,369 $ 2,686,129
Operating Income (Loss) $ 1,217,782 $ 845,130 $
(117,975) $(1,360,263) $ (12,417)
Basic Earnings Per Share $ .06 $ .04 $
- $ (0.07) $ -
Balance Sheet Data:
Property and Equipment, net $ 1,522,333 $ 1,974,501 $
2,010,457 $ 1,357,959 $ 1,059,755
Total Assets $ 8,320,992 $ 4,634,874 $ 3,381,757 $
4,053,257 $ 9,802,463
Long Term Obligations $ 16,805 $ 26,791 $
8,371 $ 12,038 $ 21,055
Stockholder's Equity $ 2,555,456 $ 1,262,306 $ 353,776
$ 391,651 $ 391,651
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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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.
Critical Accounting Policies
The Company prepares its consolidated financial statements for inclusion in this
Report in accordance with accounting principles that are generally accepted in
the United States ("GAAP"). See Note 1 of the Notes to Consolidated Financial
Statements included in "Item 8. Financial Statements" for a comprehensive
discussion of the Company's significant accounting policies. GAAP represents a
comprehensive set of accounting and disclosure rules and requirements, the
application of which requires management to make judgments and estimates
including, in certain circumstances, choices between acceptable GAAP
alternatives.
Critical accounting policies are those that may have a material impact on our
financial statements and also require management to exercise significant
judgment due to a high degree of uncertainty at the time the estimate is made.
Our senior management has discussed the development and selection of our
accounting policies, related accounting estimates and disclosures with the Audit
Committee of our Board of Directors. We believe our critical accounting
policies include those addressing the recoverability and useful lives of assets,
oil and gas estimates and income taxes and application of these accounting
policies on a consistent basis enables us to provide timely and reliable
financial information about our earnings results, financial condition and cash
flows.
Goodwill and Intangible Assets
Deferred tax asset valuation allowances. From 1995 to 2003, the Company has
maintained a valuation allowance against a portion of its deferred tax assets.
SFAS 109 requires that the Company continually assess both positive and negative
evidence to determine whether it is more likely than not that the deferred tax
assets can be realized prior to their expiration. As of December 31, 2003, the
Company has concluded that it is more likely than not that it will realize its
gross deferred tax asset position after giving consideration to relevant facts
and circumstances.
Tri-Valley will continue to monitor company-specific, oil and gas industry
economic factors and will reassess the likelihood that the Company's net
operating loss and statutory depletion carryforwards will be utilized prior to
their expiration.
Litigation and environmental contingencies. The Company makes judgments and
estimates in recording liabilities for ongoing litigation and environmental
remediation. Actual costs can vary from such estimates for a variety of
reasons. The costs to settle litigation can vary from estimates based on
differing interpretations of laws and opinions and assessments on the amount of
damages. Similarly, environmental remediation liabilities are subject to change
because of changes in laws, regulations, additional information obtained
relating to the extent and nature of site contamination and improvements in
technology. Under GAAP, a liability is recorded for these types of
contingencies if the Company determines the loss to be both probable and
reasonably estimated. See Note 10 of Notes to Consolidated Financial Statements
included in "Item 8. Financial Statements" for additional information regarding
the Company's commitments and contingencies.
The Company has adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). Under SFAS 142, goodwill is a non-amortizable asset, and is
subject to an annual review for impairment. The carrying amount of goodwill is
evaluated periodically.
The following is a discussion of the Company's most critical accounting
estimates, judgments and uncertainties that are inherent in the Company's
application of GAAP:
Accounting for oil and gas producing activities: The accounting for and
disclosure of oil and gas producing activities requires the Company's management
to choose between GAAP alternatives and to make judgments about estimates of
future uncertainties.
Successful efforts method of accounting: The Company utilizes the successful
efforts method of accounting for oil and gas activities as opposed to the
alternate acceptable full cost method. In general, the Company believes that,
during periods of active exploration, net assets and net income are more
conservatively measured under the successful efforts method of accounting for
oil and gas producing activities than under the full cost method. The critical
difference between the successful efforts method of accounting and the full cost
method of accounting is as follows: Under the successful efforts method,
exploratory dry holes and geological and geophysical exploration costs are
charged against earnings during the periods in which they occur; whereas, under
the full cost method of accounting, such costs and expenses are capitalized as
assets, pooled with the costs of successful wells and charged against the
earnings of future periods as a component of depletion expense. During the
years ended December 31, 2003, 2002 and 2001, the Company recognized
exploration, abandonment, geological and geophysical expense of $0, $45,143 and
$0, respectively, under the successful efforts method.
Proved reserve estimates. Estimates of the Company's proved reserves included
in this Report are prepared in accordance with GAAP and SEC guidelines. The
accuracy of a reserve report estimate is a function of:
- The quality and quantity of available data;
- The interpretation of that data;
- The accuracy of various mandated economic assumptions; and
- The judgment of the persons preparing the estimate.
The Company's proved reserve information included in this Report as of December
31, 2003 and 2002 was based on evaluations audited by independent petroleum
engineers with respect to the Company's major properties. Estimates prepared by
other third parties may be higher or lower than those included herein.
Because these estimates depend on many assumptions, all of which may
substantially differ from future actual results, reserve estimates will be
different from the quantities of oil and gas that are ultimately recovered. In
addition, results of drilling, testing and production after the date of an
estimate may justify material revisions to the estimate.
It should not be assumed that the present value of future net cash flows
included in this Report as of December 31, 2003 is the current market value of
the Company's estimated proved reserves. In accordance with SEC requirements,
the Company has based the estimated present value of future net cash flows from
proved reserves on prices and costs on the date of the estimate. Actual future
prices and cost may be materially higher or lower than the prices and costs as
of the date of the estimate.
The Company's estimates of proved reserves materially impact depletion expense.
If the estimates of provide reserves decline, the rate at which the Company
records depletion expense will increase, reducing future net income. Such a
decline may result from lower market prices, which may market uneconomic to
drill for and produce higher cost fields. In addition, a decline in provided
reserve estimates may impact the outcome of the Company's assessment of its oil
and gas producing properties for impairment.
Impairment of proved oil and gas properties: The Company reviews its long-lived
proved properties to be held and used whenever management determines that events
or circumstances indicate that the recorded carrying value of the properties may
not be recoverable. Management assesses whether or not an impairment provision
is necessary based upon its outlook of future commodity prices and net cash
flows that may be generated by the properties. Provide oil and gas properties
are reviewed for impairment by depletable field pool, which is the lowest level
at which depletion of proved properties are calculated.
Impairment of unproved oil and gas properties: Management periodically assesses
individually significant unproved oil and gas properties for impairment, on a
project-by-project basis. Management's assessment of the results of exploration
activities, commodity price outlooks, planned future sales or expiration of all
or a portion of such projects impact the amount and timing of impairments.
Asset Retirement Obligations: The Company has adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations" effective January 1, 2003. Under this
guidance, management is required to make judgments based on historical
experience and future expectations regarding the future abandonment cost of its
oil and gas properties and equipment as well as an estimate of the discount rate
to be used in order to bring the estimated future cost to a present value. The
discount rate is based on the risk free interest rate which is adjusted for the
credit worthiness of the Company. The adjusted risk free rate is then applied
to the estimated abandonment costs to arrive at the obligation existing at the
end of the period under review. The Company reviews its estimate of the future
obligation quarterly and accrues the estimated obligation based on the above.
Overview
Production from TVOG's existing reserves continues to decline, while demand
increases. While the trend for demand to outstrip available supplies is
worldwide as well as national, we believe that it is particularly acute in
California, our primary venue for exploration and production, which imports
nearly 60% of its oil and nearly 90% of its natural gas demand. Oil prices tend
to be set based on worldwide supplies and prices, while natural gas prices seem
to be more dependent on local conditions. We expect that gas prices will hold
steady or possibly increase over this year. If, however, prices should fall,
for instance due to new regulatory measures or the discovery of new and easily
producible reserves, our revenue from oil and gas sales would also fall.
In 2002 the Company created a limited partnership called the OPUS-I. The
purpose of this partnership is to raise one hundred million dollars by selling
partnership interests. With the funds raised we will drill up to twenty-six
exploratory wells, mostly in California, of which three are targeted for Nevada.
We begin drilling as sufficient funds are invested to drill the next target.
For the year ended December 31, 2003, we have raised $12,755,000 and spent
$10,267,787 on 4 wells. The 4 wells are being evaluated to determine further
activity.
We are continuing grading and prioritizing our geologic library, which contains
over 700 California leads and prospects, for exploratory drilling. We use our
library to decide where we should seek oil and gas leases for future
exploration. From this library we were able to put together many of the
prospects currently in OPUS-I. Of course, we cannot be sure that any future
prospect can be obtained at an attractive lease price or that any exploration
efforts would result in a commercially successful well.
We seek to fund and drill enough exploratory wells for commercial discoveries to
make up for the cost of the inevitable dry holes that we can expect in the
exploration business. We believe our existing inventory of projects bears a
high enough ratio of potentially successful to unsuccessful projects to deliver
value to our drilling partners and our shareholders from successful wells, in
excess of the total costs of all successful and unsuccessful projects. Our
future results will depend on our success in finding new reserves and commercial
production, and there can be no assurance what revenue we can ultimately expect
from any new discoveries.
Tri-Valley Corporation does not engage in hedging activities and does not use
commodity futures or forward contracts for cash management functions.
Natural Gas Activities
The Company generally sells a percentage of production at the monthly spot
price. In times when we expect the price of gas to weaken, we try to increase
the amount we sell under fixed prices. When we expect the price of gas to rise,
we seek to sell more gas in the spot market. In 2003, 2002 and 2001, we sold
our gas 100% on the spot market. Because we expect gas prices to rise, we
intend to sell 100% of our production on the spot market in 2004. Because we
plan to sell only on the spot market in 2004, a drop in the price of gas could
possibly have a more adverse impact on us than if we entered into some fixed
price contracts for sale of future production.
Our proved hydrocarbon reserves were valued using a standardized measure of
discounted future net cash flows of $2,270,632 at December 31, 2003, compared to
$2,224,270 on December 31, 2002, after taking into account a 10% discount rate
and also taking into consideration the effect of income tax. This was due
primarily to the fluctuations in gas prices. Estimates such as these are subject
to numerous uncertainties inherent in the estimation of quantities of proved
reserves. 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. 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 typically has no discovery cost to put on the
balance sheet as explained below.
Tri-Valley usually sells most of the working interest in its test wells on
prospects to third parties. The sales price of the interest is intended to pay
for all drilling and testing costs on the property. Tri-Valley retains a
minority "carried" ownership interest in the well and does not pay its
proportionate share of drilling and testing costs for the first well drilled on
each prospect. However, the Company does pay its proportionate cost of any
subsequent well drilled on each prospect. Under these arrangements, we usually
minimize the Company's cost to drill and also receive a minority interest from
the reserves we discover. On the other hand, we occasionally incur extra
expenses for drilling or development that we choose, in our discretion, not to
pass on to other venture participants.
We drilled the Sunrise-Mayel #1 in December of 2000, with independent
interpretations of an exceptional amount of dry natural gas in place in a tight
formation known as the McClure Shale; in 2001 we artificially fractured (frac'd)
the well with no success. We determined to try an acid wash and performed this
procedure in 2003. There has been no commercial success because the sand
formation is too tight to allow hydrocarbons to produce. The well will probably
be used as a water disposal well.
