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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, 2002 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 $6,284,910.
As of March17, 2003, 19,731,348 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$25,112,390.
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
Mechanical and 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 6
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 9
Natural Gas Activities 10
Petroleum Activities 10
Precious Metals Activity 10
Results of Operations 11
Comparison of Years Ended December 31,2002 and 2001 11
Balance Sheet 11
Revenues 11
Costs and Expenses 11
Comparison of Years Ended December 31,2001 and 2000 11
Balance Sheet 11
Revenues 12
Costs and Expenses 12
Financial Condition 12
Commitments 12
Operating Activities 12
Investing Activities 13
Financing Activities 13
Liquidity 13
ITEM 8. FINANCIAL STATEMENTS 14
Notes to Consolidated Financial Statements 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 39
ITEM 11. EXECUTIVE COMPENSATION 41
Employment Agreement with Our President 42
Aggregated 2002 Option Exercises and Year-End Values 42
Compensation of Directors 42
Performance Graph 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 44
ITEM 14. CONTROLS AND PROCEDURES 44
ITEM 15. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K 45
SIGNATURES 46
13
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 gas
production. 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 sophisticated 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.
Mechanical and 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 2002, 2001 and 2000, 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 2003 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, 2002.
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 OTC Bulletin Board, under the symbol TRIL.OB.
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 its 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, 2002 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, 2002, December 31, 2001 and December 31, 2000 were
as follows:
BBL MCF
--- ---
December 31, 2002 Condensate 162 Natural Gas 1,492,245
December 31, 2001 Condensate 162 Natural Gas 1,684,757
December 31, 2000 Condensate 299 Natural Gas 1,842,672
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
$2,224,270 at December 31, 2002, $1,005,010 at December 31, 2001, and $8,483,726
at December 31, 2000. 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,
2002 2001 2000
Natural Gas (MCF) 229,126 230,392 249,011
Crude Oil (BBL) 29 14 50
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,
2002 2001 2000
Gas (Mcf) Oil (Bbl*) Gas (Mcf) Oil (Bbl*) Gas (Mcf) Oil
(Bbl*)
Sales Price $3.07 $19.13 $6.93 $22.32 $3.99 $19.98
Production Costs $0.98 0 $0.40 0 .29 0
Net Profit $2.09 $19.13 $6.53 $22.32 $3.70 $19.98
* Amount represents total sales price of associated condensate, unable to
determine price per barrel.
As of December 31, 2002, 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.
In 2002 we drilled three exploratory wells, two were dry holes and were plugged
and abandoned. The third well is currently being recompleted. The Ekho No. 1
has been included in the OPUS-I project and as funds are received we will
hydraulically fracture it to determine if it is capable of commercial
production.
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,
2002 2001 2000
Exploratory 1
Producing -0- -0- -0-
Recompleting 1 -0- -0-
Dry 2 1 1
Total 3 1 -0-
Development
Producing -0- -0- -0-
Dry -0- -0- -0-
Total -0- -0- -0-
The following table sets forth information regarding undeveloped oil and gas
acreage in which we had an interest on December 31, 2002.
State Gross Acres Net Acres
----- ----------- ---------
California 39,964 36,259
Nevada 16,617 16,617
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 2003 7,843 acres
Expires in 2004 2,374 acres
Expires in 2005 5,854 acres
Precious Metals
- ----------------
The precious metals properties are located in interior Alaska. As of December
31, 2002, we had no proven precious metal reserves, but we are exploring these
properties. They are comprised of 626 40-acre claims and 15 160-acre claims, of
which 104 claims are leased from others, 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, 2002:
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 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 December 3, 2002 and is confident that we will
prevail and the judgment will be overturned.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
We held our annual meeting on November 16, 2002. 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 18,759,074 32,500
Milton J. Carlson 18,755,360 36,214
C. Chase Hoffman 18,755,360 36,214
Dennis P. Lockhart 18,755,360 36,214
Loren J. Miller 18,755,360 36,214
Harold J. Noyes 18,742,360 49,214
Measure #2 - Appoint Brown Armstrong as the Company's independent accountants.
FOR AGAINST ABSTAIN
18,733,339 58,235
PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
- --------------------------------------------------------------------------------
HOLDER MATTERS
- ---------------
Shares of Tri-Valley Corporation stock are traded over-the-counter on the
Electronic Bulletin Board under the symbol "TRIL." The following table shows
the high and low bid and asked prices of Tri-Valley stock for the quarterly
periods indicated as reported by the OTC Stock Journal:
Bid Prices Asked Prices
---------- ------------
High Low High Low
---- --- ---- ---
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
------------- ----- ----- ----- -----
2001
- ----
Fourth Quarter $1.90 $1.20 $2.05 $1.20
-------------- ----- ----- ----- -----
Third Quarter $2.50 $1.40 $2.65 $1.40
------------- ----- ----- ----- -----
Second Quarter $2.98 $0.85 $3.20 $0.69
-------------- ----- ----- ----- -----
First Quarter $2.06 $1.25 $2.50 $1.22
------------- ----- ----- ----- -----
As of December 31, 2002, we estimate that our common stock was held by
approximately 2,000 shareholders of record 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. As of March 7, 2003, we had 22 market makers for our stock.
In 2002, trading volume exceeded 6.9 million shares.
Recent Sales of Unregistered Securities
- -------------------------------------------
During 2002 we issued 13,000 shares of common stock without registration under
the Securities Act of 1933 to one former employee pursuant to the exercise of
stock options. The exercise price of the stock options was $0.50 per share, and
the options were exercised on three occasions when the closing price of our
common stock varied between $1.25 and $2.09 per share. 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.
