TVC 10-K 12-31-05
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, 2005
|
Commission
File No. 001-31852
|
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.)
|
4550
California Avenue, Suite 600, 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:
Title
of each class
|
Name
of exchange on which registered
|
Common
Stock, $0.001 par value
|
American
Stock Exchange
|
Securities
Registered Pursuant to Section 12(g) of the Act:
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act Yeso Nox
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yeso Nox
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 Noo
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
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer.
Large
accelerated filer o
Accelerated filer x
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yeso Nox
As
of
February 28, 2006, 22,967,776
common
shares were issued and outstanding.
The
aggregate market value of the common shares of Tri-Valley Corporation held
by
non-affiliates on the last day of the registrant’s most recently completed
second fiscal quarter was approximately $297,005,820.
DOCUMENTS
INCORPORATED BY REFERENCE: None
TABLE
OF CONTENTS
PART
I
|
|
|
ITEM
1
|
Business
|
1
|
|
Competition
|
1
|
|
Governmental
Regulation
|
2
|
|
Environmental
Regulation
|
2
|
|
Employees
|
4
|
|
Available
Information
|
4
|
ITEM
1A
|
Risk
Factors
|
4
|
ITEM
2
|
Properties
|
9
|
|
Oil
and Gas Operations
|
9
|
|
Mining
Activity
|
12
|
ITEM
4
|
Submission
of Matters To A Vote Of Security Holders
|
14
|
|
|
|
PART
II
|
|
|
ITEM
5
|
Market
Price Of The Registrant's Common Stock And Related Security Holder
Matters
|
14
|
|
Recent
Sales of Unregistered Securities
|
14
|
ITEM
6
|
Selected
Historical Financial Data
|
15
|
ITEM
7
|
Management's
Discussion And Analysis Of Financial Condition
|
15
|
|
Notice
Regarding Forward-Looking Statements
|
15
|
|
Overview
|
15
|
|
Critical
Accounting Policies
|
16
|
|
Results
of Operations
|
20
|
|
Financial
Condition
|
21
|
|
Operating
Activities
|
22
|
ITEM
8
|
Financial
Statements
|
24
|
ITEM
9A
|
Controls
and Procedures
|
59
|
|
Evaluation
of Disclosure Controls
|
59
|
|
Management’s
Report on Internal Control over Financial Reporting
|
59
|
|
|
|
PART
III
|
|
|
ITEM
10
|
Directors
and Executive Officers of the Registrant
|
60
|
ITEM
11
|
Executive
Compensation
|
64
|
|
Employment
Agreement with Our President
|
65
|
|
Compensation
Committee Report
|
65
|
|
Aggregated
2005 Option Exercises and Year-End Values
|
67
|
|
Compensation
of Directors
|
67
|
|
Performance
Graph
|
68
|
ITEM
12
|
Security
Ownership of Certain Beneficial Owners and
Management
|
68
|
ITEM
14
|
Principal
Accountant Fees and Services
|
69
|
ITEM
15
|
Exhibits
and Financial Statement Schedules
|
70
|
|
|
|
SIGNATURES
|
71
|
PART
I
ITEM
1 Business
Tri-Valley
Corporation (“TVC” or the Company), a Delaware corporation formed in 1971, is in
the business of exploring, acquiring and developing petroleum and metal and
mineral properties and interests therein. Tri-Valley has four wholly owned
subsidiaries and three operating segments or business lines.
· |
Tri-Valley
Oil & Gas Company (“TVOG”) operates the oil & gas activities. TVOG
derives the majority of its revenue from oil and gas drilling and
development. TVOG primarily generates its own exploration prospects
from
its internal database, and also screens prospects 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-ventures. The company deals with both accredited individual
investors and energy industry companies. TVOG serves as the operator
of
these co-ventures. TVOG operates both the oil and gas production
segment
and the drilling and development segment of our business
lines.
|
· |
Select
Resources Corporation (“Select”) was created in late 2004 to manage, grow
and operate Tri-Valley’s mineral interests. Select operates the Minerals
segment of our business lines both through a joint venture, Tri-Western
Resources, LLC and itself.
|
· |
Great
Valley Production Services, Inc., was formed in February 2006 to
operate
oil production and drilling, rigs, primarily for
TVOG.
|
· |
Tri-Valley
Power Corporation is inactive at the present
time.
|
We
sell
substantially all of our oil and gas production to ConocoPhillips and Pacific
Summit Energy. Other gatherers of oil and gas production operate within our
area
of operations in California, and we are confident that if these companies ceased
purchasing our production we could find another purchaser on similar terms
with
no adverse consequences to our income or operations.
In
1987,
we acquired precious metals claims on Alaska state lands. We have conducted
exploration operations on these properties and has reduced our original claims
to a block of approximately 28,720 acres (44.9 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 proven or 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. The same is true for other properties
acquired in 2004 and 2005.
In
2004,
Select Resources Corporation entered into a 50% - 50% industrial mineral joint
venture with a private company through the formation of Tri-Western Resources,
LLC to pursue the development of calcium carbonate, basalt minerals, and cinder
in Southern California. In 2005, we transferred our existing gold mining
properties located near Richardson, Alaska and our interest in Tri-Western
Resources, LLC to Select Resources Corporation, our new subsidiary. In 2004,
Select Resources also entered into mineral leases on additional precious and
base metals properties near Livengood, Alaska. In 2005, Select Resources also
entered into mineral leases on precious metals properties south of Dawson,
Yukon
and acquired a calcium carbonate mine, located northwest of Ketchikan,
Alaska.
In
2005,
exploration activities were conducted on all three gold properties and further
exploration is required on each of the properties before a final evaluation
as
to the economic and technical feasibility can be determined. Select Resources
will also endeavor to acquire and develop new metal and industrial mineral
properties.
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.
The
mining industry is also highly competitive in all its phases of operation.
Competition is particularly intense with respect to the acquisition of mineral
prospects and deposits suitable for exploration and development, the acquisition
of proven and probable reserves, and the hiring of experienced personnel. Our
competitors in mineral property exploration, acquisition, development, and
production include the major mining companies in addition to numerous
intermediate and junior mining companies, mineral property investors, and
individual proprietors. 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 mineral properties and prospects
and to define, evaluate, bid for, and purchase a greater number of mineral
properties and prospects than we can. Our financial or personnel resources
to
generate mineral reserves and resources in the future will be dependent on
our
ability to identify, select and acquire suitable mineable 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.
Domestic
exploration, development and operation of minerals and metals is extensively
regulated at both the federal and state levels. Legislation affecting the
mineral 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 mineral industry that often are difficult and
costly to comply with and which carry substantial penalties for noncompliance.
State statutes and regulations require permits for exploration, including
drilling, construction and operational permits, reclamation bonds, and reports
concerning operations. Our activities are subject to numerous laws and
regulations reclamation and abandonment, the discharge of materials into the
environment or otherwise relating to environmental protection. Our activities
are also subject to numerous laws and regulations related to health and safety
of mine and mine related workers. The heavy regulatory burden on the mineral
industry increases its costs of doing business and consequently affects its
profitability. Delays in obtaining or failure to obtain government permits
and
approvals may adversely impact our activities. The regulatory environment in
which Select Resources operates could change in ways that would substantially
increase costs to achieve compliance, or otherwise could have a material adverse
effect on Select Resources’ activities or financial position.
Environmental
Regulation
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.
Mineral
Operations
Select
Resources’ United States exploration and property development activities are
subject to various federal and state laws and regulations governing the
protection of the environment, including the Clean Air Act; the Clean Water
Act;
CERCLA; Compensation and Liability Act; the Emergency Planning and Community
Right-to-Know Act; the Endangered Species Act; the Federal Land Policy and
Management Act; the National Environmental Policy Act; the Resource Conservation
and Recovery Act, and related state laws. These laws and regulations are
continually changing and are generally becoming more restrictive. Select
Resources’ activities in Canada are also subject to federal and provincial
governmental regulations for the protection of the environment. In general,
environmental regulations have not had, and are not expected to have, a material
adverse impact on Select Resources’ activities or our competitive position.
Because we do not have active mining operations at present, these regulations
have little impact on our current activities. In 2005, 2004 and 2003, the
regulatory requirements had no significant effect on our precious metals or
industrial mineral activities as we continued our exploration and project
development efforts.
We
conduct our operations so as to protect public health and environment and
believe our activities are in compliance with applicable laws and regulations
in
all material respects. We have made, and expect to make in the future,
expenditures to comply with such laws and regulations. We have made estimates
of
the amount of such expenditures, but cannot precisely predict the amount of
such
future expenditures. Estimated future reclamation costs are based principally
on
legal and regulatory requirements that are applicable to each individual
property. At December 31, 2005, $122,431 was bonded for reclamation costs
relating to industrial mineral properties through Select Resources’ industrial
mineral joint venture, Tri-Western Resources, LLC.
Employees
We
had a
total of thirty-six employees on December 31, 2005 including 19 in the
Tri-Western Resources, LLC joint venture.
Available
Information
We
file
annual and quarterly reports, proxy statements and other information with the
Securities and Exchange Commission using SEC's EDGAR system. The SEC maintains
a
site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding us and other registrants
that file reports electronically with the SEC. You may read and copy any
materials that we file with the SEC at its Public Reference Room at 450 5th
Street, N.W., Washington, D.C. 20549. Our common stock is listed on the American
Stock Exchange, under the symbol TIV. Please call the SEC at 1-800-SEC-0330
for
further information about their public reference rooms. Our website is located
at http://www.tri-valleycorp.com.
We
furnish our shareholders with a copy of our annual report on Form 10-K, which
contains audited financial statements, and such other reports as we, from time
to time, deem appropriate or as may be required by law. We use the calendar
year
as our fiscal year.
ITEM
1A Risk Factors
In
addition to the other information contained in this Form, 10-K, the following
risk factors should be considered in evaluating our business.
Risks
Involved in Oil and Gas Operations
Our
success depends heavily on market conditions and prices for oil and
gas.
Our
success depends heavily upon our ability to market oil and gas production at
favorable prices. In recent decades, there have been both periods of worldwide
overproduction and underproduction of hydrocarbons and periods of increased
and
relaxed energy conservation efforts. As a result the world has experienced
periods of excess supply of, and reduced demand for, crude oil on a worldwide
basis and for natural gas on a domestic basis; these periods have been followed
by periods of short supply of, and increased demand for, crude oil and to a
lesser extent, natural gas. The excess or short supply of oil and gas has placed
pressures on prices and has resulted in dramatic price
fluctuations.
Estimating
oil and gas reserves leads to uncertain results and thus our estimates of value
of those reserves could be incorrect.
The
process of estimating oil and gas reserves is complex, requiring significant
decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result,
such
estimates are inherently imprecise. Actual future production, oil and gas
prices, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable oil and gas reserves may vary substantially from
those
estimated in reserve reports that we periodically obtain from independent
reserve engineers.
Any
significant variance in these assumptions could materially change the estimated
quantities and present value of our reserves. In addition, our proved reserves
may be subject to downward or upward revision based upon production history,
results of future exploration and development, prevailing oil and gas prices
and
other factors, many of which are beyond our control. Actual production,
revenues, taxes, development expenditures and operating expenses with respect
to
our reserves will likely vary from the estimates used, and such variances may
be
material.
Continued
production of oil and gas depends on our ability to find or acquire additional
reserves, which we may not be able to find.
In
general, the volume of production from oil and gas properties declines as
reserves are produced. Except to the extent that we acquire properties
containing proved reserves or conduct successful development and exploitation
activities, or both, our proved reserves will decline as reserves are produced.