It was decided that a horizontal well should be drilled to exploit this tight
sand. This was named the Sunrise-Mayel #2-H. It was drilled in July of 2002,
frac'd in September 2002, and acidized January 2003, with no success. It was
redrilled as the Sunrise-Mayel #2-HR in May of 2003. In June of 2003, we
perforated the well and frac'd it in July 2003. This did not result in
commercial success. We are currently preparing to re-frac the well utilizing
diesel oil to test the concept of whether this will result in commercial
production.
The Oil Lake well began drilling October 2003; in attempts to complete the well,
we have perforated one of several zones so far. The first zone is tight, but is
a major target. We are currently designing a program to properly evaluate this
first zone before proceeding ahead.
The Elk Ridge well was drilled in December 2003. We have perforated and tested
five zones without commercial success so far, with five more remaining to be
tested.
Petroleum Activities
The Oil Creek #1-23 was drilled in August of 2003 with several hundred feet of
hydrocarbon "shows" or indicators. Completion operations began in October 2003
in which we evaluated six major target zones, which were either wet or there was
no permeability. We are currently evaluating what should be done next.
Precious Metals Activity
--------------------------
The price of gold has fluctuated in the last 12 months from a low of $320 per
oz. to a high of $417 per oz. As funds become available the Company will
continue to explore its claim block for discovery success. Historically the
Company has done its exploration on a seasonal basis, normally in the warmer
months. We are in the process of raising capital to continue our work in the
area.
In 2003, Tri-Valley Corporation began implementation of a two phase reverse
circulation drilling program to confirm a suspected high grade potential deep
placer gold target ("the Target") at First Chance Creek along the northeast
boundary of its 42-square mile claim block at Richardson, Alaska.
Very high grade samples from shafts dug near the creek had been reported in old
Fairbanks newspapers around 1906 and Tri-Valley sampling of the creek and
surrounds found distributed placer gold at surface. Tri-Valley's project
manager designed a program to test to bedrock 60-90 feet deep by drilling with
reverse circulation equipment to bring material up the drill hole and pass it
through a Denver Gold Saver to strip any gold before disposing of the drill
spoil. The first phase called for 42 such holes to be drilled at three
locations crossing the Creek valley and, if results were encouraging, an
additional 66 holes in Phase II for a program total of 108 holes.
The general target area was 2,000 yards in length by 70 yards wide, covering
approximately 29 acres in the claim block. It was management's belief that the
odds were favorable to indicate more than enough resource to justify the
$265,000 expenditure of Phase I. And the results certainly did that.
Results indicated a potential resource of 38,000 ounces inferred and probable
and management believes that an expanded Phase II of some 80 holes for greater
density as well as two additional lines. We may establish an estimated resource
in the range of +/- 100,000 ounces. We believe this would justify some
arrangement to mine either as an operator or to contract out.
Mining would most likely be a form of open pit with a gravity circuit to strip
the gold. The pit would be back-filled and reclaimed as mined. All equipment
would be portable and no milling or metallurgical facilities would need to be
constructed.
Testing of the three hard rock lode targets will require separate budgets for
reverse circulation and diamond drill coring operations. Tri-Valley expects to
either joint venture these targets with another mining company doing the work to
earn a majority interest or to arrange favorable equity financing to conduct the
drill program itself.
We are confident that other parties will be willing to participate.
RESULTS OF OPERATIONS
Comparison of years Ended December 31, 2003 and 2002
------------------------------------------------------------
Balance Sheet
--------------
At December 31, 2003 we had $6,006,973 in cash compared to $1,936,294 for
December 31, 2002. This represents, for the most part, cash invested by the
OPUS I partners for the drilling of oil and gas wells in that limited
partnership. Property and equipment is $452,168 less for the current period
compared to last year because we sold to the OPUS I partnership some of the
property that we had acquired in 2002. Deposits are $55,400 higher in 2003 than
in 2002 because of a required increase in the deposit related to the Armstrong
lawsuit.
Shareholder equity increased from $1,262,306 in 2002 to $2,555,456 for 2003.
This increase was due mainly from net income after taxes.
Revenue
-------
Revenue from oil and gas sales was $148,768 higher for the year ended 2003
compared to year ending 2002 due to increased price we received for our natural
gas. Partnership income was up almost $12,000 this year over last year due to
increased distribution to Tri-Valley from the operator of the partnership
primarily attributable to higher natural gas prices. Interest income was
$14,945 more for the year ended December 31, 2003 compared to year end 2002 due
to more cash on hand during the year earning interest. Sales of oil and gas
prospects is $1,163,998 higher this period compared to the same period last
year.
Costs and Expenses
--------------------
Mining expenses were $196,928 more for the period ended December 31, 2003 than
for the same period in 2002. The costs increased this year because our 42 well
reverse circulation exploratory drilling activity. Please see the precious
metals section. Oil and gas lease activity was $183,362 for year-end 2003 and
$224,320 for December 31, 2002. We did not acquire as many leases this year as
we did in 2002. Cost of oil and gas prospects sold were $366,802 higher this
year than in 2002. The prospects we sold this year had higher acquisition costs
associated with them than prospects sold in 2002. General and administrative
costs were higher this year than last year due in large part to increased travel
costs and insurance premiums.
Comparison of Years Ended December 31, 2002 and 2001
------------------------------------------------------------
Balance Sheet
--------------
We had $1,936,294 cash on hand at December 31, 2002 compared to $911,913 at
December 31, 2001. This change was from receipt of funding of the OPUS-I
drilling program. Accounts receivable were $44,393 greater this year compared
to 2001 due to revenue due us from gas sold the end of 2002. Deposits were
$212,000 higher due to our posting a bond in this amount pending the appeal of
our judgment.See Litigation
State income taxes are $76,000 more in 2002 because the State of California
removed the ability of companies to utilize tax loss carry-forward for two
years. Prior to 2002 we were able to reduce our tax liability by using tax loss
carry forwards accumulated from prior years. Accounts payable are $564,240 for
the year ended December 31, 2002 compared to $297,001 for the same period in
2001. This increase is due to increased drilling activity in 2002.
Revenues
Oil and gas income was $844,800 less in 2002 than in 2001 due to decreased gas
prices in 2002. Partnership income was $33,243 less in 2002 compared to 2001
because of decreased gas prices in 2002. Sale of oil and gas prospects was
$5,421,782 for the year ended December 2002 compared to $218,426 for the same
period in 2001 due to increased prospect sales in 2002. Other income was
$71,973 for the year ended December 31, 2002 compared to $231,899 for the year
ended 2001, because in 2001 we settled a claim related to a loan made to a
telecommunications partnership.
Costs and Expenses
Mining costs were $54,532 less in 2002 due to no exploration activity on our
claim block in 2002. Oil and gas lease costs were $132,880 higher in 2002 than
2001 due to increased lease operating activity. Well workover expenses were
$240,718 less in 2002 because we did not work over any wells in 2002. Cost of
oil and gas prospects sold were $3,139,268 higher for the period ending December
31, 2003 compared to the same period last year cost of prospect sold varies
directly in proportion to the cost of prospect sales. Depreciation, depletion
and amortization expenses are $26,578 less in 2002 due to Statements of
Financial Accounting Standards 142 that no longer allows annual amortization.
Therefore, no amortization was taken in 2002. These assets will now be tested
for impairment annually. If required we would then take an impairment charge.
The $45,143 charge for impairment of acquisition costs are from the write off of
a prospect that the Company believes is no longer prospective. The Company has
a profit of $769,130 after taxes due to increased drilling activity and sale of
prospects..
FINANCIAL CONDITION
Commitments
-----------
Generally, our financial commitments arise from selling interests in our
drilling prospects to third parties, which results in an obligation to drill and
develop the prospect. If we are unable to sell sufficient interests in a
prospect to fund its drilling and development, we must either amend our
agreements to drill the prospect, locate a substitute prospect acceptable to the
participants or refund the participants' funds.
We have a private placement drilling program to raise up to one hundred million
dollars to drill and complete 26 prospects. We turnkey the drilling portion and
the completion portion is based on costs incurred. In a turnkey program we
guarantee to drill a well(s) for a certain amount. If the drilling amount is
greater than the turnkey costs the Company would lose money on that well, if the
cost is less than the turnkey costs the Company would make a profit on that
well.
Delay rentals for oil and gas leases amounted to$317,801 in 2003. Advance
royalty payments and gold mining claims maintenance fees were$204,755 for the
same period. We expect that approximately equal delay rentals and fees will be
paid in 2004 from operating revenues.
Operating Activities
Net cash provided by operating activities was $3,528,127 for the year-end
December 31, 2003, compared to $1,154,919 for the same period in 2002. This was
primarily because we had an increase in advances from joint venture partners of
$2,194,409. Net income was $390,652 more in 2003 ($1,159,782 for 2003 compared
to $769,130 for 2002).
Investing Activities
---------------------
Cash provided by investing activities in 2003 was $422,946 compared to
($174,185) for the same period in 2002. In 2003, this increase was from the
sale of oil and gas prospects to the OPUS I drilling partnership and the
reduction of capital expenditures.
Financing Activities
---------------------
Cash provided by financing activities was $119,575 for the period ending
December 31, 2003 compared to $43,647 for the same period in 2002. This was due
to additional paid in capital resulting from issuance of stock to outside
directors and the exercise of stock options.
Liquidity
---------
The recoverability of the our oil and gas reserves depends on future events,
including obtaining adequate financing for our exploration and development
program, successfully completing our planned drilling program, and achieving a
level of operating revenues that is sufficient to support our cost structure.
At various times in our history, it has been necessary for us to raise
additional capital through private placements of equity financing. When such a
need has arisen, we have met it successfully. It is management's belief that we
will continue to be able to meet our needs for additional capital as such needs
arise in the future. We may need additional capital to pay for our share of
costs relating to the drilling prospects and development of those that are
successful, and to acquire additional oil and gas leases. The total amount of
our capital needs will be determined in part by the number of prospects
generated within our exploration program and by the working interest that we
retain in those prospects.
Should we choose to make an acquisition of producing oil and gas properties,
such an acquisition would likely require that some portion of the purchase price
be paid in cash, and thus would create the need for additional capital.
Additional capital could be obtained from a combination of funding sources. The
potential funding sources include:
- Cash flow from operating activities,
- Borrowings from financial institutions,
- Debt offerings, which could increase our leverage and add to our need for
cash to service such debt,
- Additional offerings of our equity securities, which would cause dilution
of our common stock,
- Sales of portions of our working interest in the prospects within our
exploration program, which would reduce future revenues from its exploration
program,
- Sale to an industry partner of a participation in our exploration program,
- Sale of all or a portion of our producing oil and gas properties, which
would reduce future revenues.
Our ability to raise additional capital will depend on the results of our
operations and the status of various capital and industry markets at the time
such additional capital is sought. Accordingly, there can be no assurances that
capital will be available to us from any source or that, if available, it will
be on terms acceptable to us.
17
ITEM 8: FINANCIAL STATEMENTS
TRI-VALLEY CORPORATION
INDEX
-----
Page(s)
-------
Report of Independent Auditor 18
Consolidated Balance Sheets at December 31, 2003 and 2002 19
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001 21
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2003, 2002 and 2001 22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 23
Notes to Consolidated Financial Statements 24-43
Supplemental Information about Oil and Gas Producing
Activities (Unaudited) 44-64
18
REPORT OF INDEPENDENT AUDITOR
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, 2003 and 2002, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects the financial position of Tri-Valley Corporation
at December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
BROWN ARMSTRONG PAULDEN
McCOWN STARBUCK & KEETER
ACCOUNTANCY CORPORATION
Bakersfield, California
February 13, 2004, except for Note 11,
whose date is March 24, 2004
24
The accompanying notes are an integral part of these financial statements.