We issued 70,000 shares to Richard H. Langley, who is not affiliated with
our company, for services. The closing market price of our common stock on the
date we awarded these shares (December l8, 2002) was $1.55 per share.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
- -----------------------------------------------
Year Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ----
Income Statement Data:
Revenues $ 6,284,910 $ 2,130,187 $ 2,197,369 $
2,686,129 $ 977,982
Operating Income (Loss) $ 845,130 $ (117,975)
$(1,360,263) $ (12,417) $ (1,004,790)
Basic Earnings Per Share $ .04 $ -
$ (0.07) $ - $ (0.05)
Balance Sheet Data:
Property and Equipment, net $ 1,974,501 $ 2,010,457 $
1,357,959 $ 1,059,755 $ 1,038,237
Total Assets $ 4,634,874 $ 3,381,757 $ 4,053,257 $
9,802,463 $ 2,216,958
Long Term Obligations $ 26,791 $ 8,371 $
12,038 $ 21,055 $ 8,527
Stockholder's Equity $ 1,262,306 $ 353,776 $
391,651 $ 391,651 $ 1,230,849
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------
Notice Regarding Forward-Looking Statements
This report contains forward-looking statements. The words, "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "could," "may,"
"foresee," and similar expressions are intended to identify forward-looking
statements. These statements include information regarding expected development
of the Company's business, lending activities, relationship with customers, and
development in the oil and gas industry. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove incorrect, actual
results may vary materially and adversely from those anticipated, believed,
estimated or otherwise indicated.
Critical Accounting Issues
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. The policies are:
Oil and gas wells are drilled primarily on a contract basis. The Company
follows the completed contract method of income recognition for drilling
operations.
Sales of oil and natural gas wells are recognized when sold.
For exploration and development, costs are accounted for by the successful
efforts method.
A summary of our significant accounting policies is included in Note 1 of our
financial statements. We believe the 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.
Overview
We believe that, after 22 years of downsizing in the petroleum industry,
increased oil and natural gas prices during the past year have created a
favorable environment for renewed growth. Production from 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 55%
of its oil and 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, and three are targeted for Nevada. We
begin drilling as sufficient funds are invested to drill the next target.
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
explorations. 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 bear 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 in its cash management functions.
Natural Gas Activities
In 2002 we plugged and abandoned the Sonata #1 which began drilling in December
2001. The Sonata 3-1 began drilling on May 6, 2002 and was plugged and
abandoned. We then determined that the remaining two original Sonata Prospects,
originally 4 wells were planned, would be dropped from our list of potential
prospects and replaced. We began drilling the Sunrise-Mayel #2H on July 12,
2002, we artificially fractured the well in September 2002 and the zone was
considered to be damaged by the fracture process. We are planning on coming up
the hole and recompleting in another formation.
The Company generally sells a percentage of production on a fixed contract price
and the remainder 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 2001 and 2002, 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 2003. Because we plan to sell only on the spot market in 2003, 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 $2,224,270 at December 31, 2002, compared to
$1,005,010 on December 31, 2001, 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 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 well. 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.
Petroleum Activities
We drilled the Aurora #1-19 oil prospect in December. It was a dry hole and was
plugged and abandoned. The other wells we drilled in 2002 were for natural gas
targets.
Precious Metals Activity
The price of gold has fluctuated in the last 12 months from a low of $289 per
oz. to a high of $355 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. There was no exploration activity in 2002. We are in the process of
raising capital to continue our work in the area.
We are confident that other parties will be willing to participate when the
price of gold recovers.
RESULTS OF OPERATIONS
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 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 this year 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.
Shareholder equity increased by $908,530 due to the increase in cash from
current net income.
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, 2002 compared to the same period last year due to increased 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.
Comparison of Years Ended December 31, 2001 and 2000
Balance Sheet
- --------------
The Company had $911,913 cash on hand at December 31, 2001 compared to
$1,373,570 at December 31,2000. This decrease resulted from the Company
spending funds that had been advanced by our joint venture partners to drill
Sunrise-Mayel#1. Accounts receivables were $711,136 less in 2001 due to the
receipts owed us at the end of 2000, which were higher, as the price per mcf of
gas was much higher in 2000 than in 2001. Trade accounts payable were $284,016
less in the year ending 2001 due to reduced drilling activity in the latter part
of 2001 compared to 2000. Accounts payable to joint venture participants was
$480,511 less in 2001 than in 2000 due to the amounts and timing of revenue
receipts and their distribution to the participants. The $125,000 note
receivable that was recorded on our balance sheet on December 31, 2000, was
repaid with interest and expenses during 2001 in settlement of a claim we made
in bankruptcy court.
Revenues
- --------
Oil and gas income amounted to $1,656,265 for the year ended 2001 compared to
$1,044,013 for the year ended 2000. This increase was mainly due to the
increase in natural gas prices paid for our production in northern California
during the first half of 2001 compared to 2000. Our oil and gas income includes
sales of oil and gas, royalties, and partnership income. The decrease of
$645,074 in sale of oil and gas prospects was because the prospect we sold in
2001 was smaller than the prospect sold in 2000.
Gain on sale of property was $154,760 less in 2001 because we had no sale of
property in 2001. Sale of oil and gas prospects is $645,074 less in 2001
compared to 2000 because of the smaller prospect sales in 2001 than in 2000.
Interest income decreased $75,637 for the year ended 2001 compared to the year
ended 2000 due to reduced funds on deposit earning interest. Other income
increased $196,037 due to the settlement and payment of the telecommunications
claim.
Costs and Expenses
- --------------------
Costs and expenses are $1,309,470 less in the year ended 2001 compared to the
year ended 2000. Mining expenses were $60,901 greater due to more exploratory
activity on our Alaska claims. Workover expenses were $202,932 more in 2001 due
to more wells having work done on them to enhance production capabilities. The
cost of oil and gas prospects sold was $275,889 less in 2001 due to the size of
the prospect we sold being smaller than the one sold in 2000. General and
administrative costs were $813,462 less this year due to the settlement of a
lawsuit and the costs related to it in the year ended December 31, 2000. Our
well write-off expenses were $490,921 less in 2001 due to the fact we did not
write off any wells in the year 2001.