Our future oil and gas production is, therefore, highly dependent upon our
ability to find or acquire additional reserves. The business of acquiring,
enhancing or developing reserves is capital intensive. We require cash flow
from
operations as well as outside investments to fund our acquisition and
development activities. If our cash flow from operations is reduced and external
sources of capital become limited or unavailable, our ability to make the
necessary capital investment to maintain or expand our asset base of oil and
gas
reserves would be impaired.
The
unavailability or high cost of drilling rigs, equipment, supplies, personnel
and
oil field services could adversely affect our ability to execute our exploration
and development plans on a timely basis and within our budget.
Our
industry is cyclical and, from time to time, there is a shortage of drilling
rigs, equipment, supplies or qualified personnel. During these periods, the
costs and delivery times of rigs, equipment and supplies are substantially
greater. In addition, the demand for, and wage rates of, qualified drilling
rig
crews rise as the number of active rigs in service increases. As a result of
increasing levels of exploration and production in response to strong prices
of
oil and natural gas, the demand for oilfield services has risen, and the costs
of these services are increasing, while the quality of these services may
suffer. The unavailability or high cost of drilling rigs, equipment, supplies
or
qualified personnel has become particularly severe in California and has
materially and adversely affected us because our operations and properties
are
concentrated in those areas.
In
late
2005, in order to counter-act the rig shortage, we purchased a production rig
of
our own in order to perform necessary workover operations and we plan to acquire
more including rigs with drilling capability.
Our
oil and gas reserves are concentrated in California.
Because
we are not diversified geographically, local conditions may have a greater
effect on us than on other companies. Substantially all of our oil and gas
reserves are located in California. Because our reserves are not diversified
geographically, our business is more subject to local conditions than other,
more diversified companies.
Oil
and gas drilling and production activities are subject to numerous mechanical
and environmental risks that could cause less production.
These
risks include the risk that no commercially productive oil or gas reservoirs
will be encountered, that operations may be curtailed, delayed or canceled
and
that title problems, weather conditions, compliance with governmental
requirements, mechanical difficulties or shortages or delays in the delivery
of
drilling rigs and other equipment may limit our ability to develop, produce
or
market our reserves. New wells we drill may not be productive and we may not
recover all or any portion or our investment in the well.
Drilling
for oil and gas may involve unprofitable efforts, not only from dry wells but
also from wells that are productive but do not produce sufficient net revenues
to return a profit after drilling, operating and other costs. In addition,
our
properties may be susceptible to hydrocarbon drainage from production by other
operators on adjacent properties.
Industry
operating risks include the risks of fire, explosions, blow-outs, pipe failure,
abnormally pressured formation 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, 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 our level of insurance
may
not 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. Environmental laws could subject us to
liabilities for environmental damages even where we are not the operator who
caused the environmental damage.
Drilling
is a speculative activity, because assessments of drilling prospects are
inexact.
The
successful acquisition of oil and gas properties depends on our ability to
assess recoverable reserves, future oil and gas prices, operating costs,
potential environmental and other liabilities and other factors. Exploratory
drilling remains a speculative activity. Even when fully utilized and properly
interpreted, seismic data and other advanced technologies only assist
geoscientists in identifying subsurface structures and do not enable the
interpreter to know whether hydrocarbons are in fact present.
Therefore,
our assessment of drilling prospects are necessarily inexact and their accuracy
inherently uncertain. In connection with such an assessment, we perform a review
of the subject properties that we believe to be generally consistent with
industry practices. Such a review, however, will not reveal all existing or
potential problems, nor will it permit us to become sufficiently familiar with
the properties to fully assess their deficiencies and capabilities. Inspections
may not always be performed on every well, and structural and environmental
problems are not necessarily observable even when an inspection is undertaken.
In
most
cases, we are not entitled to contractual indemnification for pre-closing
liabilities, including environmental liabilities and we generally acquire
interests in the properties on an “as is” basis with limited remedies for
breaches of representations and warranties. In those circumstances in which
we
have contractual indemnification rights for pre-closing liabilities, the seller
may not be able to fulfill its contractual obligation. In addition, competition
for producing oil and gas properties is intense and many of our competitors
have
financial and other resources, which are substantially greater than ours.
Therefore, we may not be able to acquire producing oil and gas properties which
contain economically recoverable reserves or that we make such acquisitions
at
acceptable prices.
Governmental
regulations make production more difficult and production costs
higher.
Domestic
exploration for the production and sale of oil and gas are 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 statues and regulations require permits for drilling operations, drilling
bonds and reports concerning operations. Most states in which we 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 proscribing 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 material into
the environment or otherwise relating to environmental protection. The heavy
regulatory burden on the oil and gas industry increases its cost of doing
business and consequently affects its profitability. Any change in such laws,
rules, regulations, or interpretations, may harm our financial condition or
operating results.
Risks
Involved in Our Mineral Exploration Business
Our
industrial mineral operations have not yet begun to realize significant
revenue.
Select
Resources was formed in late 2004. Beginning in 2005, we have invested a
significant amount of capital in Select to enter into a joint venture for the
development and operation of industrial minerals deposits near Bakersfield,
California and to acquire a calcium carbonate mine near Ketchikan, Alaska.
The
first of these developments, the Monarch calcium carbonate deposit and the
Boron
basalt and cinder deposits, near Bakersfield, are expected to begin producing
and selling minerals during 2006. We have realized no significant revenue from
our investment in Select Resources to date, and even after production and sales
actually begin we will not be sure whether the mining operations will be
economically viable due to changing market conditions, production and sales
history, varying customer demands, competition, and other factors associated
with new industrial mineral ventures.
Our
mining operations may not be profitable.
The
economic value of mining operations may be adversely affected by:
|
•
|
Declines
or changes in demand;
|
|
|
|
|
•
|
Declines
in the market price of the various metals or minerals;
|
|
|
|
|
•
|
Increased
production or capital costs;
|
|
|
|
|
•
|
Reduction
in the grade or tonnage of the deposit;
|
|
|
|
|
•
|
Increase
in the dilution of the ore; and
|
|
|
|
|
•
|
Reduced
recovery rates;
|
|
•
|
Delays
in new project development;
|
|
|
|
|
•
|
New,
lower cost competitors;
|
|
|
|
|
•
|
Net
losses;
|
|
|
|
|
•
|
Reduced
cash flow;
|
|
|
|
|
•
|
Reductions
in reserves; and
|
|
|
|
|
•
|
Write-downs
of asset values.
|
Our
joint development and operating arrangements may not be
successful.
Through
Select Resources, we have entered a 50/50 joint venture with Trans-Western
Materials, LLC, a private company holding leases on various industrial mineral
deposits. As in a typical joint venture arrangement, the partners own a
proportionate share of the assets, are entitled to indemnification from each
other party and are only responsible for any future liabilities in proportion
to
its interest in the joint venture. If Trans-Western Materials fails to perform
its obligations under the joint venture agreement, we could incur liabilities
and losses in excess of our pro-rata share of the joint venture.
Our
operations may be adversely affected by risks and hazards associated with the
mining industry that may not be fully covered by
insurance.
Our
business is subject to a number of risks and hazards including:
|
•
|
Environmental
hazards;
|
|
|
|
|
•
|
Industrial
accidents;
|
|
|
|
|
•
|
Unusual
or unexpected geologic formations;
|
|
|
|
|
•
|
Unanticipated
hydrologic conditions, including flooding and periodic interruptions
due
to inclement or hazardous weather conditions.
|
|
|
|
|
Such
risks could result in:
|
|
|
|
•
|
Personal
injury or fatalities;
|
|
|
|
|
•
|
Damage
to or destruction of mineral properties or producing
facilities;
|
|
|
|
|
•
|
Environmental
damage;
|
|
|
|
|
•
|
Delays
in exploration, development or mining;
|
|
|
|
|
•
|
Monetary
losses; and
|
|
|
|
|
•
|
Legal
liability.
|
For
some
of these risks, we maintain insurance to protect against these losses at levels
consistent with our historical experience, industry practice and circumstances
surrounding each identified risk. Insurance against environmental risks is
generally either unavailable or, we believe, too expensive for us, and,
therefore, we do not maintain environmental insurance. Occurrence of events
for
which we are not insured may affect our cash flow and overall
profitability.
Risks
Involved in Our Operations Generally
There
are risks associated with forward-looking statements made by us and actual
results may differ.
Some
of
the information in this 10-K contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,”
“estimate” and “continue,” or similar words. You should read statements that
contain these words carefully because they:
•
discuss our future expectations;
•
contain projections of our future results of operations or of our
financial condition; and
•
state other “forward-looking” information.
We
believe it is important to communicate our expectations. However, there may
be
events in the future that we are not able to accurately predict and/or over
which we have no control. The risk factors listed in this section, other risk
factors about which we may not be aware, as well as any cautionary language
in
this prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. You should be aware that the occurrence
of
the events described in these risk factors could have an adverse effect on
our
business, results of operations and financial condition.
If
we are unable to obtain additional funding our business operations will be
harmed.
We
believe that our current cash position and estimated 2006 cash from operations
will not be sufficient to meet our current estimated operating and general
and
administrative expenses and capital expenditures through the end of fiscal
year
2006. As a result, the Company will require additional funding. Although we
have
always been successful in the past in attracting sufficient capital, we do
not
know if additional financing will be available when needed, or if it is
available, if it will be available on acceptable terms. Insufficient funds
may
prevent us from implementing our business strategy.
The
departure of any of our key personnel would slow our operation until we could
fill the position again.
Our
success will depend in large part on the continued services of our president
and
chief executive officer, F. Lynn Blystone. We have an employment agreement
with
Mr. Blystone which ends at the end of 2006. The loss of his services would
be
particularly detrimental to us because of his background and experience in
the
oil and gas industry. We carry key man insurance of $500,000 on Mr. Blystone’s
life.
We
also
consider our chief administrative officer, Thomas J. Cunningham, and the
president of our Tri-Valley Oil and Gas subsidiary, Joseph R. Kandle, to be
key
employees whose loss would be detrimental to us because of their oil and gas
industry experience. We do not have employment contracts with either Mr.
Cunningham or Mr. Kandle. We carry key man life insurance of $1,000,000 on
Mr.
Kandle, and no key man insurance on Mr. Cunningham.
We
consider the president of our mining subsidiary, Dr. Henry J. Sandri, to also
be
a key employee. We have no employment contract in place but carry a key man
life
insurance policy of $1,000,000.
We
have identified material weaknesses in our internal control over financial
reporting which, if not remediated, may adversely affect our ability to timely
and accurately meet our financial reporting responsibilities.
As
reported in our Annual Report on Form 10-K, as amended, for the fiscal year
ended December 31, 2004, and subsequently in our Quarterly Reports on Form
10-Q
for the fiscal quarters ended March 31, 2005, as amended, and June 30, 2005,
we
identified deficiencies that were symptomatic of and contributed to the overall
material weakness relating to the financial statement close process identified
in our evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2004. As indicated in Item 9A, we have hired
additional personnel and undertaken a process to remediate the remaining
deficiencies and believe that these former deficiencies have been remediated.
However, 2006 is the first full year for which our improved procedures are
in
place, and we may discover that additional deficiencies exist or that prior
problems may not be fully solved. Weakness in our internal control over
financial reporting could cause us to improperly record our financial results
and operating results and could result in management errors or omissions to
our
detriment.
ITEM
2 Properties
Our
headquarters and administrative offices are located at 4550 California Avenue,
Suite 600, Bakersfield, California 93309. We lease approximately 10,300 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, an industrial minerals plant
site, 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, along with more than 20,000 line miles of digitized
2-D seismic, the workhorse of the majority of the seismic in
California.