TRI-VALLEY CORPORATIONONSOLIDATED BALANCE SHEETS
December 31,
2003 2002
---- ----
ASSETS
------
Current Assets
Cash $ 6,006,973 $ 1,936,294
Accounts receivable, trade 163,825
151,618
Prepaid expenses 12,029
12,029
Total Current Assets 6,182,827
2,099,941
Property and Equipment, Net
Proved Properties 148,482 165,675
Unproved Properties 1,231,165 1,654,117
Other Property and Equipment 142,686
-----------------------
154,709
-------
Total Property and Equipment, Net(Notes 1 and 2) 1,522,333
1,974,501
Other Assets
Deposits 372,105 316,705
Investments in partnerships (Note 1) 17,400
17,400
Goodwill (net of accumulated amortization of
$221,439 at December 31, 2002 and 2003) 212,414
212,414
Other 13,913 13,913
Total Other Assets 615,832
560,432
TOTAL ASSETS $ 8,320,992 $ 4,634,874
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------
Current Liabilities
Notes payable (Note 3) $ 9,985 $
13,792
Income taxes payable 58,000
76,000
Accounts payable and accrued expenses 777,729
564,240
Amounts payable to joint venture participants 91,275
74,412
Advances from joint venture participants, net (Note 1)
4,811,742 2,617,333
Total Current Liabilities 5,748,731
3,345,777
Non-Current Liabilities
Deferred Tax Liability
Long-Term Portion of Notes Payable (Note 3) 16,805
26,791
Total Non-Current Liabilities 16,805
26,791
Total Liabilities 5,765,536 3,372,568
Shareholders' Equity
Common stock, $.001 par value; 100,000,000 shares
authorized; 20,097,627 and 19,726,348
issued and outstanding at December 31, 2003 and 2002,
Respectively 20,115 19,726
Less: common stock in treasury, at cost,
100,025 shares at December 31,
2003 and 2002. (13,370)
(13,370)
Common stock receivable -
(2,250)
Capital in excess of par value 9,010,453
8,879,724
Accumulated deficit (6,461,742) (7,621,524)
Total Shareholders' Equity 2,555,456
1,262,306
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,320,992 $
4,634,874
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2003 2002 2001
---- ---- ----
Revenues
Sale of oil and gas $ 901,739 $ 752,971
$ 1,597,771
Royalty income 529 351
6,952
Partnership income 30,000 18,299
51,542
Gain on sale of property -
- -
Interest income 34,479 19,534
23,597
Sale of oil and gas prospects 6,585,780
5,421,782 218,426
Other income 56,718 71,971
231,899
Total Revenues 7,609,245 6,284,908
2,130,187
Costs and Expenses
Mining exploration costs 366,039
169,111 223,643
Oil and gas leases 183,362 224,320
91,440
Well workover -
- 240,718
Severed acreage -
- 174
Cost of oil and gas prospects sold 4,014,891
3,648,089 508,821
General and administrative 1,449,589
1,316,894 1,117,643
Depreciation, depletion and amortization 29,222
34,384 60,962
Interest 2,572 1,838
4,761
Well write-off -
- -
Impairment of acquisition costs -
45,143 -
Total Costs and Expenses 6,391,463
5,439,779 2,248,162
Net Income (Loss) before Income Taxes 1,217,782
845,130 (117,975)
Tax Provision (Note 6) 58,000 76,000
-
Net Income (Loss) $ 1,159,782 $ 769,130
$ (117,975)
Basic and Diluted Earnings (Loss) per Common Share $ 0.06
$ 0.04 $ (0.00)
and Common Equivalent Share
Weighted Average Number of Shares Outstanding 19,801,785
19,702,054 19,495,693
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
Total Capital in Common
Common Treasury Excess of Stock
Accumulated Treasury Shareholders'
Shares Shares Par Value Par Value
Receivable Deficit Stock Equity
Balance at
December 31, 2000, 19,554,748 163,925 19,555
8,666,688 - (8,272,679)
(21,913) 391,651
Issuance of common stock 135,000 -
135 79,965 -
- - 80,100
Net loss - -
- - -
(117,975) - (117,975)
Balance at
December 31, 2001 19,689,748 163,925 19,690
8,746,653 - (8,390,654)
(21,913) 353,776
Issuance of common stock 36,600 (63,900)
36 133,071 -
- 8,543 141,650
Common stock receivable - -
- - (2,250)
- - (2,250)
Net income - -
- - -
769,130 - 769,130
Balance at
December 31, 2002 19,726,348 100,025 19,726
8,879,724 (2,250) (7,621,524) (13,370)
1,262,306
Issuance of common stock 371,279 -
389 1,442,439 -
- - 1,442,828
Stock issuance cost - -
- (1,311,710) -
- - (1,311,710)
Common stock receivable - -
- - 2,250
- - 2,250
Net income - -
- - - 1,159,782
- 1,159,782
Balance at
December 31, 2003 20,097,627 100,025 $ 20,115
$ 9,010,453 $ - $(6,461,742) $
(13,370) $ 2,555,456
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,159,782 $ 769,130 $
(117,975)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation, depletion, and amortization 29,222
34,384 60,962
Impairment, dry hole and other disposals of property
- 45,143 -
Land acquisition costs sold -
122,315 -
(Gain) on sale of property -
- -
Non-employee stock compensation -
119,700 23,100
Impairment, dry hole and other disposals of property
and equipment - -
-
Changes in operating capital:
(Increase) decrease in accounts receivable (12,207)
(44,393) 711,136
Increase in prepaids -
- -
Increase in deposits and other assets (55,400)
(212,000) (4,600)
Increase (decrease) in income taxes payable (18,000)
76,000 -
Increase (decrease) in accounts payable and accrued expenses
213,489 267,239 (284,016)
Increase (decrease) in amounts payable to joint venture
participants and related parties 16,862
14,781 (480,511)
Increase (decrease) in advances from joint venture
Participants 2,194,409 (37,380)
136,976
Net Cash Provided by Operating Activities 3,528,157
1,154,919 45,072
CASH FLOWS FROM INVESTING ACTIVITIES
Payments on notes receivable -
- 125,000
Proceeds from sale of property 422,946
- -
Capital expenditures - (184,185)
(702,613)
(Investment in) distribution from partnerships -
10,000 19,958
Net Cash Provided (Used) by Investing Activities 422,946
(174,185) (557,655)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt -
29,686 -
Principal payments on long-term debt (13,792)
(5,739) (6,074)
Proceeds from issuance of common stock 133,368
19,700 57,000
Sale of treasury stock -
----------------------
- -
- ----------------------
Stock issuance costs -
- -
Net Cash Provided by Financing Activities 119,576
43,647 50,926
Net Increase (Decrease) in Cash and Cash Equivalents 4,070,679
1,024,381 (461,657)
Cash at Beginning of Year 1,936,294 911,913
1,373,570
Cash at End of Year $ 6,006,973 $ 1,936,294 $
911,913
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 2,572 $ 1,838 $
4,761
Income taxes paid $ 40,000 $ 800 $
-
67
25
TRI-VALLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
This summary of significant accounting policies of Tri-Valley Corporation is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America and have been consistently applied in the preparation of the
financial statements.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Tri-Valley Oil & Gas Co. All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
-------------------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 estimate of Company oil and gas reserves prepared by an
independent engineering consultant. Such estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves.
Estimated reserves are used in the calculation of depletion, depreciation and
amortization as well as the Company's assessment of proved oil and gas
properties for impairment.
History and Business Activity
--------------------------------
The Company has been historically an oil and gas exploration and production
company, emphasizing the Sacramento Valley natural gas province, and is now also
very active in the south San Joaquin Valley. In the fiscal year 1987, the
Company added precious metals exploration. The Company conducts its oil and gas
business primarily through its 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.
For purposes of reporting operating segments, the Company is involved in three
areas. These are drilling and development, oil and gas production, and precious
metals.
Cash Equivalent and Short-Term Investments
----------------------------------------------
Cash equivalents include cash on hand and on deposit, and highly liquid debt
instruments with original maturities of three months or less.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Goodwill
--------
The consolidated financial statements include the net assets purchased of
Tri-Valley Corporation's wholly owned oil and gas subsidiary, TVOG. Net assets
are carried at their fair market value at the acquisition date. On January 1,
2002, Tri-Valley Corporation adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). Under SFAS 142, goodwill is a non-amortizable
asset, and is subject to an annual review for impairment. Prior to the
implementation of SFAS 142, the Company had goodwill of $433,853 that was being
amortized. The carrying amount of goodwill is evaluated periodically. Factors
used in the evaluation include the Company's ability to raise capital as a
public company and anticipated cash flows from operating and non-operating
mineral properties.
Revenue Recognition
--------------------
Crude oil and natural gas revenues are recognized as production takes place and
the sale is completed and the risk of loss transfers to a third party purchaser.
Sale of Oil and Gas Prospects
----------------------------------
Oil and gas prospects are developed by the Company for sale to industry partners
and investors. These prospects are usually exploratory, and include costs of
leasing, acquisition, and other geological and geophysical costs (hereafter
referred to as "GGLA") plus a profit to the Company. For many years the Company
recognized revenue and profit from prospects sales when sold, irrespective of
drilling commencement (spudding).
In 2003 and 2002 the Company changed its prospect offerings by inclusion of
estimated costs of drilling in addition to GGLA costs. This offering is termed a
"turnkey" exploratory drilling opportunity because investors are charged only
one certain amount in return for Tri-Valley drilling a well to the agreed total
depth.
Once the well is spudded, investor money is not refundable, and Tri-Valley
recognizes revenue together with estimated and actual costs to complete the
drilling to total depth. Amounts charged are included in an Authority for
Expenditure (AFE), which is a budget for each project well. Tri-Valley prepares
the AFE and bears all risk of well completion to total depth. If the well is
drilled to total depth for actual costs less than the AFE amounts, the Company
realizes a profit. Conversely, if actual costs exceed the AFE, Tri-Valley
realizes a loss.
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 liable for
the activities of these ventures. In the initial well in a prospect, the
Company owns a carried interest and/or overriding royalty interest in such
ventures, earning a working interest upon commencement of drilling. Costs of
subsequent wells drilled in a prospect are shared by a pro rata interest.
Receivables from and amounts payable to these related parties (as well as other
related parties) have been segregated in the accompanying financial statements.
For turnkey projects, amounts received for drilling activities, which have not
been spudded are deferred and remain within the joint venture liability, in
accordance with the Company's revenue recognition policies. Revenue is
recognized upon the commencement of drilling operations. Actual or estimated
costs to complete the drilling are charged as costs against this revenue.
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,
except those GGLA expenditures incurred on behalf of joint venture drilling
projects, which the Company defers until the GGLA is sold at the completion of
project funding and the target prospect is drilled. Expenditures incurred in
drilling exploratory wells are accumulated as work in process until the Company
determines whether the well has encountered commercial oil and gas reserves. If
the well has encountered commercial reserves, the accumulated cost is
transferred to oil and gas properties; otherwise, the accumulated cost, net of
salvage value, is charged to dry hole expense. If the well has encountered
commercial reserves but cannot be classified as proved within one year after
discovery, then the well is considered to be impaired, and the capitalized costs
(net of any salvage value) of drilling the well are charged to expense. In 2001,
2002, and 2003 there was $0, $45,143, and $0 respectively, charged to expense
for impairment of exploratory well costs. Depletion, depreciation and
amortization of oil and gas producing properties are computed on an aggregate
basis using the units-of-production method based upon estimated proved developed
reserves.