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 amount is greater
then the Company would lose money on that well, if the cost is less then the
Company would make a profit on that well.
Delay rentals for oil and gas leases amounted to$342,124 in 2002. 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 2003 from operating revenues.
Operating Activities
The company had a positive cash flow from operating activities of $1,154,919
compared to $45,072 for the same period in 2001. This was due from profit on
the sale of prospects and turnkey drilling activity in 2002. Also, $122,315 was
from the sale of lease prospects.
Investing Activities
- ---------------------
Cash used in investing activities was $397,383 less in 2002 compared to 2001
primarily from the timing related to oil and gas lease acquisition costs and the
sale of some of these costs to third parties. Typically, we acquire leases over
several months or in some cases even a year's time. We then include these
acquisition costs when we sell the prospect, at that time we recover our
acquisition, geological and geophysical costs. Most of these costs for 2002
were related to the OPUS-I drilling partnership.
Financing Activities
Cash provided by financing activities was $7,279 less in the year ended 2002
compared to the same period in 2001. This was due to increase in long term debt
by $29,686 and the reduction of paid in capital of $37,192 as stock options were
exercised in 2002 compared to 2001.
Liquidity
The recoverability of theour oil and gasreserves depends on future events,
including obtaining adequate financing forour exploration and development
program, successfully completingour planned drilling program, and achieving a
level of operating revenues that is sufficient to supportour cost structure. At
various timesin our history, it has been necessary forus 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 thatwe will
continue to be able to meetour needs for additional capital as such needs arise
in the future.We may need additional capital topay forour 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
ofourcapitalneeds will be determined in part by the number of prospects
generated withinour exploration program and by the working interest thatwe
retain in those prospects.
Shouldwe choose to make an acquisition of producing oil and gas properties, such
an acquisition wouldlikelyrequire that some portion of the purchase price be
paid in cash, and thus would createtheneed 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 increaseour leverage and add toour need for
cash to service such debt,
- - Additional offerings ofour equity securities, which would cause dilution
ofour common stock,
- - Sales of portions ofour working interest in the prospects withinour
exploration program, which would reduce future revenues from its exploration
program,
- - Sale to an industry partner of a participation inour exploration program,
- - Sale of all or a portion ofour producing oil and gas properties, which
would reduce future revenues.
Our ability to raise additional capital will depend on the results ofour
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 tous from any source or that, if available, it will be
on terms acceptable tous.
ITEM 8: FINANCIAL STATEMENTS
TRI-VALLEY CORPORATION
INDEX
- -----
Page(s)
-------
Report of Independent Auditor 15
Consolidated Balance Sheets at December 31, 2002 and 2001 16
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 17
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000 18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 19
Notes to Consolidated Financial Statements 20-34
Supplemental Information about Oil and Gas Producing
Activities (Unaudited) 35-38
15
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
BROWN ARMSTRONG PAULDEN
McCOWN STARBUCK & KEETER
ACCOUNTANCY CORPORATION
Bakersfield, California
February 21, 2003
19
The accompanying notes are an integral part of these financial statements.
TRI-VALLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
2002 2001
----
ASSETS
- ------
Current Assets
Cash $ 1,936,294 $ 911,913
Accounts receivable, trade 151,618
107,225
Prepaid expenses 12,029
12,029
Total Current Assets 2,099,941
1,031,167
Property and Equipment, Net (Notes 1 and 2) 1,974,501
2,010,457
Other Assets
Deposits 316,705 104,705
Investments in partnerships (Note 1) 17,400
9,101
Goodwill (net of accumulated amortization of
$221,439 at December 31, 2001 and 2002) 212,414
212,414
Other 13,913 13,913
Total Other Assets 560,432
340,133
TOTAL ASSETS $ 4,634,874 $ 3,381,757
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------
Current Liabilities
Notes payable (Note 3) $ 13,792 $
8,265
Income taxes payable 76,000
-
Accounts payable and accrued expenses 564,240
297,001
Amounts payable to joint venture participants 74,412
59,631
Advances from joint venture participants, net (Note 1)
2,617,333 2,654,713
Total Current Liabilities 3,345,777
3,019,610
Long-Term Portion of Notes Payable (Note 3) 26,791
8,371
Total Liabilities 3,372,568 3,027,981
Shareholders' Equity
Common stock, $.001 par value; 100,000,000 shares
authorized; 19,726,348 and 19,689,748
issued and outstanding at December 31, 2002 and 2001,
Respectively 19,726 19,690
Less: common stock in treasury, at cost,
100,025 and 163,925 shares at December 31,
2002 and 2001, respectively (13,370)
(21,913)
Common stock receivable (2,250)
-
Capital in excess of par value 8,879,724
8,746,653
Accumulated deficit (7,621,524) (8,390,654)
Total Shareholders' Equity 1,262,306
353,776
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,634,874 $
3,381,757
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2002 2001 2000
---- ---- ----
Revenues
Sale of oil and gas $ 752,971 $ 1,597,771
$ 891,774
Royalty income 351 6,952
11,406
Partnership income 18,299 51,542
140,833
Gain on sale of property -
- 154,760
Interest income 19,534 23,597
99,234
Sale of oil and gas prospects 5,421,782
218,426 863,500
Other income 71,973 231,899
35,862
Total Revenues 6,284,910 2,130,187
2,197,369
Costs and Expenses
Mining exploration costs 169,111
223,643 162,741
Oil and gas leases 224,320 91,440
72,213
Well workover - 240,718
37,786
Severed acreage -
174 1,026
Cost of oil and gas prospects sold 3,648,089
508,821 784,710
General and administrative 1,316,894
1,117,643 1,931,105
Depreciation, depletion and amortization 34,384
60,962 57,400
Interest 1,838 4,761
19,730
Well write-off -
- 490,921
Impairment of acquisition costs 45,143
- -
Total Costs and Expenses 5,439,780
2,248,162 3,557,632
Net Income (Loss) before Income Taxes 845,130
(117,975) (1,360,263)
Tax Provision (Note 6) 76,000
- -
Net Income (Loss) $ 769,130 $ (117,975)
$ (1,360,263)
Basic and Diluted Earnings (Loss) per Common Share
and Common Equivalent Share $ 0.04 $
(0.00) $ (0.07)
Weighted Average Number of Shares Outstanding 19,702,054
19,495,693 19,293,188
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, 1999,
as restated 19,301,248 179,425 $ 19,301
$ 8,344,462 $ - $ (6,912,416) $
(45,163) $ 1,406,164
Issuance of common stock 253,500 (15,500)
254 373,396 -
- 23,250 396,900
Stock issuance costs - -
- (51,150) -
- - (51,150)
Net income (loss) - -
- - -
(1,360,263) - (1,360,263)
Balance at
December 31, 2000,
as restated 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 income (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 (loss) - -
- - -
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
TRI-VALLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 769,130 $ (117,975) $
(1,360,263)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation, depletion, and amortization 34,384
60,962 57,400
Impairment, dry hole and other disposals of property 45,143
- -
Land acquisition costs sold 122,315
- -
(Gain) on sale of property -
- (154,760)
Non-employee stock compensation 119,700
23,100 88,650
Changes in operating capital:
(Increase) decrease in accounts receivable (44,393)
711,136 (663,177)
Increase in prepaids -
- (10,000)
Increase in deposits and other assets (212,000)
(4,600) (1,375)
Increase in income taxes payable 76,000
- -
Increase (decrease) in accounts payable & accrued exp.