Oil
and Gas Operations
During
2005, Tri-Valley acquired several oil and gas properties. Below is a description
of the properties which were acquired jointly with the Opus-I Partnership in
which Tri-Valley owns 25% and investor partners own the remaining
75%.
The
Temblor Valley property in Kern County consists of two producing oil properties,
one in the South Belridge Oil Field contains 49 wells, 24 producing, 24 idle
and
1 injector well. The other property is in the Edison Oil Field and consists
of 7
wells, 4 producing, 2 idle and 1 injector well. Our plan is to return the idle
wells in both fields to production and drill additional wells this
year.
Another
property is in Ventura County and is comprised of three leases in the Oxnard
Oil
Field. This property is the Pleasant Valley prospect. The Company plans to
drill
several vertical test wells prior to drilling a number of horizontal
wells.
Tri-Valley
also acquired approximately 6,900 acres in the Moffat Ranch gas field west
of
Madera, California. Two formerly producing wells will be reworked and put back
on production. A third well was drilled by the previous leaseholder. It was
not
tested and subsequently was abandoned. Our technical team believes the well
should be re-entered and completed for production. The Company plans to drill
a
10,300 foot well to appraise several other zones that produce on neighboring
properties but are so far untested on the Moffat Ranch property.
Also,
the
Company holds approximately 17,000 acres in Nevada, all chosen from proprietary
data as prospective for oil and gas exploration.
Tri-Valley
holds interests in other properties outside of the Opus Partnership. We have
producing interests in gas fields in the Sacramento Valley of Northern
California in the Rio Vista and Dutch Slough Gas Fields.
The
Company purchased approximately 6,670 acres of mineral rights, which basically
covers what was the Chowchilla Ranch Gas Field in Madera County, California.
This land position is held by a single producing gas well at this time.
Tri-Valley believes this land position to be very under developed and under
exploited and plans to re-enter, recomplete and further infill drill the
leasehold position. Tri-Valley has also leased an approximate additional 7,500
acres offsetting the 6,670 acre Chowchilla property.
During
2005, the Company successfully hydraulically fractured the Ekho #1 well in
the
Vedder Zone of completion in the interval between 18,018’ and 18,525’ injecting
approximately 5,000 barrels of fluid, which carried approximately 118,000-pounds
of bauxite propping
material. While very successful mechanically, the operation did not result
in
the well producing hydrocarbons at commercial rates. This well still has
multiple targets to evaluate further up the hole. The Company has been reviewing
the resulting data from the fracturing operation both internally and with
outside firms as it believes the potential reserve of the Vedder Zone deserves
that degree of attention. We have not made a final decision yet concerning
the
next course of action.
Also
during 2005, the Company also successfully hydraulically fractured a 1,000’
portion of the 3,000’ horizontal portion of the well bore in the Sunrise-Mayel
#2H Redrill #2 well in the Sunrise Natural Gas Project in Delano, California.
The well was hydraulically fractured utilizing gelled diesel, which carried
in
approximately 138,000 pounds of sand. Again, while mechanically successful,
the
operation did not result in the well producing hydrocarbons at commercial rates.
As with the Ekho Project, the Company continues to review all available
techniques to bring the Sunrise Project potential to commercial realization
because of the volume of natural gas in place in the tight
reservoir.
Also
in
2005, the Company drilled the Midland Trail Prospect in Railroad Valley, Nevada,
approximately 90 miles southwest of Ely, Nevada. The Midland Trail #1-32 well
was drilled to 7,063’. Based on the results of three (3) independent log
analyses, with all confirming very good hydrocarbon potential in-place, casing
was run for completion and testing. Extensive testing in the Devonian interval
between 5,700’ to 6,800’ found extremely fresh water which completely surprised
all of the experts. Fresh water produces literally the same log response as
does
the presence of oil. The Company is currently reviewing the shallower volcanic
section, which is the interval where the offsetting Eagle Springs and Trap
Springs do produce.
The
2006
development plan for the Pleasant Valley property will initially focus on the
shallow Vaca heavy oil sands. The Company plans to drill a 3,000 foot well
to
core and appraise the upper Vaca Sand unit near Oxnard, California and expects
to follow up with one or more twin horizontal well bores for steam assisted
gravity drainage (SAGD) recovery. The ultimate recovery plan envisions as many
as 20 SAGD wells. Later, a 10,000 foot well will be drilled to appraise several
deeper formations to the LLajas zone for potential additional recovery of
lighter gravity oils as well.
The
trend
of demand outstripping available supplies continues and has become more acute
in
the last year both worldwide and particularly in California which is currently
importing 60% of its oil and nearly 90% of its natural gas use. This is all
reflected in the extreme spiraling up price trend in the last year.
Tri-Valley
contracts for the drilling of the majority of its wells and currently does
not
own any bulk storage facilities or refineries. Tri-Valley does own a small
segment of a pipeline in Tracy, California. To counter the mounting shortage
of
production and drilling rigs, the Company is assembling a fleet to service
its
own wells and contract out when not in use.
Tri-Valley
has 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, 2005 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, 2005, December 31, 2004 and December 31, 2003
were
as follows:
|
BBL
|
MCF
|
|
|
|
|
|
December
31, 2005
|
Oil
|
218,030
|
Natural
Gas
|
779,598
|
December
31, 2004
|
Condensate
|
162
|
Natural
Gas
|
742,401
|
December
31, 2003
|
Condensate
|
162
|
Natural
Gas
|
1,251,548
|
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 $7,056,072 at
December 31, 2005, $1,958,238
at
December 31, 2004, and $2,270,632 at December 31, 2003. 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,
|
|
2005
|
2004
|
2003
|
|
|
|
|
Natural
Gas (MCF)
|
128,602
|
126,942
|
162,314
|
Crude
Oil (BBL)
|
17
|
22
|
25
|
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,
|
|
2005
|
2004
|
2003
|
|
|
|
|
|
|
|
|
Gas
(Mcf)
|
Oil*
|
Gas
(Mcf)
|
Oil*
|
Gas
(Mcf)
|
Oil*
|
Sales
Price
|
$7.00
|
$44.34
|
$5.66
|
$40.60
|
$5.07
|
$29.46
|
|
|
|
|
|
|
|
Production
Costs
|
$0.73
|
$
0.00
|
$1.14
|
$
0.00
|
$0.78
|
$
0.00
|
|
|
|
|
|
|
|
Net
Profit
|
$6.27
|
$44.34
|
$4.52
|
$40.60
|
$4.29
|
$29.46
|
*
Amount
represents total sales price of associated condensate, unable to determine
production cost per barrel.
As
of
December 31, 2005 we
had
the following gross and net position in wells and developed
acreage:
Wells
(1)
|
Acres
(2)
|
Gross
|
Net
|
Gross
|
Net
|
11
|
4.537
|
2,192
|
645
|
(1) |
"Gross"
wells represent the total number of producing wells in which we
have a working interest. "Net" wells represent the number of gross
producing wells multiplied by the percentages of the working interests
which
we own. "Net wells" recognizes only those wells in which we
hold an earned working interest. Working interests earned at payout
have
not been included.
|
(2) |
"Gross"
acres represent the total acres in which we
have a working interest; "net" acres represent the aggregate of the
working interests which
we own in the gross acres.
|
The
following table sets forth the number of productive and dry exploratory and
development wells which
we
drilled during:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
|
December
31,
|
December
31,
|
December
31,
|
|
2005
|
2004
|
2003
|
|
|
|
|
Exploratory
|
|
|
|
Producing
|
-0-
|
-0-
|
-0-
|
Dry
|
1
|
1
|
2
|
Total
|
1
|
1
|
2
|
|
|
|
|
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, 2005:
State
|
|
Gross
Acres
|
|
Net
Acres
|
California
|
|
21,145
|
|
19,605
|
Nevada
|
|
18,559
|
|
18,559
|
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 2006
|
1,059
acres
|
Expires
in 2007
|
6,466
acres
|
Expires
in 2008
|
4,524
acres
|
Mining
Activity
Select
Resources’ precious metals properties are located in interior Alaska, United
States and western Yukon, Canada. They are the Richardson, Shorty Creek and
Typhoon.
The
Richardson property was obtained by Tri-Valley in 1987 and comprised of 626
40-acre claims and 15 160-acre claims, of which 104 claims are leased from
others, all located solely on State owned lands requiring annual assessment
work, and an annual per claim fee. All fees are current. 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.
The
Richardson claim block covers about 44.9 square miles or 28,720 acres of land,
all of which is owned by the State of Alaska. The claims lie 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 of
the
Richardson claim block that we have under lease in Alaska as of December 31,
2005:
State
|
|
Gross
Acres
|
|
Net
Acres
|
Alaska
|
|
28,720
|
|
27,926
|
|
|
|
|
|
The
Richardson Project is an early stage gold exploration project in the Richardson
District with past placer and load gold production and prospective geochemical
signatures consistent with intrusion-related gold systems. A number of highly
prospective zones were identified in previous historical exploration,
geochemical sampling and drilling over several previous exploration campaigns
including the Richardson Lineament (including the Democrat Mine), Hilltop,
Shamrock, Buckeye and others. In 2005, Select Resources carried out a
geophysical and satellite interpretation programs over the entire Richardson
property and a multi-element soil auger geochemical program extending along
the
length of the known Richardson Lineament. The surveys defined a series of six
discrete precious metal and other element anomalies along the approximate 4.5
mile strike length and one mile width of the geochemical area tested. Select
Resources also drilled eight diamond drill holes in the Democrat Mine area
for a
total of 3,050 feet. Assay information is pending.
Select
Resources obtained the Shorty Creek property in 2004. It is located about 60
miles northwest of Fairbanks, Alaska on the
all-weather paved Elliott
Highway that
connects Fairbanks, Alaska
with the
North Slope petroleum production areas. Fairbanks is approximately 60 miles
to
the southwest, and the property is about 3 miles south of the abandoned townsite
of Livengood. At Shorty Creek, Select Resources controls mineral rights to
164
State of Alaska mining claims through staking and lease arrangements from Gold
Range Ltd., covering approximately 16 square miles.
The
following table sets forth the information regarding the acreage position of
the
Shorty Creek claim block that we have under lease in Alaska as of December
31,
2005:
State
|
|
Gross
Acres
|
|
Net
Acres
|
Alaska
|
|
9,700
|
|
9,700
|
Mineral
properties claimed on open state land require minimum annual assessment work
of
$100 worth per State of Alaska claim. All fees are current.
The
Shorty Creek Project is an
early
stage gold exploration project in the Livengood District with historical
exploration, geochemical sampling and drilling over several previous exploration
campaigns identifying anomalous concentrations of gold, copper, molybdenum
and
their pathfinder elements. In 2005 Select Resources carried out a geophysical
and satellite interpretation programs over the entire Shorty Creek property.
Select Resources also conducted a multi-element soil auger geochemical program
extending over one of four distinctive aeromagnetic anomalies, covering an
area
approximately of 1 mile, resulting in the identification of five precious metal
and base metal anomalies.
The
Typhoon property was obtained by Select Resources in 2005. It is located in
the
west-central Yukon Territory of Canada, approximately 225 miles northwest of
Whitehorse and 75 miles southeast of Dawson City. The claim group is traversed
by the Barlow Dome road, extending 12 miles from the paved all-weather North
Klondike Highway. At Typhoon, Select Resources controls mineral rights to 98
Yukon quartz claims over a 7 square mile area on Crown Land (Canadian federal
land). An exploration agreement with Curlew Lake Resources Inc. covers 36 of
these claims. All
fees
associated with these claims are current.