At December 31, 2003 and 2002, the Company carried unproved property costs of
$1.081 million and $1.449 million, respectively. Generally accepted accounting
principles require periodic evaluation of these costs on a project-by-project
basis in comparison to their estimated value. These evaluations will be
affected by the results of exploration activities, commodity price outlooks,
planned future sales or expiration of all or a portion of the leases, contracts
and permits appurtenant to such projects. If the quantity of potential reserves
determined by such evaluations is not sufficient to fully recover the cost
invested in each project, the Company will recognize non cash charges in the
earnings of future periods.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Capitalized costs relating to proved properties are depleted using the
unit-of-production method based on proved reserves. Costs of significant
non-producing properties, wells in the process of being drilled and development
projects are excluded from depletion until such time as the related project is
completed and proved reserves are established or, if unsuccessful, impairment is
determined.
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. Impairment of non-producing
leasehold costs and undeveloped mineral and royalty interests are assessed
periodically on a property-by-property basis, and any impairment in value is
currently charged to expense. In addition, we assess the capitalized costs of
unproved properties periodically to determine whether their value has been
impaired below the capitalized costs. We recognize a loss to the extent that
such impairment is indicated. In making these assessments, we consider factors
such as exploratory drilling results, future drilling plans, and lease
expiration terms. When an entire interest in an unproved property is sold, gain
or loss is recognized, taking into consideration any recorded impairment. When a
partial interest in an unproved property is sold, the amount is treated as a
reduction of the cost of the interest retained, with excess revenue and carrying
costs being recognized. 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
-----------------------
The Company has invested in several gold mineral properties with exploration
potential. All mineral claim acquisition costs and exploration and development
expenditures are charged to expense as incurred. We capitalize acquisition and
exploration 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). Currently no amounts have been
capitalized.
Advances from Joint Venture Participants
--------------------------------------------
Advances received by the Company from joint venture partners for contract
drilling projects, which are to be spent by the Company on behalf of the joint
venture partners, are classified within operating inflows on the basis they do
not meet the definition of financing or investing activities. When the cash
advances are spent, the payable is reduced accordingly. These advances do not
contribute to the Company's operating profits and are accounted or/disclosed as
balance sheet entries only i.e. within cash and payable to joint venture
participants.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Properties and Equipment
--------------------------
Properties and equipment are depreciated using the straight-line method over the
following estimated useful lives:
Office furniture and fixtures 3 - 7 years
Building 40 years
Leasehold improvements are amortized over the life of the lease.
Maintenance and repairs, which neither materially add to the value of the
property nor appreciably prolong its life, are charged to expense as incurred.
Gains or losses on dispositions of property and equipment other than oil and gas
are reflected in operations.
Concentration of Credit Risk and Fair Value of Financial Instruments
-----------------------------------------------------------------------------
As discussed in Note 7, the Company sells oil, gas and natural gas liquids to
primarily one purchaser located in the northern California region.
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.
Fair value of financial instruments are estimated to approximate the related
book value, unless otherwise indicated, based on market information available to
the Company.
Stock Based Compensation Plans
---------------------------------
The Company has adopted only the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, and has elected to continue to record
stock-based compensation expense using the intrinsic-value approach prescribed
by Accounting Principles Board ("APB") Opinion 25. The application of APB
Opinion 25 has further been clarified by Financial Accounting Standards Board
("FASB") Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation". Under APB No. 25, because the exercise price of the
company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. However, SFAS No.
123, "Accounting for Stock-Based Compensation," requires presentation of pro
forma information as if the company had accounted for its employee stock options
and performance awards granted subsequent to December 31, 1994, under the fair
value of that statement. For purposes of pro forma disclosure, the estimated
fair value of the options and performance awards at the date of grant is charged
to expense as the employee stock options are fully vested upon grant. Under the
fair value method, the company's net income (loss) and earnings (loss) per share
would have been as follows:
December 31, December 31, December 31,
2003 2002 2001
Net Income As reported $ 1,159,782 $
769,130 $ (117,975)
Pro forma 1,063,682 769,130
(978,415)
Earnings per share As reported 0.06
0.04 (0.01)
Pro forma 0.05
0.04 (0.05)
Diluted earnings per share As reported 0.06
0.04 (0.01)
Pro forma 0.05
0.03 (0.05)
------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Reclassification
----------------
Certain amounts in the financial statements have been reclassified to be
consistent and comparable from year-to-year.
Supplemental Disclosure of Non-Cash Activities
--------------------------------------------------
During 2003, the Company issued 9,000 shares of common stock valued at $23,247,
to outside consultants for services. The Company also issued 65,000 shares of
common stock valued at $86,450, of which 50,000 shares were issued to its
directors and 15,000 shares to its officers. In addition, a third party vendor
exercised 500,000 common stock warrants in exchange for 255,387 shares of common
stock (see Note 10 for detail).
Treasury Stock
---------------
The Company records acquisition of its capital stock for treasury at cost.
Differences between proceeds for reissuance of treasury stock and average cost
are charged to retained earnings or credited thereto to the extent of prior
charges and thereafter to capital in excess of par value.
Recently Issued Accounting Pronouncements
--------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for under the purchase method. The most significant changes made by
SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no
longer be amortized; 2) goodwill and intangible assets with indefinite lives
must be tested for impairment at least annually; and 3) the amortization period
for intangible assets with finite lives will no longer be limited to 40 years.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement No. 142. Statement No. 141 will require, upon adoption of Statement
No. 142, that the Company evaluate its existing intangible assets and goodwill
that were acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria in
Statement No. 141 for recognition apart from goodwill. Upon adoption of
Statement No. 142, the Company has reassessed the useful lives and residual
values of all intangible assets acquired in purchase business combinations. No
material amortization adjustments have been necessary. The Company had
unamortized goodwill in the amount of $212,414 all of which was, at the date of
adoption, subject to the provisions of Statements 141 and 142. Amortization
expense related to goodwill was $10,846 per year for the fiscal years 2001.
There was no goodwill impairment recognition for either 2002 or 2003. The
adoption of these statements did not have a material effect on its financial
position, results of operations or cash flows.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Recently Issued Accounting Pronouncements (Continued)
---------------------------------------------------------
In June 2001, the FASB approved for issuance SFAS 143 "Asset Retirement
Obligations." SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets such as wells and
production facilities. SFAS 143 guidance covers (1) the timing of the liability
recognition, (2) initial measurement of the liability, (3) allocation of asset
retirement cost to expense, (4) subsequent measurement of the liability and (5)
financial statement disclosures. SFAS 143 requires that an asset retirement cost
should be capitalized as part of the cost of the related long- lived asset and
subsequently allocated to expense using a systematic and rational method. The
adoption of SFAS 143 could result in (1) an increase of total liabilities,
because more retirement obligations are required to be recognized, (2) an
increase in the recognized cost of assets, because the retirement costs are
added to the carrying amount of the long-lived asset and (3) an increase in
operating expense because of the accretion of the retirement obligation and
additional depreciation and depletion. The Company adopted the statement on
January 1, 2003. The transition adjustment resulting from the adoption of SFAS
143 will be reported as a cumulative effect of a change in accounting principle
in January 2003. The adoption of this standard had no material impact, i.e.,
$4,000, on its financial position, results of operations, or cash flows.
In August 2001, the FASB also approved SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The new accounting model for long-lived assets to be disposed
of by sale applies to all long-lived assets, including discontinued operations,
and replaces the provisions of APB Opinion No. 30, "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business", for
the disposal of segments of a business. SFAS 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of SFAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001
and therefore were adopted by the Company in 2002. The adoption of this
statement did not impact the Company's financial position, results of
operations, or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS 145, which is effective for fiscal years beginning after May 15, 2002,
provides guidance for income statement classification of gains and losses on
extinguishment of debt and accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The adoption
of this statement did not impact the Company's financial position, results of
operations, or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 nullifies the guidance of the
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for a cost that is associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS 146 also establishes that fair
value is the objective for the initial measurement of the liability. The
provisions of SFAS 146 are required for exit or disposal activities that are
initiated after December 31, 2003. The adoption of this statement did not impact
the Company's financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends FASB Statement No.
123, "Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on the
reported results. The provisions of SFAS 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of this
statement did not impact the Company's financial position, results of
operations, or cash flows.
During January 2003, the Financial Accounting Standards Board issued
interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN46"),
which requires the consolidation of certain entities that are determined to be
variable interest entities ("VIE's"). An entity is considered to be a VIE when
either (i) the entity lacks sufficient equity to carry on its principal
operations, (ii) the equity owners of the entity cannot make decisions about the
entity's activities or (iii) the entity's equity neither absorbs losses or
benefits from gains.
NOTE 2 - PROPERTY AND EQUIPMENT
------------------------
Oil and gas properties, and equipment and fixtures consist of the following:
December 31, December 31,
2003 2002
Oil and Gas - California
----------------------------
Proved properties, net of accumulated depletion of $604,223
and $587,030 at December 31, 2003 and 2002, respectively $
148,482 $ 165,675
Unproved properties 1,231,165
1,654,117
Total Oil and Gas Properties 1,379,647
1,819,792
Other Property and Equipment
-------------------------------
Land 12,281 12,281
Building, net of accumulated depreciation
$12,879 and $11,751 at December 31,
2003 and 2002, respectively 37,516
38,644
Transmission tower 45,000
45,000
Office equipment, vehicle, and leasehold improvements net of
accumulated depreciation of $170,625 and $159,731 at
December 31, 2003 and 2002, respectively 47,889
58,784
Total Other Property and Equipment 142,686
154,709
Property and Equipment (Net) $ 1,522,333 $
1,974,501
NOTE 3 - NOTES PAYABLE
--------------
December 31, December 31,
2003 2002
Note payable to Union Bank dated July 29,2002;
secured by a vehicle; interest at 8.3%; payable
in 60 monthly installments of $602. $ 22,437 $
27,638
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
Note payable to Union Bank, dated January
15, 2000; secured by a vehicle; interest at 8.5%;
payable in 60 monthly installments of $380. 4,353
8,371
26,790 40,583
Less current portion 9,985
13,792
Long-term portion of notes payable $ 16,805 $
26,791
NOTE 3 - NOTES PAYABLE (Continued)
--------------
Maturities of long-term debt for the years subsequent to December 31, 2003 are
as follows:
Year Ended
December 31,
2004 $ 9,985
2005 6,100
2006 6,606
Thereafter 4,099
$ 26,790
NOTE 4 - RELATED PARTY TRANSACTIONS
----------------------------
Employee Stock Options
------------------------
The Company has a qualified and 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 plans are exercisable immediately, however, the plan expires
in August 2008.
The purpose of the Company's stock option plans is to further the interest of
the Company by enabling officers, directors, employees, consultants and advisors
of the Company to acquire an interest in the Company by ownership of its stock
through the exercise of stock options and stock appreciation rights granted
under its various stock option plans.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS 123
allows entities to continue to measure compensation cost for stock-based awards
using the intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and to provide pro forma net
income and pro forma earnings per share disclosures as if the fair value based
method defined in SFAS 123 had been applied. The Company has elected to continue
to apply the provisions of APB 25 and provide the pro forma disclosure
provisions of SFAS 123. For stock options granted, the option price was not less
than the market value of shares on the grant date, therefore, no compensation
cost has been recognized.