267,239 (284,016) 189,915
Increase (decrease) in amounts payable to joint venture
participants and related parties 14,781
(480,511) 444,156
Increase (decrease) in advances from joint venture
participants (37,380) 136,976
(5,359,863)
Net Cash Provided (Used) by Operating Activities 1,154,919
45,072 (6,769,317)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments on notes receivable -
125,000 -
Proceeds from sale of property - -
154,760
Capital expenditures (170,272) (702,613)
(293,489)
(Investment in) distribution from partnerships 10,000
19,958 (17,053)
Net Cash Used by Investing Activities (160,272)
(557,655) (155,782)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 29,686
- -
Principal payments on long-term debt (5,739)
(6,074) (8,900)
Proceeds from issuance of common stock 26
134 274
Additional paid in capital 19,674 56,866
284,726
Sale of treasury stock -
- 23,250
Stock issuance costs -
- (51,150)
Net Cash Provided by Financing Activities 43,647
50,926 248,200
Net Increase (Decrease) in Cash and Cash Equivalents 1,038,294
(461,657) (6,676,899)
Cash at Beginning of Year 911,913 1,373,570
8,050,469
Cash at End of Year $ 1,936,294 $ 911,913 $
1,373,570
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,838 $ 4,761 $
19,730
Income taxes paid $ 800 $ -
$ 15,756
49
20
TRI-VALLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
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.
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. The Company typically owns a carried interest
and/or overriding royalty interest in such ventures, earning a working interest
at payout.
Receivables from and amounts payable to these related parties (as well as other
related parties) have been segregated in the accompanying financial statements.
For contract drilling projects where the Company acts strictly as operator of
drilling, the Company makes cash calls to participants when drilling
expenditures exceed participant contributions. Excess project funding is held
until it is determined that no further requirement exists for abandonment or
plugging back of project wells, at which time the funds are refunded. In 2000,
the Company expensed $490,921 worth of joint venture project costs attributed to
a dry hole project.
Sale of Oil and Gas Prospects
- ----------------------------------
The Company sells the rights to unproven oil and gas prospects to the joint
ventures created for drilling and exploration activities. These amounts
represent the Company's costs of leasing and acquiring the prospects, and other
geological and geophysical costs (hereafter referred to as "GGLA") plus a profit
to the Company. The Company recognizes gain on the sale of prospect GGLA at the
point when the joint venture is fully funded, as the portion of the project cost
attributed to GGLA is nonrefundable upon completion of project funding.
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 2000,
2001, and 2002 there was $0, $0, and $45,143, 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
The Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and/or Long-Lived Assets to be Disposed of," requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The provisions of SFAS 121 are applicable to proved properties and
our costs of wells and related equipment. Periodically, if there is a large
decrease in oil and gas reserves or production on a property, or if a dry hole
is drilled on or near one of its properties the Company will review the
properties for impairment. SFAS 121 also established guidelines for determining
recoverability based on future net cash flows from the use of the asset and for
the measurement of the impairment loss. Impairment loss under SFAS No. 121 is
calculated as the difference between the carrying amount of the asset and its
fair value. If the carrying amount exceeds the undiscounted future net revenues,
an impairment is recognized equal to the difference between the carrying value
and the discounted estimated future net revenues of that property, which closely
reflects fair market value. Any impairment loss is recorded in the current
period in which the recognition criteria are first applied and met. Under the
successful efforts method of accounting for oil and gas operations, the Company
periodically assesses its proved properties for impairments by comparing the
aggregate net book carrying amount of all proved properties with their aggregate
future net cash flows. The statement requires that the impairment review be
performed on the lowest level of asset groupings for which there are
identifiable cash flows. In the case of the Company, this results in a
field-by-field impairment review.
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. 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.
Based on the Company's experience, management believes site restoration,
dismantlement, and abandonment costs net of salvage value to be immaterial in
relation to operating costs. These costs are currently expensed when incurred.
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 finance 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". Accordingly, the Company computes compensation cost for
each employee stock option granted as the amount by which the quoted market
price of the Company's common stock on the date of grant exceeds the amount the
employee must pay to acquire the stock. The amount of compensation costs, if
any, is charged to operations over the vesting period.
Revenue Recognition
- --------------------
OIL AND GAS SALES
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.