The
Typhoon Project is an
early
stage gold exploration project within the Clear Creek District, an area with
historical placer production and more recent extensive exploration for lode
gold
deposits. In 2005 Select Resources carried out a geophysical and satellite
interpretation programs over the entire Typhoon property and a multi-element
soil geochemical program and a ground magnetic survey resulting in the
identification of a precious metal and base metal anomaly.
To
date,
Select Resources has not identified proven or probable mineral reserves on
these
properties. There is no assurance that a commercially viable mineral deposit
exists on any of these mineral properties. Further exploration is required
before a final evaluation as to the economic and technical feasibility can
be
determined.
Select
Resources industrial mineral projects consist of the Admiral calcium carbonate
mine in Alaska and through Tri-Western Resources, LLC joint venture.
The
Admiral Mine was obtained in 2005 from Sealaska Corporation. It is located
on
the north-west side of Prince of Wales Island, approximately 150 (air) miles
south of Juneau and 88 (air) miles northwest of Ketchikan. The mine consists
of
13.7 million tons of drilled high chemical grade, high brightness and high
whiteness mineralized material, and is considered to be in the top 1% of high
grade CaCO3 deposits in the world. "Mineralized material" means a mineralized
body, which has been delineated by appropriately spaced drilling and/or
underground sampling to support a sufficient tonnage and average grade of
metals. Determinations of mineralized material are based upon unit cost, grade,
recoveries, and other material factors to reach conclusions regarding legal
and
economic feasibility. Grade and brightness tests were conducted by Hazen
Research of Golden, Colorado on selected run-of-mine and core sample material.
Hazen's and independent geological engineer, M. G. Bright's grade and tonnage
figures correspond and support the earlier grade and tonnage figures represented
by Sealaska and SeaCal, LLC. No proved or probable ore reserves have been
determined which meet the standards set forth in the SEC's Industry Guide 7.
We
have obtained a preliminary estimate on the mine from M. G. Bright, independent
registered professional geologist, which identifies a total of approximately
13.7 million tons of high grade to ultra high grade (+94% to +98%
CaCO3),
high
brightness (+95 GE Brightness @ -325 mesh) calcium carbonate mineralized
material in place. The purchase also includes all associated infrastructure
and
equipment which the previous owner installed at a cost exceeding $20 million.
The current mine covers only 15 acres; the entire property covers 572 acres
of
patented mining ground, and includes all operating permits and tideland leases.
Less than 10% of the gross acreage has been explored and the Company believes
additional resources may yet be discovered. We do not currently have plans
to
proceed with redevelopment of the mine but intend to hold it while Select
Resources pursues other previously identified opportunities.
In
2005,
Tri-Western Resources initiated the permitting and development of a calcium
carbonate deposit near Mojave, California, and a basalt deposit and a cinder
deposit near Boron, California. Select Resources purchased a 10-acre industrial
property in Bakersfield California, with 129,000
square
feet of buildings to be used in the processing of calcium carbonate and other
industrial minerals.
This
facility is occupied by Tri-Western Resources.
ITEM
4 Submission of Matters To A Vote Of Security Holders
We
held
our annual meeting on October 20, 2005. At the meeting, the shareholders
re-elected all of the seven directors who were recommended by the board.
The
shareholder votes were as follows:
Measure
#1 - Election of Directors
|
|
FOR
|
AGAINST
|
ABSTAIN
|
F.
Lynn Blystone
|
11,611,328
|
118,922
|
|
Milton
J. Carlson
|
11,688,211
|
42,039
|
|
C.
Chase Hoffman
|
11,673,444
|
56,865
|
|
Dennis
P. Lockhart
|
11,990,064
|
40,186
|
|
Loren
J. Miller
|
11,661,343
|
68,907
|
|
Harold
J. Noyes
|
11,564,716
|
165,534
|
|
Henry
Lowenstein
|
11,694,328
|
35,922
|
|
Measure
#2 - Incentive
Stock
Option Plan
|
11,259,404
|
397,891
|
72,955
|
PART
II
ITEM
5 Market Price Of The Registrant's Common Stock And Related Security Holder
Matters
On
October 29, 2003, shares of Tri-Valley Corporation stock began trading on the
American Stock Exchange under the symbol “TIV”. Prior to that, shares had been
traded over-the-counter on the Electronic Bulletin Board under the symbol
"TRIL." The following table shows the high and low sales prices reported on
AMEX
for the year ended December 31, 2005 as well as for 2004, and the high and
low
closing prices of Tri-Valley stock for the quarterly periods
indicated:
|
|
Sales
Prices
|
Closing
Prices
|
|
|
High
|
Low
|
High
|
Low
|
2005
|
|
|
|
|
|
Fourth
Quarter
|
$12.25
|
$5.52
|
$11.75
|
$6.14
|
|
Third
Quarter
|
$14.09
|
$8.51
|
$14.00
|
$8.99
|
|
Second
Quarter
|
$14.30
|
$8.13
|
$14.30
|
$9.12
|
|
First
Quarter
|
$17.50
|
$7.70
|
$17.27
|
$7.90
|
|
|
|
|
|
|
|
|
Bid
Prices
|
Asked
Prices
|
|
|
High
|
Low
|
High
|
Low
|
2004
|
|
|
|
|
|
Fourth
Quarter
|
$12.98
|
$4.40
|
$12.23
|
$4.46
|
|
Third
Quarter
|
$
4.70
|
$3.73
|
$
4.70
|
$3.89
|
|
Second
Quarter
|
$
4.94
|
$3.90
|
$
4.91
|
$3.98
|
|
First
Quarter
|
$
5.40
|
$4.30
|
$
5.40
|
$4.36
|
As
of
December 31, 2005, we estimate that our common stock was held by approximately
4,500 shareholders in the United States and several foreign
countries.
We
historically have paid no dividends and at this time do not plan to pay any
dividends in the immediate future. Rather, we strive to add share value through
discovery success. In 2005 trading volume exceeded 42 million
shares.
Recent
Sales of Unregistered Securities
During
the fourth quarter of 2005, we issued 98,000 shares of common stock without
registration under the Securities Act of 1933 which have not been previously
reported on Form 8-K. On October 28, 2005, 90,000 shares were issued to two
private individuals in exchange for their right, title and interest in certain
State of Alaska mining claims. The closing price of our stock on that day was
$7.72 per share. On December 22, 2005, a total of 8,000 shares were awarded
to
four outside directors for services in accordance with usual and approved
practice. The closing price of our common stock on that day was $8.13 per share.
All of these shares issued in privately negotiated transactions in reliance
on
the exemption contained in Section 4(2) of the Securities Act.
During
the fourth quarter of 2005, we issued a total of 198,000 shares of common stock
without registration under the 1933 Act.
ITEM
6 Selected Historical Financial Data
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Income
Statement Data:
|
|
|
|
(restated)
|
|
(restated)
|
|
|
|
|
|
Revenues
|
|
$
|
12,528,606
|
|
$
|
4,498,670
|
|
$
|
6,464,245
|
|
$
|
6,284,908
|
|
$
|
2,130,187
|
|
Operating
Income (Loss)
|
|
$
|
(9,730,071
|
)
|
$
|
(1,171,005
|
)
|
$
|
456,109
|
|
$
|
769,130
|
|
$
|
(117,972
|
)
|
Basic
Earnings Per Share
|
|
$
|
(0.43
|
)
|
$
|
(0.06
|
)
|
$
|
0.02
|
|
$
|
0.04
|
|
$
|
-
|
|
Diluted
earnings per share
|
|
$
|
(0.39
|
)
|
$
|
(0.05
|
)
|
$
|
0.02
|
|
$
|
0.04
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
$
|
13,635,981
|
|
$
|
1,778,208
|
|
$
|
1,543,121
|
|
$
|
1,974,501
|
|
$
|
2,010,457
|
|
Total
Assets
|
|
$
|
19,738,730
|
|
$
|
14,473,326
|
|
$
|
8,341,782
|
|
$
|
4,634,874
|
|
$
|
3,381,757
|
|
Long
Term Obligations
|
|
$
|
4,528,365
|
|
$
|
6,799
|
|
$
|
16,805
|
|
$
|
26,791
|
|
$
|
8,371
|
|
Stockholder's
Equity
|
|
$
|
7,572,720
|
|
$
|
6,796,903
|
|
$
|
1,851,783
|
|
$
|
1,262,306
|
|
$
|
353,776
|
|
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.
Overview
Thanks
to
the acquisition of producing properties, TVOG’s production and reserves are
increasing while demand increases. While the trend for demand to outstrip
available supplies is worldwide as well as national, we believe that it is
particularly acute in California, our primary venue for exploration and
production, which imports nearly 60%
of its
oil and nearly 90%
of its
natural gas demand. Oil prices tend to be set based on supply and demand, 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 or a terrorist attack that would reduce
flying and traveling to create a temporary glut from reduced fuel use, our
revenue from oil and gas sales would also fall.
In
2002
we created a limited partnership called the OPUS-I. The purpose of this
partnership is to raise one hundred million dollars by selling partnership
interests. For the year ended December 31, 2005, OPUS I partnership raised
$15,194,850 and spent $16,302,783, part of which was on the acquisition of
two
properties totaling $6.9 million, with the remaining amount being spent
primarily on drilling Sunridge, Midland Trail, the Ekho frac and the Sunrise
Redrill # 2. Additionally, in 2004 we drilled one well on the Los Gatos prospect
which was a dry hole and was abandoned.
At
the
end of 2005, with the acquisition of Pleasant Valley, Temblor Valley and Moffat
Ranch East on behalf of the partnership, it was determined to end the raising
of
funds for the remainder of exploration plays in favor of capitalizing
development of the properties to build production and revenue to achieve a
high
multiple return to Opus investors rather than continue further exploration
risk
for the Opus I partners. A new partnership is envisioned for further
exploration.
Tri-Valley
continues grading and prioritizing our proprietary geologic library, which
contains over 700 California leads and prospects, for exploratory drilling.
We
use our library and our seismic database and other geoscientific data to decide
where we should seek oil and gas leases for future exploration. From this
library we were able to put together many of the prospects currently in OPUS-I.
Of course, we cannot be sure that any future prospect can be obtained at an
attractive lease price or that any exploration efforts would result in a
commercially successful well.
Tri-Valley
believes that is has acquired an inventory of under explored/under exploited
properties with the potential to yield a multiple return on investment with
further development. The Company believes our existing inventory of projects
bears a high enough ratio of potentially successful to unsuccessful projects
to
deliver value to our drilling partners and our shareholders from successful
wells, in excess of the total costs of all successful and unsuccessful projects.
Our future results will depend on our success in finding new reserves and
commercial production, and there can be no assurance what revenue we can
ultimately expect from any new discoveries. Tri-Valley Corporation does not
engage in hedging activities and does not use commodity futures or forward
contracts for cash management functions.