The fair value of each option grant is estimated on the date of grant the
Black-Scholes American option-pricing model with the following weighted-average
assumptions used for grant in 2003, 2002 and 2001, respectively. Expected life
of 4, 5, and 6 years for 2003, 2002 and 2001, respectively, no expected
dividends, expected volatility of 88 percent for 2003, 98.04 percent for 2002,
and 122 percent for 2001 and risk-free interest rates of 3.00, 3.86, and 4.85
percent, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
----------------------------
Employee Stock Options (Continued)
------------------------
A summary of the status of the Company's fixed stock option plan as of December
31, 2003 and 2002, and changes during the years ending on those dates is
presented below:
2003 2002 2001
Weighted- Weighted-
---------
Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares
Price
Fixed Options
--------------
Outstanding at beginning of year 2,960,500 $ 1.25
3,229,000 $ 1.26 2,644,000 $ 1.20
Granted 100,000 $ 1.33 -
$ - 700,000 $ 1.35
Exercised (41,900) $ 0.50 (20,500)
$ 0.50 (115,000) $ 1.50
Cancelled - $ - (248,000)
$ 1.36 -
Outstanding at end of year 3,018,600 $ 1.27
2,960,500 $ 1.25 3,229,000 $ 1.26
Options exercisable at year-end 3,018,600 2,960,500
3,229,000
Weighted-average fair value of
options granted during the year $ 0.96 $
- $ 1.22
The following table summarizes information about fixed stock options
outstanding at December 31, 2003:
Options Outstanding and Exercisable
Weighted-Average
Number Outstanding Remaining Weighted-Average
Range of Exercise Prices at December 31, 2003 Contractual
Life Exercise Price
$.50 - $2.43 3,018,600
4.72 $ 1.27
A summary of option transactions during the years ended December 31, 2003,
2002, and 2001 is presented below:
Number Weighted-Average
of Shares Exercise Price
Outstanding at December 31, 2000 2,644,000 $
1.20
Issued 700,000 1.35
Exercised (115,000) 0.50
Outstanding at December 31, 2001 3,229,000
1.26
Issued - -
Exercised (20,500) 0.50
Cancelled (248,000) 1.36
Outstanding at December 31, 2002 2,960,500
1.25
Issued 100,000 1.33
Exercised (41,900) 0.50
Cancelled -
-
Outstanding at December 31, 2003 3,018,600
Exercisable at December 31, 2003 3,018,600
Available for Issuance at December 31, 2003 610,400
------
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
----------------------------
PARTNERSHIPS
------------
Tri-Valley is a general partner and operator of the Tri-Valley Oil & Gas
Exploration Programs 1971-1, Martins-Severin, and Opus I Partnerships. The
Company accounts for these partnerships on the equity method. Oil and gas income
follows:
December 31, December 31, December 31,
2003 2002 2001
Partnership income, net of expenses $ 30,000 $
18,299 $ 51,542
NOTE 5 - EARNINGS PER SHARE
--------------------
Full year basic earnings (loss) per share for the Company were $.06, $.04, and
$(.01) in 2003, 2002 and 2001, respectively, and were based on the weighted
average shares outstanding of 19,801,785 in 2003, 19,702,054 in 2002, and
19,495,693 in 2001. Diluted earnings (loss) per share for the Company were
$.05, $.03, and $(.01) in 2003, 2002 and 2001, respectively. The diluted
earning per share amounts are based on weighted average shares outstanding plus
common stock equivalents. Common stock equivalents include stock options and
awards, and common stock warrants, and totaled 3,018,600 in 2003, 2,698,500 in
2002, and 0 in 2001. Common stock equivalents excluded from the calculation of
diluted earnings per share because the effect was antidilutive were 0, 960,000,
and 3,729,000 in 2003, 2002 and 2001, respectively.
NOTE 6 - INCOME TAXES
-------------
At December 31, 2003, the Company had available net operating loss carry
forwards for financial statements and federal income tax purposes of
approximately $56,000. These loss carryforwards expire between 2004 and 2014.
The components of the net deferred tax assets were as follows:
December 31, December 31, December 31,
2003 2002 2001
Deferred Tax Assets:
Net operating loss carryforwards $ 21,758 $
45,667 $ 606,550
Statutory depletion carryforwards 339,007
297,217 291,276
Total Deferred Tax Assets 360,765
342,884 897,826
Valuation Allowance (360,765) (342,884)
(897,826)
Net Deferred Tax Assets $ - $
- $ -
A full valuation allowance has been established for the deferred tax assets
generated by net operating loss and statutory depletion carryforwards due to the
uncertainty of future utilization.
NOTE 6 - INCOME TAXES (Continued)
-------------
The reconciliation of federal taxable income follows:
December 31, December 31, December 31,
2003 2002 2001
Income (loss) before tax $ 1,217,782 $ 845,130
$ (117,975)
Computed "expected" tax (benefit) $ 414,046 $
304,344 $ (40,112)
State tax liability 58,000 76,000
-
Utilization (non-utilization) of operating loss carryover
(414,046) (304,344) 40,112
Total income tax provision $ 58,000 $ 76,000
$ -
NOTE 7 - MAJOR CUSTOMERS
----------------
Oil and Gas
-------------
The Company received all of 10% of its oil and gas revenue from one customer.
Substantially all oil and gas sales have occurred in the northern California gas
market.
The Company received more than 10% of its prospect sales from the following
Opus I Other
Period Ended:
December 31, 2001 $ 1,597,771 $
-
December 31, 2002 $ 752,971 $
-
December 31, 2003 $ 5,440,780 $
-
NOTE 8 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
--------------------------------------------------------
The Company adopted SFAS No. 131, Disclosure About Segments of an Enterprise and
Related Information 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 8 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS (Continued)
--------------------------------------------------------
The Company's operations are classified into two principal industry segments.
Following is a summary of segmented information for 2003, 2002, and 2001:
Oil and Gas Precious Drilling and
Production Metals Development Total
Year Ended December 31, 2003
Revenues from External Customers $ 932,268 $
- $ 6,585,780 $ 6,373,048
Interest Revenue $ 34,479 $ -
$ - $ 34,479
Interest Expense $ 2,572 $ -
$ - $ 2,572
Expenditures for Segment Assets $ - $
- $ - $ -
Depreciation, Depletion, and Amortization $ 29,222 $
- $ - $ 29,222
Total Assets $ 8,320,992 $ - $
- $ 8,320,992
Net Income (Loss) $ (624,280) $ (366,039) $
2,150,101 $ 1,159,782
Year Ended December 31, 2002
Revenues from External Customers $ 771,621 $
- $ 5,421,782 $ 6,193,403
Interest Revenue $ 19,534 $ -
$ - $ 19,534
Interest Expense $ 1,838 $ -
$ - $ 1,838
Expenditures for Segment Assets $ 155,132 $
- $ - $ 155,132
Depreciation, Depletion, and Amortization $ 34,384 $
- $ - $ 34,384
Total Assets $ 4,634,874 $ - $
- $ 4,634,874
Net Income (Loss) $ (835,452) $ (169,111) $
1,773,693 $ 769,130
Year Ended December 31, 2001
Revenues from External Customers $ 1,656,265 $
- $ - $ 1,656,265
Interest Revenue $ 23,597 $ -
$ - $ 23,597
Interest Expense $ 4,761 $ -
$ - $ 4,761
Expenditures for Segment Assets $ 702,613 $
- $ - $ 702,613
Depreciation, Depletion, and Amortization $ 60,962 $
- $ - $ 60,962
Total Assets $ 3,381,757 $ - $
- $ 3,381,757
Net Income (Loss) $ 396,063 $ (223,643) $
(290,395) $ (117,975)
NOTE 9 - COMMON STOCK
-------------
During 2003 we issued the following shares of common stock. All of these
securities were issued pursuant to privately negotiated transactions in reliance
on the exemption contained in Section 4(2) of the Securities Act.
- One officer, one former employee, and one private individual exercised
options to purchase 41,900 common shares at $.50 each.
- One private individual purchased 3,000 common stock shares at $1.35 each.
- We issued 15,000 shares to the Company's officers. The closing market
price of our common stock on the date we awarded these shares was $1.36.
- We issued 50,000 shares to the Company's outside directors. The closing
market price of our common stock on the date we awarded these shares was $1.33
- We issued 6,000 shares to a consultant for service. The closing market
price of our common stock on the date we awarded these shares was $3.20.
- We issued 255,387 common shares to Swartz Private Equity, LLC (see Note
10).
NOTE 10 - COMMITMENTS AND CONTINGENCIES
-------------------------------
Litigation
----------
The Company is a defendant in an action filed by Armstrong Petroleum alleging
the Company failed to make correct royalty payments to Armstrong for several
years. In 2002, Armstrong was awarded a judgment against the Company for
$141,500. The Company believes the judgment was based on incorrect facts and
has filed an appeal. The Company was required to post a cash bond of $267,400
with the appeal. The bond amount is included in Deposits at December 31, 2003.
On March 24, 2004, the appellate court affirmed the decision of the trial court.
We are considering whether to appeal the appellate court judgment to the
California Supreme Court. Tri-Valley Corporation created a cash reserve for
this judgment in 2002 when this verdict was awarded. Included in accounts
payable at December 31, 2003 certain estimated expenses have been accrued in
connection with the appeal.
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 10 - COMMITMENTS AND CONTINGENCIES (Continued)
-------------------------------
Natural Gas Contracts
-----------------------
The Company sells its gas under three separate gas contracts. Each of the
contracts is effective for a twelve month period and are renegotiated annually.
During 2001, 2002, and 2003, the Company sold all of its produced gas under
these agreements. The terms of the agreements are identical among the contracts.
During 2003, the terms of the agreements were as follows: 100% of the produced
gas was sold at the monthly spot price. During 2002, the terms of the
agreements were as follows: 100% percent of the produced gas was sold at the
monthly spot price, which is the PG&E Citygate price. During 2001, the terms of
the agreements were as follows: 100% percent of the produced gas was sold at the
monthly spot price, which is the PG&E Citygate price.
Joint Venture Advances
------------------------
As discussed in Note 1, the Company receives advances from joint venture
participants, which represent funds raised to drill exploratory wells. The
Company receives a carried working interest if the well is successfully drilled
and completed. The Company acts as both the fiduciary agent and Operator during
the period required to drill and equip the well, and as Operator while the well
is produced. The Company is obligated to use these funds for expenditures of the
joint venture prospect. The joint venture agreements specify that the Company
must drill the subject well or substitute another prospect. Some agreements
require that the interest earned on joint venture advances be credited to the
project account. Expenditures of the projects are charged directly against the
obligation.
The balance of the joint venture advance represents the sum of amounts
contributed for drilling prospects, net of expenditures for the projects.
Residual project balances are held until the Company makes a final determination
concerning any remedial obligations of the joint venturers. The balance at
December 31, 2003 consists primarily of the following projects:
Opus
----
In May of 2001 the Company began raising funds for a one hundred million dollars
exploration drilling program named OPUS-I. The program calls for the drilling
of 26 prospects, 23 in California and 3 in Nevada. As of December 31, 2003 the
program has drilled seven wells in which two were dry holes, the remaining wells
are currently being tested or evaluated for further work. The drilling portion
of these prospects is turnkeyed, meaning the drilling portion is done for a
fixed cost and the completion portion is done at the actual cost. The Opus
Drilling Program joint venture status at December 31, 2003 is as follows:
Total Opus Contributions $ 19,767,438
Total Opus Expenditures $ 15,911,488
====================
Ekho
----
The Ekho project was originally a three-well project, which commenced February
7, 2000 with the first well. The first well has been drilled to its target depth
of just over 19,000 feet. The original majority joint interest partners were
unable to fulfill their obligations to continue to fund well completion
activities. The Company is currently seeking substitute partners to raise funds
to fracture and complete the well. Ekho joint venture project status at December
31, 2003, which is included in the joint venture advance, is as follows (the
vast majority of expenditures were made in 2000):
Total Ekho joint venture contributions $ 10,604,300
Total Ekho joint venture expenditures $ 10,878,236
====================
Interest credited to the joint account $ 246,749
======================
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
-------------------------------
Leases
------
The Company leases its office space on a month to month basis.