DRILLING PROJECTS
For turnkey drilling projects, amounts received for drilling activities which
have not been completed are deferred and reported as liabilities within the
joint venture advance liability. The costs of turnkey drilling projects are
reimbursed by the drilling partnership on a periodic basis and carried in
Company inventory until drilling is completed. The Company follows the
completed contract method of accounting for its turnkey drilling projects, and
recognizes revenue on the turnkey project when drilling is complete. During
2002, two drilling projects were performed on a turnkey basis.
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 2002, the Company issued 70,000 shares of common stock valued at
$119,700, of which 63,900 shares were issued from treasury, to an outside
consultant for services.
During 2002, the Company issued 4,500 shares of common stock to an officer in
exchange for a $2,250 receivable. The shares were under the Company's stock
option plan.
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. For all business combinations for which
the date of acquisition is after June 30, 2001, SFAS 141 also establishes
specific criteria for the recognition of intangible assets separately from
goodwill. SFAS 141 also requires unallocated negative goodwill (in a case where
the purchase price is less than fair market value of the acquired assets) to be
written off immediately as an extraordinary gain, rather than deferred and
amortized. SFAS 142 changes the accounting for goodwill and other intangible
assets after an acquisition. 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 will be required to reassess the useful lives and
residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
will be required to test the intangible asset for impairment in accordance with
the provisions of Statement No. 142 within the first interim period. Any
impairment loss will be measured as of the date of adoption and recognized as
the cumulative effect of a change in accounting principle in the first interim
period. In connection with the transitional goodwill impairment evaluation,
Statement No. 142 will require the Company to perform an assessment, by
reporting unit, of whether there is an indication that goodwill is impaired as
of the date of adoption. Management believes the Company has one reporting unit.
The Company will then have up to six months from the date of adoption to
determine the fair value of its reporting unit and compare it to the reporting
unit's carrying amount. To the extent the reporting unit's carrying amount
exceeds its fair value, an indication exists that the reporting unit's goodwill
may be impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of it assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with Statement No. 141, to its carrying amount, both of which
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
----------------------------------------------
Recently Issued Accounting Pronouncements (Continued)
- ---------------------------------------------------------
would be measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings. SFAS 142 is effective for the fiscal year beginning January 1, 2002.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $212,414 all of which will be subject to the transition provisions
of Statements 141 and 142. Amortization expense related to goodwill was $10,846
per year for the fiscal years 2001 and 2000. The Company does not believe that
the adoption of these statements will have a material effect on its financial
position, results of operations or cash flows.
In June 2001, the FASB also 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 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, 2002. 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.
NOTE 2 - PROPERTY AND EQUIPMENT
------------------------
Oil and gas properties, and equipment and fixtures consist of the following:
December 31, December 31,
2002 2001
Oil and Gas - California
- ----------------------------
Proved properties, net of accumulated depletion of $587,030
and $562,311 at December 31, 2002 and 2001, respectively $
109,355 $ 190,396
Unproved properties 1,710,437
1,692,702
Total Oil and Gas Properties 1,819,792
1,883,098
Other Property and Equipment
- -------------------------------
Land 12,281 12,281
Building, net of accumulated depreciation
$11,751 and $10,623 at December 31,
2002 and 2001, respectively 38,644
39,771
Transmission tower 45,000
45,000
Office equipment, vehicle, and leasehold improvements net of
accumulated depreciation of $159,731 and $151,195 at
December 31, 2002 and 2001, respectively 58,784
30,307
Total Other Property and Equipment 154,709
127,359
Property and Equipment (Net) $ 1,974,501 $
2,010,457
NOTE 3 - NOTES PAYABLE
--------------
December 31, December 31,
2002 2001
Note payable to Union Bank dated July 29,2002;
secured by a vehicle; interest at 8.3%; payable
in 60 monthly installments of $602. $ 27,638 $
- -
NOTE 3 - NOTES PAYABLE (Continued)
--------------
Note payable to Imperial Premium Finance, Inc.,
dated June 9, 1997; secured by contractual policy;
interest at 12.00%; payable in monthly installments
of $680 including interest. 4,574
4,574
Note payable to Union Bank, dated January
15, 2000; secured by a vehicle; interest at 8.5%;
payable in 60 monthly installments of $380. 8,371
12,062
40,583 16,636
Less current portion 13,792
8,265
Long-term portion of notes payable $ 26,791 $
8,371
Maturities of long-term debt for the years subsequent to December 31, 2002 are
as follows:
Year Ended
December 31,
2003 $ 13,792
2004 9,986
2005 6,100
Thereafter 10,705
$ 40,583
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 non-employee
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 stock option plan.
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
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
----------------------------
was not less than the market value of shares on the grant date, therefore, no
compensation cost has been recognized. Had compensation cost been determined
under the provisions of SFAS 123, there would have been no effect on the
Company's net income and earnings per share for the years ended December 31,
2000, 2001, and 2002 as the fair value of the Company's stock exceeded the
weighted average fair value of the options granted.
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 2002, 2001 and 2000, respectively. Expected life
of 5, 6, and 7 years for 2002, 2001 and 2000, respectively, no expected
dividends, expected volatility of 98.04 percent for 2002, 82.91 percent for
2001, and 89.28 and 89.97 percent for 2000 and risk-free interest rates of
3.86, 4.85, and 5.25 percent, respectively.