Critical
Accounting Policies
We
prepare Consolidated Financial Statements for inclusion in this Report
in
accordance with accounting principles that are generally accepted
in the
United States ("GAAP"). Note 2 to our Consolidated Financial Statements
(contained in Item 8 of this Annual Report) contains a comprehensive
discussion of our significant accounting policies. 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.
|
|
Successful
Efforts Method Of Accounting
|
The
Company utilizes the successful efforts method of accounting for oil and gas
activities as opposed to the alternate acceptable full cost method. In general,
the Company believes that, during periods of active exploration, net assets
and
net income are more conservatively measured under the successful efforts method
of accounting for oil and gas producing activities than under the full cost
method. The critical difference between the successful efforts method of
accounting and the full cost method of accounting is as follows: Under the
successful efforts method, exploratory dry holes and geological and geophysical
exploration costs are charged against earnings during the periods in which
they
occur; whereas, under the full cost method of accounting, such costs and
expenses are capitalized as assets, pooled with the costs of successful wells
and charged against the earnings of future periods as a component of depletion
expense
Use
of Estimates
|
|
Preparation
of our Consolidated Financial Statements under GAAP requires management
to
make estimates and assumptions that affect reported assets, liabilities,
revenues, expenses, and some narrative disclosures. The estimates
that are
most critical to our Consolidated Financial Statements involve oil
and gas
reserves, recoverability and impairment of reserves, and useful lives
of
assets.
|
|
Oil
and Gas Reserve Estimates. Estimates
of our proved reserves included in this Report are prepared in accordance
with GAAP and SEC guidelines and were based on evaluations audited
by
independent petroleum engineers with respect to our major properties.
The
accuracy of a reserve report estimate is a function of:
|
|
-
|
The
quality and quantity of available data;
|
-
|
The
interpretation of that data;
|
-
|
The
accuracy of various mandated economic assumptions; and
|
-
|
The
judgment of the persons preparing the estimate.
|
|
|
Because
these estimates depend on many assumptions, all of which may substantially
differ from future actual results, reserve estimates will be different
from the quantities of oil and gas that are ultimately recovered.
In
addition, results of drilling, testing and production after the date
of an
estimate may justify material revisions to the estimate.
|
|
In
2005, our proved, developed gas reserve estimates were revised upward
by a
total of approximately 165,000 million cubic feet. These upward revisions
were the result of increasing the potential future recoverable reserves
from approximately 742,000 million cubic feet. Also in 2005, our
proved
oil reserves estimated were increased by a total of approximately
217,000
barrels of oil due to acquisitions of oil properties.
|
|
It
should not be assumed that the present value of future net cash flows
included in this Report as of December 31, 2005 is the current market
value of our estimated proved reserves. In accordance with SEC
requirements, we have based the estimated present value of future
net cash
flows from proved reserves on prices and costs on the date of the
estimate. Actual future prices and cost may be materially higher
or lower
than the prices and costs as of the date of the estimate.
|
|
Estimates
of proved reserves materially impact depletion expense. If the estimates
of proved reserves decline, the rate at which we record depletion
expense
will increase, reducing future net income. Such a decline may result
from
lower market prices, which may make it uneconomic to drill for and
produce
higher cost fields. In addition, a decline in proved reserve estimates
may
impact the outcome of our assessment of its oil and gas producing
properties for impairment.
|
Impairment
of Proved Oil and Gas Properties.
We
review our long-lived proved properties, consisting of oil and gas reserves,
at
least annually and record impairments to those properties, whenever management
determines that events or circumstances indicate that the recorded carrying
value of the properties may not be recoverable. Proved oil and gas properties
are reviewed for impairment by depletable field pool, which is the lowest level
at which depletion of proved properties are calculated. Management assesses
whether or not an impairment provision is necessary based upon its outlook
of
future commodity prices and net cash flows that may be generated by the
properties. We determine that a property is impaired when prices being paid
for
oil or gas make it no longer profitable to drill on, or to continue production
on, that property. Price increases over the past three years have reduced the
instances where impairment of reserves appeared to be required, though we did
record impairment expense of $90,165 in 2005 as a result of reducing potential
future recoverable reserves.
Additional
production data indicated the initial reserve estimates would not be achievable,
so we reduced reserves accordingly. If petroleum prices, particularly natural
gas prices, in Northern California, begin to fall in the future, more of our
proved developed reserves could become impaired, which would reduce our
estimates of future revenue, our proved reserve estimates and our
profitability.
Asset
Retirement Obligations. We
adopted SFAS No. 143, "Accounting for Asset Retirement Obligations"
effective January 1, 2003. Under this guidance, management is required
to
make judgments based on historical experience and future expectations
regarding the future abandonment cost of its oil and gas properties
and
equipment as well as an estimate of the discount rate to be used
in order
to bring the estimated future cost to a present value. The discount
rate
is based on the risk free interest rate which is adjusted for our
credit
worthiness. The adjusted risk free rate is then applied to the estimated
abandonment costs to arrive at the obligation existing at the end
of the
period under review. We review our estimate of the future obligation
quarterly and accrue the estimated obligation based on the
above.
|
|
Other
Significant Accounting Policies
|
|
In
addition to those significant accounting policies described in Note
2 to
our Consolidated Financial Statements, we have adopted the following
accounting policies which may require the use of estimates.
|
|
Deferred
Tax Asset Valuation Allowances.
We
maintain a valuation allowance against our deferred tax assets, which
result from net operating losses and statutory depletion carryforwards
from prior years. We continually assess whether it is more likely
than not
that deferred tax assets can be realized prior to their expiration,
but we
currently have a valuation allowance of 100% of the value of the
deferred
tax assets. See
Note 7 to our Consolidated Financial Statements.
|
|
Commitments
and contingencies.
We
make judgments and estimates regarding possible liabilities for litigation
and environmental remediation. We have no ongoing litigation. We
routinely
have clean-up and maintenance obligations in connection with oil
and gas
drilling and production activities, but we have never had a material
environmental liability or claim.
See Note 11 to our Consolidated Financial Statements.
|
|
Goodwill.
We evaluate goodwill at least annually in December. At December 31,
2005,
goodwill, which consists of purchased assets of our subsidiary, TVOG,
constituted less than 2% of our total assets. See
Note 2 - Goodwill - of our Consolidated Financial
Statements.
|
Intangible
Assets
Deferred
tax asset valuation allowances. From 1995 to 2005, the Company has maintained
a
valuation allowance against its deferred tax assets. SFAS 109 requires that
the
Company continually assess both positive and negative evidence to determine
whether it is more likely than not that the deferred tax assets can be realized
prior to their expiration. As
of
December 31, 2005, the Company has concluded that it is more likely than not
that it will realize its gross deferred tax asset position after giving
consideration to relevant facts and circumstances.
Tri-Valley
will continue to monitor company-specific, oil and gas industry economic factors
and will reassess the likelihood that the Company’s net operating loss and
statutory depletion carryforwards will be utilized prior to their
expiration.
Environmental
contingencies. The Company makes judgments and estimates in recording
liabilities for ongoing litigation and environmental remediation. Actual costs
can vary from such estimates for a variety of reasons. Environmental remediation
liabilities are subject to change because of changes in laws, and regulations;
additional information obtained relating to the extent and nature of site
contamination and improvements in technology. Under GAAP, a liability is
recorded for these types of contingencies if the Company determines the loss
to
be both probable and reasonably estimated. See Note 11 of Notes to Consolidated
Financial Statements included in “Item 8. Financial Statements” for additional
information regarding the Company’s commitments and contingencies.
The
Company has adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). Under SFAS 142, goodwill is a non-amortizable asset, and
is
subject to a periodic review for impairment. The carrying amount of goodwill
is
evaluated periodically.
The
following is a discussion of the Company’s most critical accounting estimates,
judgments and uncertainties that are inherent in the Company’s application of
GAAP:
Accounting
for Oil and Gas Producing Activities
Accounting
for Suspended Well Costs: The Company has adopted FASB Staff Position FAS 19-1,
“Accounting for Suspended Well Costs” effective January 1, 2005. Under this
guidance, management is required to expense the capitalized costs of drilling
an
exploratory well if proved reserves are not found unless reserves are found
and
the enterprise is making sufficient progress on assessing the reserves and
the
economic and operating viability of the project.
Oil
and
Gas Production:
The
Company generally sells a percentage of production at the monthly spot price.
In
times when we expect the price of gas to weaken, we try to increase the amount
we sell under fixed prices. When we expect the price of gas to rise, we seek
to
sell more gas in the spot market. In 2005, 2004 and 2003, we sold our gas 100%
on the spot market. Because we expect gas prices to be steady or to rise, we
intend to sell 100% of our production on the spot market in 2006. Thus, a drop
in the price of gas in 2006 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 $7,056,072 at December 31, 2005, compared
to
$1,958,238 and $2,270,632 on December 31, 2004, and 2003 after taking into
account a 10% discount rate and also taking into consideration the effect of
income tax. This increase was due primarily to our share of the acquisition
of
the Temblor Valley project. Estimates such as these are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves.
The
Temblor properties were acquired at year-end 2005, and have not, as of December
31, 2005, added significantly to Tri-Valley’s actual production of oil and gas.
Because of unpredictable variances in expenses and capital forecasts, crude
oil
and natural gas price changes, largely influenced and controlled by U.S. and
foreign government actions, and the fact that the basis for such estimates
vary
significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows presented do not represent
management's assessment of future profitability or future cash flows to the
Company. This value does not appear on the balance sheet because accounting
rules require discovered reserves to be carried on the balance sheet at the
cost
of obtaining them rather than the actual future net revenue from producing
them.
Tri-Valley typically has no discovery cost to put on the balance sheet as
explained below.
Drilling
and Development Activities: Tri-Valley sold working interests and prospects
in
its test wells to the Opus-1 drilling partnership. The sales price of the
interest is intended to pay for all drilling and testing costs on the property.
Tri-Valley retains a minority "carried" ownership interest in the well and
does
not pay its proportionate share of drilling and testing costs for the first
well
drilled on each prospect. However, the Company does pay its proportionate cost
of any subsequent well drilled on each prospect. Under these arrangements,
we
usually minimize the Company's cost to drill and also receive a minority
interest from the reserves we discover. On the other hand, we occasionally
incur
extra expenses for drilling or development that we choose, in our discretion,
not to pass on to other venture participants.
During
2005, Tri-Valley acquired and retained 25% working interest in three (3) oil
properties with two of the three properties being what Tri-Valley believes
to be
very under developed and under exploited oil properties. One property consisted
of three separate leases in the Oxnard Oil Field in Ventura County, California
and two properties were in Kern County, California.
One
Kern
County property was a producing property in the Edison Oil Field and the second
property was a producing property in the South Belridge Oil Field containing
a
total of 57
wells,
total consisting of 28 wells currently producing at this point. Plans call
for
returning the remaining wells to active production. The Oxnard Oil Field
properties contained three existing non-producing wells.
Tri-Valley
also purchased approximately 6,670-acres of mineral rights, which basically
covers what was the Chowchilla Ranch Gas Field in Madera County, California.
This land position is held by a single producing gas well at this point.
Tri-Valley believes this land position to be very under developed and under
exploited and plans to being re-entering, recompleting and further infill drill
the leasehold position.
In
addition to these properties, Tri-Valley also holds producing interests in
gas
leases in the Sacramento Valley of Northern California in the RioVista and
Dutch
Slough Gas Fields.
Mining
Activity
During
2005, the price of gold has fluctuated between $411 and $536 per ounce
continuing the support for the exploration and development of precious metals,
including the support of junior exploration ventures. Accordingly, management
is
advancing its precious metal opportunities.
We
completed the buyout of royalty and carried working interest burdens on its
Richardson, Alaska gold exploration project in order to transfer a clean
property into Select Resources Corporation. We are recording non cash losses
as
a result of issuing stock for these interests, which are non producing at this
time and cannot be booked as assets equal to the value of the stock paid. We
believe the ultimate return we can realize on the property unburdened by royalty
and carried interests will exceed the upfront costs of the buyout. In December
2005, we transferred our precious metal assets controlled by Tri-Valley
Corporation to Select Resources.