Stock Sale Agreement
----------------------
Effective February 6, 2002, the Company completed a Securities Act registration
of 8,500,000 shares of its common stock to be sold to Swartz Private Equity, LLC
("Swartz") under an Investment Agreement dated September 13, 2001 for a total
value of up to $15,000,000, subject to a formula based on the Company's stock
price and trading volume, over a three year period beginning from the effective
date of the registration.
Under the Investment Agreement with Swartz, when the common shares are sold to
Swartz the Company will receive the lesser of (1) 93% of the market price for
the Company's stock or (2) the market price minus $0.12 per share. The number of
shares sold to Swartz may not exceed 15% of the aggregate trading volume during
the twenty trading days following the date the Company invokes a put right, and
is subject to other volume limitations.
Common Stock Warrants
-----------------------
On April 20, 2001, the Company issued 500,000 common stock warrants to Swartz
Private Equity, LLC. The warrants are exercisable at $2.42 per warrant and
expire on April 20, 2006. During September and October of 2003 Swartz Private
Equity, LLC chose to exercise these Warrants through a cashless transaction. The
company issued 255,387 shares under the Warrant agreement. The resulting costs
in the amount of $1,311,710 were recognized as stock issuance costs, and offset
against additional paid in capital, in accordance with Financial Accounting
Standards Board Statement on Financial Accounting Standard No. 123 (as amended).
NOTE 11 - SUBSEQUENT EVENT
-----------------
On November 7, 2002 a judgment of $141,500 was awarded to Armstrong Petroleum
against Tri-Valley Corporation, as a result of a breach of contract lawsuit
regarding royalties, filed by Armstrong. On March 24, 2004, the appellate court
affirmed the decision of the trial court. The Company is considering an appeal.
The Company has restricted deposit dedicated to payment of this award plus legal
fees, in the event the lawsuit is not overturned. See Note 10.
------
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.
Disclosures of oil and gas reserves, which follow, are based on estimates
prepared by independent engineering consultants for the years ended December 31,
2003, 2002, and 2001. 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 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 fair market 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 were as follows:
December 31, December 31, December 31,
2003 2002 2001
Aggregate capitalized costs:
Proved properties $ 752,705 $ 752,705
$ 752,705
Unproved properties 1,231,165 1,654,117
1,692,703
Accumulated depletion, depreciation and amortization (604,223)
(587,030) (562,310)
Net capitalized assets $ 1,379,647 $ 1,819,792
$ 1,833,098
The following sets forth costs incurred for oil and gas property acquisition,
exploration and development activities, whether capitalized or expensed, during:
December 31, December 31, December 31,
2003 2002 2001
Acquisition of producing properties and productive and
non-productive acreage $ - $
- $ -
Exploration costs and development activities $ -
$ 45,143 $ -
------
Results of operations from oil and gas producing activities
-------------------------------------------------------------------
The results of operations from oil and gas producing activities are as follows:
December 31, December 31, December 31,
2003 2002 2001
` ` ` `
- -
Sales to unaffiliated parties $ 932,268 $
771,621 $ 1,656,265
Production costs (183,362) (224,320)
(332,160)
Depletion, depreciation and amortization (26,551)
(24,719) (38,388)
722,355 522,582
1,285,717
Income tax expense (264,968) (187,057)
(461,867)
Results of operations from activities before
extraordinary items (excluding
corporate overhead and interest costs) $ 457,387 $
335,525 $ 823,850
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, 2003, 2002, and 2001, and
changes in such quantities during each of the years then ended, were as follows:
December 31, 2003 December 31, 2002 December 31, 2001
Oil Gas Oil Gas Oil Gas
--- --- ---
(BBL) (MCF) (BBL) (MCF) (BBL)
(MCF)
Proved developed and undeveloped reserves:
Beginning of year 150 1,492,245 164
1,684,757 299 1,842,672
Revisions of previous estimates extensions,
discoveries and other additions 25 (47,026)
15 40,066 (121) 72,477
Net reserve additions - 36,982
- - - -
Production (25) (162,314) (29)
(232,578) (14) (230,392)
End of year 150 1,319,887 150
1,492,245 164 1,684,757
Proved developed reserves:
Beginning of year 150 1,492,245 164
1,684,757 299 1,842,672
End of year 150 1,319,887 150
1,492,245 164 1,684,757
Standardized measure of discounted future net cash flows relating to proved oil
--------------------------------------------------------------------------------
and gas reserves
------------------
A standardized measure of discounted future net cash flows is presented below
for the year ended December 31, 2003, 2002, and 2001.
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.
December 31, December 31, December 31,
2003 2002 2001
Future cash in flows $ 5,973,197 $ 5,791,416 $
---------------- ---------------- --
4,231,473
---------
Future production and development costs (1,376,902)
(1,297,906) (1,293,017)
Future income tax expenses (1,134,811) (1,202,626)
(430,547)
Future net cash flows 3,461,484 3,290,884
----------------- -----------------
2,507,909
---------
10% annual discount for estimated timing of cash flows 1,190,852
1,066,614 1,502,899
Standardized measure of discounted future net cash flow $ 2,270,632
----------------
$ 2,224,270 $ 1,005,010
---------------- ----------------
* Refer to the following table for analysis in changes in standardized measure.
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.
December 31, December 31, December 31,
2003 2002 2001
Standardized measure - beginning of period $ 2,224,270 $
1,005,010 $ 8,483,726
Sales of oil and gas produced, net of production costs (748,906)
(547,301) (60,294)
Revisions of estimates of reserves provided in prior years:
Net changes in prices 969,281 2,432,433
(1,336,765)
Revisions of previous quantity estimates (171,355)
166,536 (295,610)
Extensions and discoveries 102,382
- 495,354
Purchases of minerals in place -
- -
Accretion of discount 263,451 274,545
117,937
Changes in production rates (timing) and other (436,306)
(334,874) 1,122,078
Net change in income taxes 67,815 (772,079)
(7,521,416)
Net increase (decrease) 46,362 1,219,260
(7,478,716)
Standardized measure - end of period $ 2,270,632 $
2,224,270 $ 1,005,010
Quarterly Financial Data (Unaudited)
---------------------------------------
2003
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating Revenues $ 176,780 $ 1,190,371 $
3,137,062 $ 3,105,032
Net Income (Loss) $ (421,407) $ (152,183) $
1,242,570 $ 490,802
Net Income (Loss) per Common Share $ (0.02) $
(0.01) $ 0.06 $ 0.03
2002
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating Revenues $ 182,734 $ 857,241 $
3,923,875 $ 1,321,058
Net Income (Loss) $ (264,117) $ (360,283) $
1,071,553 $ 321,977
Net Income (Loss) per Common Share $ (0.01) $
(0.02) $ 0.05 $ 0.02
2001
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating Revenues $ 749,810 $ 614,146 $
298,560 $ 467,671
Net Income (Loss) $ 252,254 $ 64,206 $
(172,172) $ (262,263)
Net Income (Loss) per Common Share $ 0.01 $
- $ (0.01) $ -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
------------------------------------
Evaluation of Disclosure Controls
We evaluated the effectiveness of our disclosure controls and procedures
("Disclosure Controls") as of the end of the 2003 fiscal year. This evaluation
("Controls Evaluation") was done with the participation of our president and
chief executive officer("CEO") and chief financial officer ("CFO").
Disclosure Controls are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 ("Exchange Act") is
recorded processed, summarized and reported within the time periods specified in
the SEC's rules and forms. Disclosure Controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our Disclosure
Controls or our internal controls over financial reporting ("Internal Controls")
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, but not absolute, assurance
that the objectives of a control system are met. Further, any control system
reflects limitations on resources, and the benefits of a control system must be
considered relative to its costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within Tri-Valley Corporation
have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of a control. A design of a control system is also based
upon certain assumptions about potential future conditions; over time, controls
may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and may not be detected.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that,
subject to the limitations noted above, the Disclosure Controls are effective in
providing reasonable assurance that material information relating to Tri-Valley
Corporation is made known to management on a timely basis during the period when
our periodic reports are being prepared.
There were no changes in our Internal Controls that occurred during the
quarter covered by this report that have materially affected, or are reasonably
likely to materially affect our Internal Controls.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------------------------------------------------------------------
All directors of the Company serve one year terms from the time of their
election to the time their successor is elected and qualified. The following
information is furnished with respect to each director and executive officer:
Year First
Became Director or Position With
Name of Director Age Executive Officer Company
F. Lynn Blystone 68 1974 President, CEO, Director,
TVC
CEO and Director, TVOG
President, CEO, Director, TVPC
Dennis P. Lockhart(1) 57 1982 Director
Milton J. Carlson(1) 73 1985 Director
Harold J. Noyes 55 2002 Director
Loren J. Miller(1) 59 1992 Director
C. Chase Hoffman 81 2000 Director
Thomas J. Cunningham 61 1997 Treasurer, Chief
Financial Officer and
Secretary, TVC, TVOG, and TVPC
Joseph R. Kandle 61 1999 President, TVOG
(1)- Member of Audit Committee
F. LYNN BLYSTONE - 68 President and Chief Executive Officer of 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 1974
--
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 Pipeline
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 - 57 Director 1982
-----------------------
Mr. Lockhart is a professor at Georgetown University. He was previously
Managing Partner of Zephyr Management L.P., an international private equity
investment fund sponsor/manager headquartered in New York. He remains a partner
in this firm. He is also (non-executive) Chairman of the Small Enterprise
Assistance Funds (SEAF),a not-for-profit operator of emerging markets venture
capital funds focused on the small and mid-sized company sector. He is a
director of CapitalSource Inc. (NYSE) and SMELoan Asia/Maveo Systems (private,
Hong Kong based). In 2002 and 2003 he was an Adjunct Professor at the Johns
Hopkins University School of Advanced International Studies. From 1988 to 2001,
he was President of Heller International Group Inc., a non-bank corporate and
commercial finance company operating in 20 countries, and a director of the
group's parent, Heller Financial Inc. From 1971 to 1988 he held a variety of
international and domestic positions at Citibank/Citicorp (now Citigroup)
including assignments in Lebanon, Saudi Arabia, Greece, Iran and the bank's
Latin American group in New York. In 1999, he was Chairman of the Advisory
Committee of the U.S. Export Import Bank. He is a graduate of Stanford
University and The John Hopkins University School of Advanced International
Studies. He also attended the Senior Executive Program at the Sloan School of
Management, Massachusetts Institute of Technology.
MILTON J. CARLSON - 73 Director 1985
----------------------
Since 1989, Mr. Carlson has been a principal in Earthsong Corporation, which, in
part, consults on environmental matters and performs environmental audits for
government agencies and public and private concerns. Mr. Carlson attended the
University of Colorado at Boulder and the University of Denver.
LOREN J. MILLER, CPA - 59 Director 1992
-------------------------
Mr. Miller has served in a treasury and other senior financial capacities at the
Jankovich Company since 1994. Prior to that he served successively as vice
president and chief financial officer of Hershey Oil Corporation from 1987 to
1990 and Mock Resources from 1991 to 1992. Prior to that he was vice president
and general manager of Tosco Production Finance Corporation from 1975 to 1986
and was a senior auditor the accounting firm of Touche Ross & Company from 1968
to 1973. 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.