Employee Stock Options (Continued)
- ------------------------
A summary of the status of the Company's fixed stock option plan as of December
31, 2002 and 2001, and changes during the years ending on those dates is
presented below:
2002 2001 2000
Weighted- Weighted-
---------
Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares
Price
Fixed Options
- --------------
Outstanding at beginning of year 3,229,000 $ 1.26
2,644,000 $ 1.20 1,248,000 $ 0.77
Granted - $ - 700,000
$ 1.35 1,410,000 $ 1.57
Exercised (20,500) $ 0.50 (115,000)
$ 1.50 (14,000) $ 0.50
Cancelled (248,000) $ 1.36 -
- -
Outstanding at end of year 2,960,500 $ 1.25
3,229,000 $ 1.26 2,644,000 $ 1.20
Options exercisable at year-end 2,960,500 3,229,000
2,644,000
Weighted-average fair value of
options granted during the year $ - $
1.02 $ 1.30
The following table summarizes information about fixed stock options outstanding
at December 31, 2002:
Options Outstanding and Exercisable
Weighted-Average
Number Outstanding Remaining Weighted-Average
Range of Exercise Prices at December 31, 2002 Contractual
Life Exercise Price
$.50 - $2.43 2,960,500
6.15 $ 1.25
A summary of option transactions during the years ended December 31, 2002, 2001,
and 2000 is presented below:
Number Weighted-Average
of Shares Exercise Price
Outstanding at December 31, 1999 1,248,000 $
0.77
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
----------------------------
Issued 1,410,000 1.57
Exercised (14,000) 0.50
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
Exercisable at December 31, 2002 2,960,500
1.25
Available for Issuance at December 31, 2002 490,000
Beneficial Owners
- ------------------
The following is known to the Company to be the only beneficial owners of 5% or
more of the Company's outstanding common stock at December 31, 2002:
Ownership Shares Percentage
F. Lynn Blystone 1,332,764 (1) 6.40%
Dennis Vaughan 1,009,200 5.10%
(1) Includes 886,500 stock options that he has the right to exercise.
PARTNERSHIPS
------------
Tri-Valley is a general partner and operator of the Tri-Valley Oil & Gas
Exploration Programs 1971-1 and Martins-Severin Partnerships. The Company
accounts for these partnerships on the equity method. Oil and gas income
produced follows:
December 31, December 31, December 31,
2002 2001 2000
Partnership income, net of expenses $ 18,299 $
51,542 $ 140,833
NOTE 5 - EARNINGS PER SHARE
--------------------
Full year basic earnings (loss) per share for the Company were $.04, $.00, and
$(.07) in 2002, 2001 and 2000, respectively, and were based on the weighted
average shares outstanding of 19,702,054 in 2002, 19,495,693 in 2001,
NOTE 5 - EARNINGS PER SHARE(Continued)
--------------------
and 19,293,188 in 2000. Diluted earnings (loss) per share for the Company were
$.04, $.00, and $(.07) in 2002, 2001 and 2000, 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 2,698,500 in 2002, 0 in 2001, and
0 in 2000. Common stock equivalents excluded from the calculation of diluted
earnings per share because the effect was antidilutive were 960,000, 3,729,000,
and 2,644,000 in 2002, 2001 and 2000, respectively.
NOTE 6 - INCOME TAXES
-------------
At December 31, 2002, the Company had available net operating loss carry
forwards for financial statements and federal income tax purposes of
approximately $1,040,000. These loss carryforwards expire between 2002 and 2014.
The components of the net deferred tax assets were as follows:
December 31, December 31, December 31,
2002 2001 2000
Deferred Tax Assets:
Net operating loss carryforwards $ 45,667 $
606,550 $ 802,644
Statutory depletion carryforwards 297,217
291,276 259,233
Total Deferred Tax Assets 342,884
897,826 1,061,877
Valuation Allowance (342,884) (897,826)
(1,061,877)
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.
The reconciliation of federal taxable income follows:
December 31, December 31, December 31,
2002 2001 2000
Income (loss) before tax $ 845,130 $ (117,975)
$ (1,360,263)
Computed "expected" tax (benefit) $ 304,344 $
(40,112) $ (462,489)
State tax liability 76,000 -
- -
Utilization (non-utilization) of operating loss carryover
(304,344) 40,112 462,489
Total income tax provision $ 76,000 $
- - $ -
NOTE 7 - MAJOR CUSTOMERS
----------------
Oil and Gas
- -------------
The Company received in excess of 10% of its oil and gas revenue from various
sources as follows:
NOTE 7 - MAJOR CUSTOMERS(Continued)
----------------
Oil and Gas
- -------------
A Other
Period Ended:
December 31, 2000 $ 994,553 $
50,460
December 31, 2001 $ 1,597,771 $
- -
December 31, 2002 $ 752,971 $
- -
Substantially, all oil and gas sales have occurred in the northern California
gas market.
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).
The Company's operations are classified into two principal industry segments.
Following is a summary of segmented information for 2002, 2001, and 2000:
Oil and Gas Precious Drilling and
Production Metals Development Total
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 $ 4,648,787 $ - $
- - $ 4,648,787
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 8 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS(Continued)
--------------------------------------------------------
Year Ended December 31, 2000
Revenues from External Customers $ 1,044,013 $
- - $ - $ 1,044,013
Interest Revenue $ 99,234 $ -
----------------- ----------------------
$ - $ 99,234
- --------------------- -----------------
Interest Expense $ 19,730 $ -
----------------- ----------------------
$ - $ 19,730
- --------------------- -----------------
Expenditures for Segment Assets $ 293,489 $
---------------- --
- - $ - $ 293,489
- - ---------------------- ----------------
Depreciation, Depletion, and Amortization $ 57,400 $
----------------- --
- - $ - $ 57,400
- - ---------------------- -----------------
Total Assets $ 4,053,257 $ - $
- - $ 4,053,257
Net Income (Loss) $ (1,118,732) $ (162,741) $
(78,790) $ (1,360,263)
NOTE 9 - COMMON STOCK
-------------
During 2002 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 and one former employee exercised options to purchase 20,500
common shares at $.50 each. Included as a component of shareholder's equity is
a $2,250 receivable from the officer for shares received.
- - We issued 10,000 shares to the Company's President, Lynn Blystone,
pursuant to an employment contract. The closing market price of our common
stock on the date we awarded these shares was $1.17.
- - We issued 70,000 shares to Richard Langley for services, of which 63,900
shares were issued from treasury stock. The closing market price of our common
stock on the date we awarded these shares (December 18, 2002) was $1.71.