Select
Resources is staffed by F. Lynn Blystone, Chairman and CEO, Dr. Henry J. Sandri;
President, Ian Chapman, Vice President; Thomas J. Cunningham, Director; Arthur
M. Evans, Chief Financial Officer; David C. Oliver, Senior Staff Geologist;
Dr.
Odin Christensen, consulting geologist and technical team leader; Dr. Craig
Beagle, consulting geophysicist; Dr. Jeffrey Jaacks, consulting geochemist;
Sandra Perry, consulting remote sensing specialist; and a GIS
specialist.
In
2005,
Select advanced all three of its gold properties with geophysical
and satellite interpretation programs, and geochemical sampling programs. In
addition, at Richardson, Select Resources drilled eight diamond drill holes
in
the Democrat Mine area. The core holes demonstrated the structure is
considerably larger than previously suspected and the system is extensively
altered and mineralized.
In
2005,
Tri-Western Resources initiated the permitting and development of a calcium
carbonate deposit near Mojave, California, a basalt deposit and a cinder deposit
near Boron, California. The projects are designed to produce specialty grade
basalt for the building products industry and other applications, chemical
grade
calcium carbonate as a filler, extender and loader, and decorative stone as
a
by-product from the two operations, for sale in the landscaping market. Neither
deposit was operational in 2005. However, commercial cinder production began
in
the first quarter of 2006.
Results
of Operations
Comparison
of Years Ended December 31, 2005,
2004
and 2003
Revenue
Primarily
from heavy forward investment in its projects, which included $3 million in
stock for buyback of royalty burden on its Alaska mineral property and start-up
costs for our mining subsidiary, we lost $9.7 million in 2005 compared to a
loss
of $1.17 million in 2004. In 2003, we had operating income before taxes of
about
$495,000. Total revenue was $8
million
higher
this fiscal year compared to fiscal year 2004, which was about $1.96 million
lower than 2003. Revenue from oil and gas sales was roughly the same for the
fiscal year 2005 compared to fiscal year 2004 Interest income was about $75,000
more for the year ended December 31, 2005 compared to the year ended December
31, 2004 due to more cash on hand during the year earning interest. $11,000
more
than 2003. Revenue from Drilling and Development activities are $7.9 million
more this period compared to the same period last year. 2004 Revenue from
drilling and development activities was about $1.9 million lower compared to
2003. This is due primarily to sales of drilling and development prospects.
The
Company expects its Temblor (South Belridge and Edison) and Pleasant Valley
to
begin production in 2006.
The
Company lost $1,171,005 in 2004 compared to profits of $456,109 in
2003.
Total revenue was about $1.88 million lower in 2004 than in
2003.
In 2004, our revenue from drilling and development fell to about
$3.56
million, compared to $5.44 million in 2003. In 2004 we recorded drilling
and development revenues from drilling only one well, compared to
revenues
recorded from drilling three wells in 2003.
In
2005, our largest source of revenue has been oil and gas drilling
and
development. We record revenue received by us from joint ventures
for
drilling and development when we complete drilling wells that have
been
sold to joint venture partners, including the Opus-I drilling partnership.
In 2005, our revenue from drilling and development increased to about
$11.42 million,
compared to $3.56 million in 2004. This increase was largely due
to a $3.5
million frac job on the Ehko well and the drilling of the Midland
Trail
well in Nevada which cost about $3.4 million. Also in 2005, our interest
income increased from about $46,000 in 2004 to about $121,000 in
2005.
This increase was due to both increasing interest rates and an increased
average cash balance.
Also,
in 2004 and 2003, our largest source of revenue has been oil and
gas
drilling and development. In 2004, our revenue from drilling and
development fell to about $3.56
million, compared to $5.44 million in 2003. In 2004 we recorded drilling
and development revenues from drilling only one well, compared to
revenues
recorded from drilling three wells in 2003.
|
Costs
and
Expenses
Costs
and
expenses were $16.5 million more for the year ended December 31, 2005 compared
to year end 2004. Mining exploration expenses were $5.7 million more for the
period ended December 31, 2005 than for the same period in 2004, due to
increased mining exploration activity, purchase of royalties and properties
that
had to be expensed, and start-up expenses associated with our industrial
minerals operations. Oil and gas lease activity was $93,429 for the year ended
December 31, 2005 and $144,101 for the year ended December 31, 2004. We did
not
spend as much for leases this year compared to the previous year due to the
expiration of some leases in 2005 that were not renewed. Costs from drilling
and
development activities were $7.0 million more this year than in 2004 because
of
the increased drilling activity (one well complete in 2005 and one well which
drilling was in progress but not completed until January 2006) , a $3.5 million
frac job on the Ehko well and the redrill of the Sunrise well. . General and
administrative costs were $3.1 million higher this year than last year due
in
large part to the increased activity in our minerals segment of the Company.
Tri-Western Resources and Select Resources had greatly increased travel costs,
start-up expenses, insurance premiums and fees to consulting geologists in
2005,
their first full year of operation.
We
expect our costs and expenses to increase significantly in 2006 due
to
drilling and workover activities on the Temblor and Pleasant Valley
properties.
Because
of our reduced drilling activity in 2004, our drilling and development
costs fell. Our 2004 drilling and development costs fell 45% from
2003.
This was due to fewer wells being permitted and the difficultly in
getting
drilling rigs during 2004.
|
|
Likewise,
oil and gas lease expense fell as our production activity fell in
2004,
mainly due to having two shut in wells for much of 2004, for which
we
incurred fewer operating costs. Likewise, depreciation, depletion
and
amortization expense fell in 2004 compared to 2003 due to lower production
levels, but this is a minor component of our current operating
costs.
|
Financial
Condition
Balance
Sheet
At
December 31, 2005 we had
$4,876,921
in cash
compared to $11,812,920
for
December 31, 2004. This represents, for the most part, cash invested by the
OPUS
I partners for the drilling of oil and gas wells in that limited partnership.
The reduction was caused primarily from the expenditures in drilling the
Sunridge, Midland Trail, the Ekho frac and the Sunrise redrill. Property and
equipment is
$11,857,773
more for
the current period compared to last year because of fixed assets and property
additions. The property additions were primarily for milling equipment and
a
facility to house the milling equipment and the purchase of the Pleasant Valley
and Temblor Valley oil properties. Deposits increased about $116,000
in 2005
compared to 2004 due to the payments made to secure the purchase of some
equipment.
Shareholder
equity increased from $6,796,903
in 2004
to
$7,572,720
for
2005. This increase was due mainly to the private placement of common
stock.
At
December 31, 2004 we had $11,812,920 in cash compared to $6,006,975 for December
31, 2003. This represents, for the most part, cash invested by the Opus I
partners for the drilling of oil and gas wells in that limited partnership.
Property and equipment was $235,087 more for the year 2004 compared to the
year
2003 because of increased leasehold interest acquired last year. Deposits
decreased $171,698 in 2004 compared to 2003 due to the settlement of a lawsuit
and the payment of the award, which was secured by a bond.
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 or locate a substitute prospect acceptable to the
participants.
Delay
rentals for oil and gas leases amounted to $718,630
in 2005.
Advance royalty payments and gold mining claims maintenance fees were
$207,830
for the
same period. We expect that approximately equal delay rentals and fees will
be
paid in 2006
from
operating revenues.
Contractual
Obligations and Contingent Liabilities and Commitments
The
table
below presents our fixed, non-cancelable contractual obligations and commitments
primarily related to our outstanding purchase orders, certain capital
expenditures and lease arrangements as of December 31, 2005
|
|
Payments
Due By Period
|
|
|
|
Less
than 1
year
|
|
1-3
years
|
|
3-5
years
|
|
After
5
years
|
|
Total
|
|
Long
term debt(1)
|
|
$
|
966,284
|
|
$
|
1,240,351
|
|
$
|
775,851
|
|
$
|
2,218,672
|
|
$
|
5,201,158
|
|
Operating
lease commitments (2)
|
|
|
154,700
|
|
|
371,280
|
|
|
371,280
|
|
|
30,940
|
|
|
928,200
|
|
Total
contractual cash obligations
|
|
$
|
1,120,984
|
|
$
|
1,611,631
|
|
$
|
1,147,131
|
|
$
|
2,249,612
|
|
$
|
6,129,358
|
|
(1) |
represents
cash obligations for principal payments and interest payments on
various
loans which are all secured by the asset financed. For further detail,
see
Note 4 to the financial
statements..
|
(2) |
lease
agreement of new corporate headquarters in Bakersfield, California,
lease
terms are until March 2011 at a monthly payment of
$15,470.
|
Operating
Activities
Net
cash
used by operating activities was $4,471,638 for the year-end December 31, 2005,
compared to $1,023,187 for the same period in 2004. This was primarily because
we had a decrease in advances from joint venture partners. The major component
of cash used in operations was our net loss of $9.7 million in 2005 compared
to
$1.17 million for 2004.
Investing
Activities
Cash
used
by investing activities in 2005 was $10,751,424 compared to $519,181 for the
same period in 2004. This was due to the capital expenditures in the current
year for industrial mining equipment and a milling facility in Kern County,
California and gold property in Alaska
Financing
Activities
Cash
provided by financing activities was $8,287,063 for the period ending December
31, 2005 compared to $5,301,939 for the same period in 2004. This was due to
proceeds from sale of common stock in private transactions and the proceeds
from
long-term debt.
Liquidity
The
recoverability of our oil and gas reserves depends on future events, including
obtaining adequate financing for our exploration and development program,
successfully completing our planned drilling program, and achieving a level
of
operating revenues that is sufficient to support our cost structure. At various
times in our history, it has been necessary for us to raise additional capital
through private placements of equity financing. When such a need has arisen,
we
have met it successfully. It is management’s belief that we will continue to be
able to meet our needs for additional capital as such needs arise in the future.
We may need additional capital to pay for our share of costs relating to the
drilling prospects and development of those that are successful, and to acquire
additional oil and gas leases, drilling equipment and other assets. The total
amount of our capital needs will be determined in part by the number of
prospects generated within our exploration program and by the working interest
that we retain in those prospects.
During
2006, we expect to expend approximately $7 million on drilling activities.
Funds for these activities will be provided by sales of partnership
interests in the Opus-I drilling partnership, which will still be
raising
funds for development purposes. We have not yet planned our proposed
prospect drilling and development activities for 2006. Our ability
to
complete our planned drilling activities in 2006 depends on some
factors
beyond our control, such as availability of equipment and
personnel.
|
|
In
2006, we expect expenditures of approximately $ 3.1 million on mining
activities, including mining lease and exploration expenses. We have
spent
approximately $0.6 million on mining lease and exploration expense
in the
first two months of the year and expect approximately another $ 2.5
million in expenses in the remainder of the year to improve our production
capacity. We believe that proceeds from our prior stock sales are
more
than sufficient to fund our remaining mining activities as well as
our
operating capital needs for the balance of 2006. We expect that revenue
from mining operations will begin to offset mine operating expenses
beginning in the third quarter of
2006.
|
Should
we
choose to make an acquisition of producing oil and gas properties, such an
acquisition would likely require that some portion of the purchase price be
paid
in cash, and thus would create the need for additional capital. Additional
capital could be obtained from a combination of funding sources. The potential
funding sources include:
· |
Cash
flow from operating activities,
|
· |
Borrowings
from financial institutions,
|
· |
Debt
offerings, which could increase our leverage and add to our need
for cash
to service such debt,
|
· |
Additional
offerings of our equity securities, which would cause dilution of
our
common stock,
|
· |
Sales
of portions of our working interest in the prospects within our
exploration program, which would reduce future revenues from its
exploration program,
|
· |
Sale
to an industry partner of a participation in our exploration
program,
|
· |
Sale
of all or a portion of our producing oil and gas properties, which
would
reduce future revenues.
|
Our
ability to raise additional capital will depend on the results of our operations
and the status of various capital and industry markets at the time such
additional capital is sought. Accordingly, there can be no assurances that
capital will be available to us from any source or that, if available, it will
be on terms acceptable to us.