HAROLD J. NOYES - 55 Director 2002
--------------------
Since August 2000, he has been president of H.J. Noyes and Associates, Inc., a
firm that provides consulting and business development services to the minerals
industry. Dr. Noyes is currently a senior program manager with Pacific
Northwest National Laboratory. He served October 2001 through October 2002 as
vice president, marketing and business development for Blake Street Investments,
Inc., a money management and investment advisory firm. From 1997 to 2000 he was
president of North Star Exploration, Inc. He was manager, resource development
for Doyon Limited from 1983 to 1997. Dr. Noyes graduated from the University of
Minnesota Magna Cum Laude in geology and took his Ph.D. in geology and
geochemistry at the Massachusetts Institute of Technology. Later he earned a
Masters in Business Administration at the University of Chicago
C. CHASE HOFFMAN - 81 Director 2000
---------------------
Since 1965 Mr. Hoffman has owned and operated a milk cow dairy and farmed 4,000
acres of land. Additionally, he has been a commercial and residential land
developer in California and Hawaii since 1978. From 1973 to 1978 he was a
senior vice president and general manager for Knudsen for the State of
California. Mr. Hoffman also sits as a director for two companies whose shares
are listed on the Canadian Venture Exchange: Seine River Resources, Inc.,
Vancouver, British Columbia, with California gold operations and Guatemala oil
properties, and International Powerhouse Energy Corporation, a British Columbia,
Canada, hydroelectric project. He is a graduate of Stanford University with a
degree in Economics and Business Administration from Graduate School of
Business.
THOMAS J. CUNNINGHAM - 61 Secretary, Treasurer and Chief Financial Officer
---------------------------
of Tri-Valley Corporation, and its wholly owned subsidiaries, Tri-Valley Oil &
Gas Company and Tri-Valley Power Corporation, Bakersfield, California 1997
Named as Tri-Valley Corporation's treasurer and chief financial officer in
February 1997, and as corporate secretary on December 1998. From 1987 to 1997
he was a self employed management consultant in finance, marketing and human
resources. Prior to that he was executive vice president, chief financial
officer and director for Star Resources from 1977 to 1987. He was the
controller for Tucker Drilling Company from 1974 to 1977. He has over 25 years
experience in corporate finance, Securities Exchange Commission public company
reporting, shareholder relations and employee benefits. He received his
education from Angelo State University, Texas.
JOSEPH R. KANDLE - 61 President and Chief Operating Officer Tri-Valley Oil &
---------------------
Gas Company, wholly owned subsidiary of Tri-Valley Corporation Bakersfield,
California 1998
Mr. Kandle was named as president of Tri-Valley Oil & Gas Co. February 1999
after joining the Company June 1998 as vice president - engineering. From 1995
to 1998 he was employed as a petroleum engineer for R & R Resources,
self-employed as a consulting petroleum engineer from 1994 to 1995. He was vice
president - engineering for Atlantic Oil Company from 1983 to 1994. From 1981
to 1983 he was vice president for Star Resources. He was vice president and
chief engineer for Great Basins Petroleum from 1973 to 1981. He began his
career with Mobil Oil (from 1965 to 1973) after graduating from the Montana
School of Mines in 1965.
AUDIT COMMITTEE
The outside independent directors that serve on the audit committee are Loren J.
Miller, Dennis P. Lockhart and Milton J. Carlson. The board of directors has
determined that Loren J. Miller is considered to be the audit committee
financial expert. Please see his biography above.
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 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 2001.
ITEM 11. 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 (the "Named
Officer"), for the fiscal year ended December 31, 2003, 2002, and 2001.
The Board of Directors (excluding Mr. Blystone) served as the compensation
committee for fiscal year 2003.
Long Term
Compensation
Annual Compensation Awards
(a) (b) ( c ) (d) (e)
----- ---
Other Securities
Name Period Covered Salary Compensation
Underlying Options
F. Lynn FYE 12/31/03 $ 99,000 $50,000
Blystone, CEO FYE 12/31/02 $ 99,000
$50,000
FYE 12/31/01 $ 99,000 $16,250
300,000
Employment Agreement with Our President
-------------------------------------------
We have an employment agreement with F. Lynn Blystone, our President and Chief
Executive Officer, which ended in August 2002, and was automatically renewable
for three one-year periods after 2002, unless we terminated the agreement by
giving him 90 days written notice. The base salary amount is $99,000 per year
plus 5,000 shares of our common stock at the end of each year of service. Mr.
Blystone is also entitled to a bonus (not to exceed $25,000) equal to 10% of net
operating cash flow before taxes, including interest income and excluding debt
service. Mr. Blystone is also entitled to a bonus of 4% of the company's annual
net after-tax income. The total of the bonuses from cash flow and net income
may not exceed $50,000 per year.
The employment agreement also provides a severance payment to Mr. Blystone if he
is terminated within 12 months after a sale of control of Tri-Valley. The
severance payment equals $150,000. In addition, Mr. Blystone is entitled to a
bonus equal to to 10% of net operating cash flow before taxes, including
interest income and excluding debt service, plus 4% of the company's annual net
after-tax income, up to a maximum of $50,000 (with the maximum amount pro-rated
over the period for which the payment is made). For purposes of the severance
provision, a sale of control is deemed to be the sale of ownership of 30% of the
outstanding stock of Tri-Valley or the acquisition by one person of enough stock
to appoint a majority of the board of directors of the company.
We carry key man life insurance of $500,000 on Mr. Blystone's life.
Aggregated 2003 Option Exercises and Year-End Values
The following table summarizes the number and value of all unexercised stock
options held by the Named Officer and the Directors at the end of 2003.
( A ) (B) (C) (D) (E)
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options/SARs
Options/SARs at FY-End (#) at FY-End ($)*
Shares Acquired
Name On Exercise (#) Value Realized ($) Exercisable/Unexercisable
---- -------------------------
Exercisable/Unexercisable
-------------------------
F. Lynn Blystone 11,900 $41,970 874,600/0 $2,765,440/0
*Based on a fair market value of $4.40 per share, which was the closing
price of the Company's Common Stock on the American Stock Exchange on December
31, 2003.
No additional stock options were granted to Mr. Blystone in 2003.
Compensation of Directors
---------------------------
The Company compensates non-employee directors for their service on the board of
directors.
The following table sets forth information regarding the cash compensation paid
to outside directors in 2003.
(A) (B) (C)
NAME FEES RESTRICTED SHARES
---- ---- -----------------
Harry J. Noyes $2,400 10,000
Milton Carlson $2,400 10,000
Dennis P. Lockhart $2,400 10,000
Loren J. Miller $2,400 10,000
C. Chase Hoffman $2,400 10,000
Performance Graph
------------------
The following stock price performance graph is included in accordance with the
SEC's executive compensation disclosure rules and is intended to allow
stockholders to review our executive compensation policies in light of
corresponding stockholder returns, expressed in terms of the appreciation of our
common stock relative to two broad-based stock performance indices. The
information is included for historical comparative purposes only and should not
be considered indicative of future stock performance. The graph compares the
yearly percentage change in the cumulative total stockholder return on our
common stock with the cumulative total return of Royale Energy, Inc., Parallel
Petroleum Corporation and Equity Oil Company from December 31, 1999 through
December 31, 2003.
Total returns assume $100 invested on December 31, 1999 in shares of Tri-Valley
Corporation, Royale Energy Inc., Parallel Petroleum Corporation, and Equity Oil
Company, assuming reinvestment of dividends for each measurement period.
Total Return Analysis
12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003
Tri-Valley Corp $ 100.00 $ 108.00 $
106.67 $ 93.33 $ 293.33
Royale Energy, Inc. $ 100.00 $ 289.20 $
292.61 $ 267.05 $ 697.16
Parallel Petroleum Corp. $ 100.00 $ 255.44 $
188.17 $ 162.13 $ 257.40
Equity Oil Co. $ 100.00 $ 312.50 $
160.71 $ 178.57 $ 350.89
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------
As of December 31, 2003, there were 20,097,627 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
F. Lynn Blystone
P.O. Box 1105
Bakersfield, CA 93302 1,329,864(1) 6.3%
Includes 874,600 shares of stock Mr. Blystone has the right to acquire upon the
exercise of options, and 30,200 shares held in the name of Bandera Land Company,
Inc., a family corporation of which Mr. Blystone is the president.
The following table sets forth the beneficial ownership of the Company's common
stock as of December 31, 2003 by each director, by each of the executive
officers named in Item 11, and by the executive officer named in Item 10 and
directors as a group:
Number of Percent of
Directors Shares(1) Total(2)
F. Lynn Blystone 1,329,864(3) 6.3%
Dennis P. Lockhart 342,091(3) 1.7%
Milton J. Carlson 349,000(3) 1.7%
Loren J. Miller 315,300(3) 1.5%
Harold J. Noyes 110,000(3) 0.5%
C. Chase Hoffman 257,500(3) 1.2%
Total group (all directors and
------------
Executive officers - 6 persons) 2,703,755(3) 12.2%
(1) Includes shares which the listed shareholder has the right to acquire
from options as follows: Dennis P. Lockhart 270,000; Milton J. Carlson 268,000;
Loren J. Miller 270,000, Harold J. Noyes 100,000, C. Chase Hoffman 200,000; F.
Lynn Blystone 874,600.
(2) Based on total outstanding shares of 20,097,627 as of December 31, 2003.
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 30,200 shares held in the name of Bandera Land Company, Inc., a
family corporation of which Mr. Blystone is the president.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------------
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------------
YEAR AUDIT SERVICES TAX SERVICES SEC SERVICES
2003 $45,509.82 $16,784.18 $ 6,286.00
2002 $35,276.47 $15,149.31 $19,592.88
ITEM 15. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
---------------------------------------------------------
(a) Exhibits.
Exhibit
Number Description of Exhibit
3.1 Amended and Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.2 of the Company's Form 10-KSB for the year ended
December 31, 1999.
3.2 Amended and Restated Bylaws, incorporated by reference to Exhibit
3.3 of the Company's Form 10-KSB for the year ended December 31, 1999.
10.1 Employment Agreement with F. Lynn Blystone, incorporated by
reference to Exhibit 10.1 of the Company's form 10-KSB/A, Amendment No. 3 to
Form 10-KSB for the year ended December 31, 2000, filed December 14, 2001.
14.1 Code of Business Conduct & Ethics
21.1 Subsidiaries of the Registrant, incorporated by reference to
Exhibit 21.1 of the Company's form 10-KSB/A, Amendment No. 3 to Form 10-KSB for
the year ended December 31, 2000, filed December 14, 2001.
31.1 Certifications Pursuant to 18 U.S.C. 1350.
(b) Reports on Form 8-K
None
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 24, 2004 By:_/s/ F. Lynn Blystone____________________
F. Lynn Blystone
President, Chief Executive Officer and
Director
March 24, 2004 By:__/s/ Thomas J. Cunningham________________
Thomas J. Cunningham
Secretary, Treasurer, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates included:
March 24, 2004 By:__/s/ Milton J. Carlson___________________
Milton J. Carlson, Director
March 24, 2004 By:__/s/ C. Chase Hoffman___________________
C. Chase Hoffman, Director
March 24, 2004 By:__/s/ Dennis P. Lockhart__________________
Dennis P. Lockhart, Director
March 24, 2004 By:__/s/ Loren J. Miller____________________
Loren J. Miller, Director
March 24, 2004 By:__/s/ Harold J. Noyes___________________
Harold J. Noyes, Director
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, F. Lynn Blystone, certify that:
1. I have reviewed this quarterly report on Form 10-K of Tri-Valley
Corporation ("Tri-Valley")
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present, in all material
respects, the financial condition, results of operations and cash flows of
Tri-Valley as of, and for, the periods presented in this annual report.