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 $212,000
with the appeal. The bond amount is included in Deposits at December 31, 2002.
The Company believes it will prevail in its appeal and the likelihood of loss is
less than probable. Included in accounts payable at December 31, 2002 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 one gas contract. The contract is effective for
a twelve month period and is renegotiated annually. During 2000, 2001, and 2002,
the Company sold all of its produced gas under these agreements. The terms of
the agreements are identical among the contracts. During 2002, the terms of the
agreements were as follows: 100% percent of the produced gas was purchased 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
purchased at the monthly spot price, which is the PG&E Citygate price. During
2000, the terms of the agreements were as follows: Sixty percent of the produced
gas was purchased at a fixed price of $2.35, the remaining forty percent was
purchased 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, 2002 consists primarily of the following projects:
OPUS
- ----
The Opus Drilling Program is a multi-well drilling program covering more than 24
prospects. The Company began fund raising for the Opus program in late 2001 and
2002. To date, the Program has drilled 3 wells, which include the Aurora 1-19,
the Sunrise-Mayel 2H, and the Sonata 3-1. The Aurora and Sonata wells were not
commercially
productive. Testing continues on the Sunrise well. All projects are turn-key
projects, with turn-key drilling costs and completion costs for each well fixed
in the drilling program Memorandum. The Opus Drilling Program joint venture
status at December 31, 2002, which is included in the joint venture advance
liability, is as follows:
Total Opus Contributions $ 6,105,250
Total Opus Expenditures $ 4,982,561
=====================
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, 2002, which is included in the joint venture advance, is as follows:
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 three year lease which has 19 months
remaining.
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. The Company may also receive an additional $1,210,000
from sales to Swartz on the exercise of outstanding warrants. The proceeds of
the sale will be used to finance property acquisition and development, for
working capital, and to pay the expenses of the offering.
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.
------
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,
2002, 2001, and 2000. 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,
2002 2001 2000
Aggregate capitalized costs:
Proved properties $ 752,706 $ 752,706
$ 752,706
Unproved properties 1,449,119 1,692,702
990,089
Accumulated depletion, depreciation and amortization (587,030)
(562,310) (525,916)
Net capitalized assets $ 1,614,795 $ 1,833,098
$ 1,216,879
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,
2002 2001 2000
Acquisition of producing properties and productive and
non-productive acreage $ - $
- - $ 56,320
Exploration costs $ 118,119 $ 702,613 $
227,568
- ------
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,
2002 2001 2000
Sales to unaffiliated parties $ 771,621 $
1,656,265 $ 1,045,013
Production costs (224,320) (332,160)
(601,946)
Depletion, depreciation and amortization (24,719)
(38,388) (29,634)
522,582 1,285,717
413,433
Income tax expense (187,057) (461,867)
(144,489)
Results of operations from activities before
extraordinary items (excluding
corporate overhead and interest costs) $ 335,525 $
823,850 $ 268,944
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, 2002, 2001, and 2000, and
changes in such quantities during each of the years then ended, were as follows:
December 31, 2002 December 31, 2001 December 31, 2000
Oil Gas Oil Gas Oil Gas
--- --- ---
(BBL) (MCF) (BBL) (MCF) (BBL)
(MCF)
Proved developed and undeveloped reserves:
Beginning of year 164 1,684,757 299
1,842,672 185 1,540,004
Revisions of previous estimates extensions,
discoveries and other additions 15 40,066
(121) 72,477 164 551,679
Production (29) (232,578) (14)
(230,392) (50) (249,011)
End of year 150 1,492,245 164
1,684,757 299 1,842,672
Proved developed reserves:
Beginning of year 164 1,684,757 299
1,842,672 185 1,540,004
End of year 150 1,492,245 164
1,684,757 299 1,842,672
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, 2002, 2001, and 2000.
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,
2002 2001 2000
Future cash in flows $ 5,791,416 $ 4,231,473 $
25,127,878*
Future production and development costs (1,297,906)
(1,293,017) (1,975,633)
Future income tax expenses (1,202,626) (430,547)
(7,951,963)
Future net cash flows 3,290,884 2,507,909
15,200,282
10% annual discount for estimated timing of cash flows 1,066,614
1,502,899 6,716,556
Standardized measure of discounted future net cash flow $ 2,224,270
$ 1,005,010 $ 8,483,726
* 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,
2002 2001 2000
Standardized measure - beginning of period $ 1,005,010 $
8,483,726 $ 1,217,249
Sales of oil and gas produced, net of production costs (547,301)
(60,294) (443,067)
Revisions of estimates of reserves provided in prior years:
Net changes in prices 2,432,433 (1,336,765)
10,411,028
Revisions of previous quantity estimates 166,536
(295,610) 3,186,723
Extensions and discoveries -
495,354 694,792
Purchases of minerals in place -
- - 842,668
Accretion of discount 274,545 117,937
1,306,674
Changes in production rates (timing) and other (334,874)
1,122,078 (902,506)
Net change in income taxes (772,079) (7,521,416)
(7,829,835)
Net increase (decrease) 1,219,260 (7,478,716)
7,266,477
Standardized measure - end of period $ 2,224,270 $
1,005,010 $ 8,483,726
Quarterly Financial Data (Unaudited)
- ---------------------------------------
2002
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating Revenues $ 182,734 $ 857,241 $
3,923,875 $ 1,321,060
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) $ (0.01)
------
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 67 1974 President, CEO, Director,
TVC
CEO and Director, TVOG
President, CEO, Director, TVPC
Dennis P. Lockhart(1) 56 1982 Director
Milton J. Carlson(1) 72 1985 Director
Harold J. Noyes 54 2002 Director
Loren J. Miller(1) 58 1992 Director
C. Chase Hoffman 80 2000 Director
Thomas J. Cunningham 60 1997 Treasurer, Chief
Financial Officer and
Secretary, TVC, TVOG, and TVPC
Joseph R. Kandle 60 1999 President, TVOG
(1)- Member of Audit Committee
F. LYNN BLYSTONE - 67 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
Pipe-line Project. He has founded, run and sold companies in several fields
including Learjet charter, commercial construction, municipal finance and land
development. He is also president of a family corporation, Bandera Land
Company, Inc., with real estate interests in Kern, Riverside and Orange Counties
California. A graduate of Whittler College, California, he did graduate work at
George Williams College, Illinois in organization management. He gives full
time to Tri-Valley.