ITEM
8: FINANCIAL STATEMENTS
TRI-VALLEY
CORPORATION
INDEX
|
Page(s)
|
|
|
Report
of Independent Auditor
|
25
|
|
|
Consolidated
Balance Sheets at December 31, 2005 and 2004
|
27
|
|
|
Consolidated
Statements of Operations for the Years Ended
|
|
December
31, 2005, 2004 and 2003
|
29
|
|
|
Consolidated
Statements of Changes in Shareholders' Equity for the
|
|
Years
Ended December 31, 2005, 2004 and 2003
|
30
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended
|
|
December
31, 2005, 2004 and 2003
|
31
|
|
|
Notes
to Consolidated Financial Statements
|
33
|
|
|
Supplemental
Information about Oil and Gas Producing
|
|
Activities
(Unaudited)
|
52
|
To
the
Board of Directors and
Stockholders
of Tri-Valley Corporation
Bakersfield,
California
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
audited the accompanying balance sheets of Tri-Valley Corporation as of December
31, 2005 and 2004, and the related statements of income, stockholders’ equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2005. We also have audited management’s assessment,
included in the accompanying “Management’s Report on Internal Control over
Financial Reporting,” that Tri-Valley Corporation maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Tri-Valley Corporation’s management is responsible for these financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on these financial
statements, an opinion on management’s assessment, and an opinion on the
effectiveness of the company’s internal control over financial reporting based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as
we
considered necessary in the circumstances. We believe that our audits provide
a
reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Tri-Valley Corporation as of
December 31, 2005 and 2004, and the results of its operations and its cash
flows
for each of the years in the three-year period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States
of
America. Also, in our opinion, management’s assessment that Tri-Valley
Corporation maintained effective internal control over financial reporting
as of
December 31, 2005 is fairly stated, in all material respects, based on criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Furthermore, in our opinion, Tri-Valley Corporation maintained, in all material
respects, effective internal control over financial reporting as of December
31,
2005, based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
BROWN
ARMSTRONG PAULDEN
McCOWN
STARBUCK THORNBURGH & KEETER
ACCOUNTANCY
CORPORATION
Bakersfield,
California
March
10,
2006
TRI-VALLEY
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
___2005___
|
|
___2004__
|
|
ASSETS
|
|
|
|
(restated)
|
|
Current
assets
|
|
|
|
|
|
Cash
|
|
$
|
4,876,921
|
|
$
|
11,812,920
|
|
Accounts
receivable, trade
|
|
|
273,409
|
|
|
192,008
|
|
Advance
receivable
|
|
|
158,460
|
|
|
150,000
|
|
Prepaid
expenses
|
|
|
42,529
|
|
|
96,056
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
5,351,319
|
|
|
12,250,984
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
|
|
|
Proved
properties
|
|
|
1,146,103
|
|
|
131,382
|
|
Unproved
properties
|
|
|
3,009,564
|
|
|
1,381,667
|
|
Other
property and equipment
|
|
|
9,480,314
|
|
|
265,159
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net (Note 3)
|
|
|
13,635,981
|
|
|
1,778,208
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
Deposits
|
|
|
316,614
|
|
|
200,407
|
|
Investments
in partnerships (Note 5)
|
|
|
17,400
|
|
|
17,400
|
|
Goodwill
|
|
|
212,414
|
|
|
212,414
|
|
Other
|
|
|
205,002
|
|
|
13,913
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
751,430
|
|
|
444,134
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
19,738,730
|
|
$
|
14,473,326
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
TRI-VALLEY
CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
December
31,
|
|
|
|
___2005___
|
|
___2004__
|
|
|
|
|
|
(restated)
|
|
Current
liabilities
|
|
|
|
|
|
Notes
payable
|
$
966,649
|
$
9,985
|
Accounts
payable and accrued expenses
|
1,190,604
|
1,237,848
|
Amounts
payable to joint venture participants
|
161,747
|
100,115
|
Advances
from joint venture participants, net
|
5,318,645
|
6,321,676
|
|
|
|
Total
current liabilities
|
7,637,645
|
7,669,624
|
|
|
|
Non-Current
Liabilities
|
|
|
Due
to joint ventures
|
201,748
|
-
|
Asset
Retirement Obligation
|
92,108
|
-
|
Long-term
portion of notes payable
|
4,234,509
|
6,799
|
|
|
|
Total
non-current liabilities
|
4,528,365
|
16,805
|
|
|
|
Total
liabilities
|
12,166,010
|
7,676,423
|
|
|
|
Stockholders’
equity
|
|
|
Common
stock, $.001 par value; 100,000,000 shares
|
|
|
authorized;
22,806,176 and 21,836,052 issued and
|
|
|
outstanding
at December 31, 2005, and 2004
|
22,806
|
21,836
|
Less:
common stock in treasury, at cost,
|
|
|
100,025
shares at December 31, 2005 and 2004.
|
(13,370)
|
(13,370)
|
Subscription
receivable
|
|
(750)
|
Capital
in excess of par value
|
25,629,775
|
15,125,607
|
Accumulated
deficit
|
(18,066,491)
|
(8,336,420)
|
|
|
|
Total
stockholders’ equity
|
7,572,720
|
6,796,903
|
|
|
|
Total
liabilities and stockholder’s equity
|
$
19,738,730
|
$
14,473,326
|
The
accompanying notes are an integral part of these financial
statements.
TRI-VALLEY
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
__For
the Years Ended December 31,_
|
|
|
|
___2005___
|
|
___2004___
|
|
___2003___
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
Revenues
|
|
|
|
|
|
|
|
Sale
of oil and gas
|
|
$
|
901,359
|
|
$
|
799,474
|
|
$
|
901,739
|
|
Royalty
income
|
|
|
883
|
|
|
674
|
|
|
529
|
|
Partnership
income
|
|
|
30,000
|
|
|
30,000
|
|
|
30,000
|
|
Interest
income
|
|
|
120,904
|
|
|
45,990
|
|
|
34,479
|
|
Drilling
and development
|
|
|
11,422,234
|
|
|
3,559,500
|
|
|
5,440,780
|
|
Other
income
|
|
|
53,226
|
|
|
63,032
|
|
|
56,718
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
12,528,606
|
|
|
4,498,670
|
|
|
6,464,245
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
Mining
exploration costs
|
|
|
6,697,441
|
|
|
1,029,898
|
|
|
366,039
|
|
Production
costs
|
|
|
93,429
|
|
|
144,101
|
|
|
183,362
|
|
Drilling
and development
|
|
|
9,267,621
|
|
|
2,224,793
|
|
|
4,014,889
|
|
General
and administrative
|
|
|
5,231,624
|
|
|
2,103,457
|
|
|
1,373,058
|
|
Interest
|
|
|
377,944
|
|
|
33,332
|
|
|
2,572
|
|
Depreciation,
depletion and amortization
|
|
|
500,453
|
|
|
21,699
|
|
|
29,216
|
|
Impairment
of acquisition costs
|
|
|
90,165
|
|
|
112,395
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
22,258,677
|
|
|
5,669,675
|
|
|
5,969,136
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before income taxes
|
|
|
(9,730,071
|
)
|
|
(1,171,005
|
)
|
|
495,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
provision
|
|
|
-
|
|
|
-
|
|
|
39,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(9,730,071
|
)
|
$
|
(1,171,005
|
)
|
$
|
456,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$
|
(0.43
|
)
|
$
|
(0.06
|
)
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
22,426,580
|
|
|
20,507,342
|
|
|
19,801,785
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common equivalent share
|
|
$
|
(0.39
|
)
|
$
|
(0.05
|
)
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common stock
and
equivalent outstanding
|
|
|
25,030,468
|
|
|
23,060,942
|
|
|
22,820,385
|
|
The
accompanying notes are an integral part of these financial
statements.
TRI-VALLEY
CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
Total
|
|
|
|
|
|
Capital
in
|
|
Common
|
|
|
|
|
|
|
|
|
|
Common
|
|
Treasury
|
|
|
|
Excess
of
|
|
Stock
|
|
Accumulated
|
|
Treasury
|
|
Stockholders’
|
|
|
|
Shares
|
|
Shares
|
|
Par
Value
|
|
Par
Value
|
|
Receivable
|
|
Deficit
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
|
19,726,348
|
|
|
100,025
|
|
$
|
19,726
|
|
$
|
8,879,724
|
|
$
|
(2,250
|
)
|
$
|
(7,621,524
|
)
|
$
|
(13,370
|
)
|
$
|
1,262,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
371,279
|
|
|
-
|
|
|
389
|
|
|
1,442,439
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,442,828
|
|
Stock
issuance cost
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,311,710
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,311,710
|
)
|
Common
stock receivable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,250
|
|
|
-
|
|
|
-
|
|
|
2,250
|
|
Net
income, as restated
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
456,109
|
|
|
-
|
|
|
456,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003, as restated
|
|
|
20,097,627
|
|
|
100,025
|
|
|
20,115
|
|
|
9,010,453
|
|
|
-
|
|
|
(7,165,415
|
)
|
|
(13,370
|
)
|
|
1,851,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
1,738,425
|
|
|
-
|
|
|
1,721
|
|
|
6,761,354
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,763,075
|
|
Stock
issuance cost
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(646,200
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(646,200
|
)
|
Common
stock receivable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(750
|
)
|
|
-
|
|
|
-
|
|
|
(750
|
)
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,171,005
|
)
|
|
-
|
|
|
(1,171,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004, as restated
|
|
|
21,836,052
|
|
|
100,025
|
|
|
21,836
|
|
|
15,125,607
|
|
|
(750
|
)
|
|
(8,336,420
|
)
|
|
(13,370
|
)
|
|
6,796,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
970,124
|
|
|
-
|
|
|
970
|
|
|
9,199,610
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,200,580
|
|
Stock
issuance cost
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(432,067
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(432,067
|
)
|
Common
stock receivable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750
|
|
|
-
|
|
|
-
|
|
|
750
|
|
Drilling
program equity
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,736,625
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,736,625
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(9,730,071
|
)
|
|
-
|
|
|
(9,730,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
22,806,176
|
|
|
100,025
|
|
$
|
22,806
|
|
$
|
25,629,775
|
|
$
|
-
|
|
$
|
(18,066,491
|
)
|
$
|
(13,370
|
)
|
$
|
7,572,720
|
|
The
accompanying notes are an integral part of these financial
statements.