4. Tri-Valley's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
the Exchange Act Rules 13a-14 and 15d-14) for Tri-Valley and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to Tri-Valley, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of Tri-Valley's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. Tri-Valley's other certifying officers and I have disclosed, based on our
most recent evaluation, to our auditors and the audit committee of Tri-Valley's
board of directors :
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Tri-Valley's ability to record, process,
summarize and report financial data and have identified for Tri-Valley's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Tri-Valley's internal controls.
6. Tri-Valley's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2004
_____________________________________________
F. Lynn Blystone, President and Chief Executive Officer
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, Thomas J. Cunningham, certify that:
1. I have reviewed this annual report on Form 10-K of Tri-Valley
Corporation. ("Tri-Valley")
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present, in all material
respects, the financial condition, results of operations and cash flows of
Tri-Valley as of, and for, the periods presented in this annual report.
4. Tri-Valley's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
the Exchange Act Rules 13a-14 and 15d-14) for Tri-Valley and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to Tri-Valley, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of Tri-Valley's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. Tri-Valley's other certifying officers and I have disclosed, based on our
most recent evaluation, to our auditors and the audit committee of Tri-Valley's
board of directors :
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect Tri-Valley's ability to record, process,
summarize and report financial data and have identified for Tri-Valley's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in Tri-Valley's internal controls.
6. Tri-Valley's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2004 _________________________________________
Thomas J. Cunningham, Chief Financial Officer
EXHIBIT 99.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. 1350
The undersigned officer certifies that this Annual Report on Form 10-K complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, and the information contained in such report fairly
represents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 24, 2004
TRI-VALLEY CORPORATION
By: F. Lynn Blystone
------------------
F. Lynn Blystone, Chief Executive Officer
The undersigned officer certifies that this Annual Report on Form 10-K complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, and the information contained in such report fairly
represents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 24, 2004
TRI-VALLEY CORPORATION
By: Thomas J. Cunningham
----------------------
Thomas J. Cunningham, Chief Financial Officer
TRI-VALLEY CORPORATION
CODE OF BUSINESS CONDUCT & ETHICS
GENERAL PHILOSOPHY
-------------------
Tri-Valley Corporation and its subsidiaries ("Tri-Valley") and each of its
directors, officers and employees must conduct their affairs with uncompromising
honesty and integrity. Business ethics are no different than personal ethics.
The same high standard applies to both. As an employee of Tri-Valley or any of
its subsidiaries, you are required to adhere to the highest standard. The
ethical standards set forth in this code reflect who we are and are the
standards by which we choose to be judged.
Our employees are expected to be honest and ethical in dealing with each other,
with clients, vendors, and all other third parties. Doing the right thing means
doing it right every time.
You must also respect the rights of your fellow co-workers and third parties.
Your actions must be free from discrimination, libel, slander or harassment.
Each person must be accorded equal opportunity regardless of age, race, sex,
color, creed, religion, national origin, marital status, veteran's status,
handicap or disability.
Misconduct cannot be excused because it was directed or requested by another.
In this regard, you are expected to alert management whenever an illegal,
dishonest or unethical act is discovered or suspected. You will never be
penalized for reporting your discoveries or suspicions. There will be no
reprisals for the good faith reporting of a perceived violation. Reports of a
violation will be investigated promptly and the matter will be treated, to the
extent possible, as confidential. In addition to (or instead of) reporting the
matter to Tri-Valley's management, employees may report violations by senior
management (and must report violations involving financial accounting and
reporting) to the chairperson of our audit committee, who is an independent
director and who does not report to our president or other senior management of
Tri-Valley.
The following statements concern frequently raised ethical concerns. Violations
of this code are serious matters that may result in disciplinary actions, up to
and including termination. In addition, violations of the law may result in
fines, penalties or other legal remedies imposed by regulatory and law
enforcement authorities.
Conflicts of Interest
-----------------------
You must avoid any personal activity, investment or association which could
appear to interfere with good judgment concerning Tri-Valley's best interests.
You may not exploit your position or relationship with Tri-Valley for personal
gain. You should avoid even the appearance of such a conflict. For example,
there is a likely conflict of interest if you:
- cause Tri-Valley to engage in business transactions with relatives or
friends;
- use nonpublic Tri-Valley, client or vendor information for personal gain
by you, relatives or friends (including securities transactions based on such
information);
- have more than a modest financial interest in Tri-Valley's vendors,
clients or competitors;
- receive a loan or guarantee of obligations from Tri-Valley or a third
party as a result of your position at Tri-Valley;
- work simultaneously for Tri-Valley and a competitor, customer or
supplier; or
- compete, or prepare to compete, with Tri-Valley while still employed by
Tri-Valley.
A conflict of interest exists when a person's private interest interferes in any
way with the interests of Tri-Valley. If you have concerns about any situation,
management (with the help of our legal counsel) can assist you.
Gifts, Bribes and Kickbacks
------------------------------
Other than for modest gifts given or received in the normal course of business
(including travel or entertainment), neither you nor your relatives may give
gifts to, or receive gifts from, Tri-Valley's clients or vendors. Other gifts
may be given or accepted only with prior approval of your senior management and
in no event should you put Tri-Valley or yourself in a position that would be
embarrassing if the gift was made public.
Dealing with government employees is often different than dealing with private
persons. Many governmental bodies strictly prohibit the receipt of any
gratuities by their employees, including meals and entertainment. You must be
aware of and strictly follow these prohibitions.
Any employee who pays or receives bribes or kickbacks will be immediately
terminated and reported, as warranted, to the appropriate authorities. A
kickback or bribe includes any item intended to improperly obtain favorable
treatment.
LOANS
You may not request or accept a loan from Tri-Valley.
Improper Use or Theft of Tri-Valley Property
--------------------------------------------
Every employee must safeguard Tri-Valley property from loss or theft, and may
not take such property for personal use. Tri-Valley property includes
confidential information, software, computers, office equipment and supplies.
You must appropriately secure all Tri-Valley property within your control to
prevent its unauthorized use.
COVERING UP MISTAKES; FALSIFYING RECORDS
Mistakes should never be covered up, but should be immediately fully disclosed
and corrected. Falsification of any Tri-Valley, client or third party record is
prohibited.
ABUSE OF TRI-VALLEY, CLIENT OR VENDOR INFORMATION
You may not use or reveal Tri-Valley, client or vendor confidential or
proprietary information to others. This includes business methods, pricing and
marketing data, strategy, computer code, screens, forms, experimental research,
and information about our current, former and prospective clients and
associates.
FAIR DEALING
No Tri-Valley employee should take unfair advantage of anyone through
manipulation, concealment, abuse of privileged information, misrepresentation of
material facts, or any other unfair-dealing practice.
FAIR COMPETITION AND ANTITRUST LAWS
Tri-Valley must comply with all applicable fair competition and antitrust laws.
These laws attempt to ensure that businesses compete fairly and honestly and
prohibit conduct seeking to reduce or restrain competition. If you are
uncertain whether a contemplated action raises unfair competition or antitrust
issues, management (with the help of our legal counsel) can assist you.
SECURITIES TRADING
It is usually illegal to buy or sell securities using material information not
available to the public. This "inside" information includes, but is not limited
to, information that Tri-Valley has not released to the general public about
significant contracts, claims, liabilities, major litigation, potential sales,
mergers or acquisitions, and oil, gas and mineral plans, activities,
discoveries, forecasts or budgets.
If you give such undisclosed inside information to others, you as well as the
recipients may be liable as persons who illegally trade securities while
possessing such information. Securities laws may be violated if you, or any of
your relatives or friends trade in securities of Tri-Valley, or any of its
clients or vendors, while possessing information. If you are uncertain,
management (with the help of our legal counsel) can assist you.
PROVISIONS APPLICABLE TO THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
Our chief executive officer ("CEO") and chief financial officer ("CFO") are
responsible for full, fair, accurate, timely and understandable disclosure in
our periodic reports required to be filed with the Securities and Exchange
Commission. As a result, in addition to the remaining provisions in this code,
the CEO and CFO shall:
- promptly bring to the attention of the audit committee any information
they may have concerning (a) significant deficiencies in the design or operation
of internal controls which could adversely affect our ability to record,
process, summarize and report financial data or (b) any fraud, whether or not
material, that involves management or other employees who have a significant
role in our financial reporting, disclosures or internal controls;
- Promptly bring to the attention of our legal counsel and the audit
committee any information they may have concerning any violation of this code or
of the securities or other laws, rules and regulations applicable to Tri-Valley
and the operation of its business;
- promptly bring to the attention of our legal counsel and the audit
committee any material transaction or relationship that arises and of which they
become aware that could be expected to give rise to an actual or apparent
conflict of interest;
- develop and maintain the skills necessary and relevant to Tri-Valley's
needs with respect to maintenance of adequate disclosure controls and internal
controls and procedures; and
- proactively promote ethical and honest behavior within Tri-Valley.
WAIVERS
This code applies to all Tri-Valley employees and its board of directors. There
shall be no waiver of any part of this code, except by a vote of the board of
directors or a designated committee, which will ascertain whether a waiver is
appropriate and ensure that the waiver is accompanied by appropriate controls
designed to protect Tri-Valley. In the event that any waiver is granted, the
waiver must be disclosed publicly in a filing with the SEC and will be posted on
the Tri-Valley website, thereby allowing the Tri-Valley shareholders to evaluate
the merits of the particular waiver.
REPORTING ETHICAL VIOLATIONS
Your conduct can reinforce an ethical atmosphere and positively influence the
conduct of fellow employees. If you are powerless to stop suspected misconduct
or discover it after it has occurred, you should report it to the president or
another senior officer. If the suspected misconduct involves the president or
another senior officer, you may report it to the chairperson of the audit
committee. If the suspected misconduct involves financial accounting or
reporting, it must be reported to the chairperson of the audit committee.
----
Employees may forward complaints on a confidential or anonymous basis to the
president or to the chairperson of the audit committee.
Accounting and Financial Reporting Matters
Suspected misconduct concerning accounting and financial reporting must be
reported to the chairperson of the audit committee. Accounting and financial
reporting misconduct includes, without limitation, the following:
- fraud or deliberate error in the preparation, evaluation, review or
audit of any or our financial statements;
- fraud or deliberate error in recording and maintaining our financial
records;
- deficiencies in or noncompliance with our internal accounting controls;
- misrepresentations or false statements to or by a senior officer with
respect to a matter contained in our financial records, financial reports or
audit reports, or
- deviation from full and fair reporting of our financial condition.
Reports to the secretary of the audit committee may be made to:
Milt Carlson
379 Grandview Drive
Kalispell, MT 59901
CONCLUSION
In the final analysis, you are the guardian of Tri-Valley's ethics. While there
are no universal rules, when in doubt ask yourself:
- Will my actions be ethical in every respect and fully comply with the
law and with Tri-Valley policies?
- Will my actions have the appearance of impropriety?
- Will my actions be questioned by my supervisors, associates, clients,
family and the general public?
- Am I trying to fool anyone, including myself, as to the propriety of my
actions?
If you are uncomfortable with your answer to any of the above, you should not
take the contemplated actions without first discussing them with management.
Any employee who ignores or violates any of Tri-Valley's ethical standards, and
any manager who penalizes a subordinate for trying to follow these ethical
standards, will be subject to corrective action, including immediate dismissal.
However, it is not the threat of discipline that should govern your actions. We
hope you share our belief that a dedicated commitment to ethical behavior is the
right thing to do and is good business.