DENNIS P. LOCKHART - 56 Director 1982
-----------------------
Mr. Lockhart is currently associated with Zephyr Management L.P., a global
investment firm headquartered in New York. Mr. Lockhart was until recently a
senior officer and director of Heller Financial Inc. and President of Heller's
international subsidiary which operates in 18 countries. Heller Financial is a
NYSE company active in various lines of commercial finance. He was president of
Heller International Group from 1988 through 2001. Prior to 1988, Mr. Lockhart
was an officer of Citicorp/Citibank and held a number of corporate banking and
management positions in the U.S. and overseas. 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 - 72 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 - 58 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 - 54 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 - 80 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 - 60 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 - 60 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.
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, 2002, 2001, and 2000.
The Board of Directors (excluding Mr. Blystone) served as the compensation
committee for fiscal year 2002.
Long Term
Compensation
Annual Compensation Awards
(a) (b) ( c ) (d) (e)
----- ---
Other Securities
Name Period Covered Salary Compensation
Underlying Options
F. Lynn FYE 12/31/02 $149,000 (1)
Blystone, CEO FYE 12/31/01 $115,250 (2)
FYE 12/31/00 $105,720 (3)
(1) Includes a bonus of $50,00 for 2002.
(2) Includes a bonus of $16,250 for 2001.
(3) Includes value of 5,000 common shares issued on April 3, 2000, pursuant
to Mr. Blystone's employment contract, with a fair market value of $9,850 ($1.97
per share).
Employment Agreement with Our President
- -------------------------------------------
We have an employment agreement with F. Lynn Blystone, our President and Chief
Executive Officer, which ends in August 2002, and is automatically renewable for
three one-year periods after 2002, unless we terminate 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 additon, 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 $500,000 on Mr. Blystone's life.
Aggregated 2002 Option Exercises and Year-End Values
The following table summarizes the number and value of all unexercised stock
options held by the Named Officer and the Directors at the end of 2002.
( A ) (B) (C) (D) (E)
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options/SARs
Options/SARs at FY-End (#) at FY-End ($)*
Shares Acquired
Name On Exercise (#) Value Realized ($) Exercisable/Unexercisable
---- -------------------------
Exercisable/Unexercisable
-------------------------
F. Lynn Blystone 7,500 $8,065 886,500/0 $263,850/0
*Based on a fair market value of $1.40 per share, which was the closing bid
price of the Company's Common Stock in the NASD National Market System on
December 31, 2002.
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 2002.
(A) (B)
NAME FEES
---- ----
Harry J. Noyes $1,200
(A) (B)
NAME FEES
---- ----
Milton Carlson $2,400
Dennis P. Lockhart $2,050
Loren J. Miller $2,400
C. Chase Hoffman $2,400
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, 1998 through
December 31, 2002.
Total returns assume $100 invested on December 31, 1997 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
12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002
Tri-Valley Corp $ 100.00 $ 300.00 $
324.00 $ 320.00 $ 280.00
Royale Energy, Inc. $ 100.00 $ 81.70 $
212.42 $ 208.17 $ 169.61
Parallel Petroleum Corp. $ 100.00 $ 117.36 $
264.58 $ 220.83 $ 190.28
Equity Oil Co. $ 100.00 $ 115.46 $
341.24 $ 185.57 $ 220.62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
As of December 31, 2002, there were 19,726,348 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 1,332,764(1) 6.8%
Dennis Vaughan
2298 Featherhill Road
Santa Barbara, CA 93108 1,009,200(1) 5.1%
Includes 886,500 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, 2002 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 1,332,764(3) 6.8%
Dennis P. Lockhart 332,091(3) 1.7%
Milton J. Carlson 339,000(3) 1.7%
Loren J. Miller 305,300(3) 1.5%
Harold J. Noyes -0-(3) 0.0%
C. Chase Hoffman 247,500(3) 1.2%
Total group (all directors and
- ------------
Executive officers - 6 persons) 2,556,655(3) 12.9%
(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;
C. Chase Hoffman 200,000; Loren J. Miller 270,000, F. Lynn Blystone 886,500.
(2) Based on total outstanding shares of 19,726,348 as of December 31, 2002.
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. CONTROLS AND PROCEDURES
- ------------------------------------
Within the 90 days prior to the date of this Form 10-K, we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief accounting officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
our chief executive officer and chief accounting officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to our company required to be included in our
periodic SEC filings. There have been no significant changes in our internal
controls or in other factors, which could significantly affect internal controls
subsequent to the date our management carried out their evaluation
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.
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.
99.1 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, 2003 By:_/s/ F. Lynn Blystone____________________
F. Lynn Blystone
President, Chief Executive Officer and
Director
March 24, 2003 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, 2003 By:__/s/ Milton J. Carlson___________________
Milton J. Carlson, Director
March 24, 2003 By:__/s/ C. Chase Hoffman___________________
C. Chase Hoffman, Director
March 24, 2003 By:__/s/ Dennis P. Lockhart__________________
Dennis P. Lockhart, Director
March 24, 2003 By:__/s/ Loren J. Miller____________________
Loren J. Miller, Director
March 24, 2003 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, 2003
_____________________________________________
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, 2003 _________________________________________
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, 2003
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, 2003
TRI-VALLEY CORPORATION
By: Thomas J. Cunningham
----------------------
Thomas J. Cunningham, Chief Financial Officer