TRI-VALLEY
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(9,730,071
|
)
|
$
|
(1,171,005
|
)
|
$
|
456,109
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
|
|
|
provided
(used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion, and amortization
|
|
|
500,453
|
|
|
21,699
|
|
|
29,216
|
|
Impairment,
dry hole and other disposals of property
|
|
|
90,165
|
|
|
112,395
|
|
|
-
|
|
Gain
on sale of property
|
|
|
131,766
|
|
|
-
|
|
|
-
|
|
Property,
mining claims & services paid with common stock
|
|
|
5,666,575
|
|
|
804,180
|
|
|
-
|
|
Changes
in operating capital:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
(89,862
|
)
|
|
(28,183
|
)
|
|
(12,207
|
)
|
(Increase)
decrease in prepaids
|
|
|
53,527
|
|
|
-
|
|
|
-
|
|
(Increase)
decrease in deposits and other assets
|
|
|
(307,296
|
)
|
|
87,671
|
|
|
(55,400
|
)
|
Increase
(decrease) in income taxes payable
|
|
|
-
|
|
|
(39,000
|
)
|
|
(37,000
|
)
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
(47,244
|
)
|
|
552,064
|
|
|
121,543
|
|
Increase
(decrease) in amounts payable to joint venture
|
|
|
|
|
|
|
|
|
|
|
participants
and related parties
|
|
|
263,380
|
|
|
8,840
|
|
|
16,863
|
|
Increase
(decrease) in advances from joint venture
|
|
|
|
|
|
|
|
|
|
|
participants
|
|
|
(1,003,031
|
)
|
|
674,526
|
|
|
3,029,817
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Operating Activities
|
|
|
(4,471,638
|
)
|
|
1,023,187
|
|
|
3,548,941
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PROVIDED (USED) BY INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property
|
|
|
-
|
|
|
-
|
|
|
402,164
|
|
Capital
expenditures
|
|
|
(10,751,424
|
)
|
|
(369,181
|
)
|
|
-
|
|
(Investment
in) advance to joint project
|
|
|
-
|
|
|
(150,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Investing Activities
|
|
|
(10,751,424
|
)
|
|
(519,181
|
)
|
|
402,164
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PROVIDED (USED) BY FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
5,496,798
|
|
|
-
|
|
|
-
|
|
Principal
payments on long-term debt
|
|
|
(311,673
|
)
|
|
(10,006
|
)
|
|
(13,792
|
)
|
Net
Proceeds from issuance of common stock
|
|
|
3,101,938
|
|
|
5,310,224
|
|
|
133,368
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Financing Activities
|
|
|
8,287,063
|
|
|
5,301,939
|
|
|
119,576
|
|
The
accompanying notes are an integral part of these financial
statements.
TRI-VALLEY
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
(6,935,999
|
)
|
$
|
5,805,945
|
|
$
|
4,070,681
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at Beginning of Year
|
|
|
11,812,920
|
|
|
6,006,975
|
|
|
1,936,294
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at End of Year
|
|
$
|
4,876,921
|
|
$
|
11,812,920
|
|
$
|
6,006,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
377,943
|
|
$
|
33,332
|
|
$
|
2,572
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
$
|
40,000
|
|
SUPPLEMENTAL
NON-CASH ACTIVITIES:
|
|
Property
& services paid with common stocks
|
|
$
|
2,662,075
|
|
$
|
92,200
|
|
$
|
23,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued to exchange mining claims
|
|
$
|
3,004,500
|
|
$
|
712,000
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these financial
statements.
NOTE
1 - GENERAL
History
and Business Activity
Tri-Valley
Corporation (“TVC” or the Company), a Delaware corporation formed in 1971, is in
the business of exploring, acquiring and developing petroleum and precious
metals properties and interests therein. Tri-Valley has four wholly owned
subsidiaries. Tri-Valley Oil & Gas Company (“TVOG”) operates the oil &
gas activities and derives the majority of its revenue from oil and gas, Great
Valley Production Services, Inc., which was formed in February 2006 to operate
oil production, rigs, primarily for TVOG, Select Resources Corporation which
handles all precious and industrial mineral interests and Tri-Valley Power
Corporation which is inactive.
The
Company conducts its oil and gas business primarily through Tri-Valley Oil
&
Gas Company. TVOG is engaged in the exploration, acquisition and production
of
oil and gas properties. Substantially all of the Company’s oil and gas reserves
are located in California.
In
the
fiscal year 1987, the Company added precious metals exploration. Select
Resources Corporation conducts precious metals exploration activities and is
a
joint venture partner in Tri-Western Resources, which conducts industrial
minerals activities acquisition. 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 oil and gas production, minerals, and drilling and
development
NOTE
2 - 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, its
wholly-owned subsidiaries, Tri-Valley Oil & Gas Co., and Select Resources,
Inc. and Tri-Valley Power Corporation, since their inception. Because the
Company is the principal beneficiary of a mining venture, it has also
consolidated a 50% owned joint venture, Tri-Western Resources, LLC. Other
partnerships in which the Company has an operating or nonoperating interest
in
which the Company is not the primary beneficiary and owns less than 51%, are
proportionately combined. This includes Opus I, Martins-Severin, Martins-Severin
Deep, and Tri-Valley Exploration 1971-1 partnerships. All material intra and
intercompany accounts and transactions have been eliminated in combination
and
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.
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. The majority
of
these funds are held at Smith Barney.
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 a periodic review for impairment. Prior to the
implementation of SFAS 142, the Company had goodwill of $212,414 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.
Advances
from Joint Venture Participants
Advances
received by the Company from joint venture partners for contract drilling
projects, which are to be spent by the Company on behalf of the joint venture
partners, are classified within operating inflows on the basis they do not
meet
the definition of financing or investing activities. When the cash advances
are
spent, the payable is reduced accordingly. These advances do not contribute
to
the Company's operating profits and are accounted or/disclosed as balance sheet
entries only i.e. within cash and payable to joint venture
participants.
Revenue
Recognition
Sale
of Oil and Gas
Crude
oil
and natural gas revenues are recognized as production occurs, the title and
risk
of loss transfers to a third party purchaser, net of royalties, discounts,
and
allowances, as applicable.
Drilling
and Development
Oil
and
gas prospects are developed by the Company for sale to industry partners and
investors. These prospects are usually exploratory, and include costs of
leasing, acquisition, and other geological and geophysical costs (hereafter
referred to as “GGLA”) plus a profit to the Company. Prior to 2002, the Company
recognized revenue and profit from prospects sales when sold, irrespective
of
drilling commencement (“spudding”).
Starting
2002 the Company changed its prospect offerings by inclusion of estimated costs
of drilling in addition to GGLA costs. This offering is termed a “turnkey”
exploratory drilling opportunity because investors are charged only one certain
amount in return for Tri-Valley drilling a well to the agreed total
depth.
Once
the
well is spudded, investor money is not refundable. Tri-Valley recognizes revenue
when the well is logged. Amounts charged are included in an Authority for
Expenditure (AFE), which is a budget for each project well. Tri-Valley prepares
the AFE and bears all risk of well completion to total depth. If the well is
drilled to total depth for actual costs less than the AFE amounts, the Company
realizes a profit. Conversely, if actual costs exceed the AFE, Tri-Valley
realizes a loss.
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition
(Continued)
Drilling
Agreements/Joint Ventures
Tri-Valley
frequently participates in drilling agreements whereby it acts as operator
of
drilling and producing activities. As operator, TVOG is liable for the
activities of these ventures. In the initial well in a prospect, the Company
owns a carried interest and/or overriding royalty interest in such ventures,
earning a working interest upon commencement of drilling. Costs of subsequent
wells drilled in a prospect are shared by a pro rata interest.
Receivables
from and amounts payable to these related parties (as well as other related
parties) have been segregated in the accompanying financial statements. For
turnkey projects, amounts received for drilling activities, which have not
been
spudded are deferred and remain within the joint venture liability, in
accordance with the Company’s revenue recognition policies. Revenue is
recognized upon the completion of drilling operations and the well is logged.
Actual or estimated costs to complete the drilling are charged as costs against
this revenue.
Impairment
of Long-lived and Intangible Assets
The
Company evaluates its long-lived assets (property, plant and equipment) and
definite-lived intangible assets for impairment whenever indicators of
impairment exist, or when it commits to sell the asset. The accounting standards
require that if the sum of the undiscounted expected future cash flows from
a
long-lived asset or definite-lived intangible asset is less than the carrying
value of that asset, an asset impairment charge must be recognized. The amount
of the impairment charge is calculated as the excess of the asset’s carrying
value over its fair value, which generally represents the discounted future
cash
flows from that asset, or in the case of assets the Company evaluates for sale,
at fair value less costs to sell. A number of significant assumptions and
estimates are involved in developing operating cash flow forecasts for the
Company’s discounted cash flow model, sales volumes and prices, costs to
produce, working capital changes and capital spending requirements. The Company
considers historical experience, and all available information at the time
the
fair values of its assets are estimated. However, fair values that could be
realized in an actual transaction may differ from those used to evaluate the
impairment of long-lived assets and definite-lived intangible assets. Therefore,
assumptions and estimates used in the determination of impairment losses may
affect the carrying value of long-lived and intangible assets, and possible
impairment expense in the Company’s Consolidated Financial
Statements.
Oil
and Gas Property and Equipment (Successful Efforts)
The
Company accounts for its oil and gas exploration and development costs using
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 2005, 2004, and 2003
there was $90,165, $112,395 and $0 respectively, charged to
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Oil
and Gas Property and Equipment (Successful Efforts, continued)
expense
for impairment of exploratory well costs. Depletion, depreciation and
amortization of oil and gas producing properties are computed on an aggregate
basis using the units-of-production method based upon estimated proved developed
reserves.
At
December 31, 2005 and 2004, the Company carried unproved property costs of
$3.01
million
and $1.38 million, respectively. Generally accepted accounting principles
require periodic evaluation of these costs on a project-by-project basis in
comparison to their estimated value. These evaluations will be affected by
the
results of exploration activities, commodity price outlooks, planned future
sales or expiration of all or a portion of the leases, contracts and permits
appurtenant to such projects. If the quantity of potential reserves determined
by such evaluations is not sufficient to fully recover the cost invested in
each
project, the Company will recognize non cash charges in the earnings of future
periods.
Capitalized
costs relating to proved properties are depleted using the unit-of-production
method based on proved reserves. Costs of significant non-producing properties,
wells in the process of being drilled and development projects are excluded
from
depletion until such time as the related project is completed and proved
reserves are established or, if unsuccessful, impairment is
determined.
Upon
the
sale of oil and gas reserves in place, costs less accumulated amortization
of
such property are removed from the accounts and resulting gain or loss on sale
is reflected in operations. Impairment of non-producing leasehold costs and
undeveloped mineral and royalty interests are assessed periodically on a
property-by-property basis, and any impairment in value is currently charged
to
expense.
In
addition, we assess the capitalized costs of unproved properties periodically
to
determine whether their value has been impaired below the capitalized costs.
We
recognize a loss to the extent that such impairment is indicated. In making
these assessments, we consider factors such as exploratory drilling results,
future drilling plans, and lease expiration terms. When an entire interest
in an
unproved property is sold, gain or loss is recognized, taking into consideration
any recorded impairment. When a partial interest in an unproved property is
sold, the amount is treated as a reduction of the cost of the interest retained,
with excess revenue and carrying costs being recognized. Upon abandonment of
properties, the reserves are deemed fully depleted and any unamortized costs
are
recorded in the statement of operations under leases sold, relinquished and
impaired.
As
of
January 1, 2005, the Company adopted FASB Staff Position FAS 19-1, “Accounting
for Suspended Well Costs.” Upon adoption of the FSP, the Company evaluated all
existing capitalized exploratory well costs under the provisions of the FSP.
As
a result, the Company determined that there were no capitalized costs of
exploratory wells during 2005, 2004 and 2003, and does not include amounts
that
were capitalized and subsequently expensed in the same period.
Asset
retirement obligations. The Company has significant obligations to
remove tangible equipment and facilities and to restore land at the end of
oil
and gas production operations. The Company’s removal and restoration obligations
are primarily associated with plugging and abandoning wells and removing and
disposing of oil and gas wells. Estimating the future restoration and removal
costs is difficult and requires management to make estimates and judgments
because most of the removal obligations are many years in the future and
contracts and regulations often have vague descriptions of what constitutes
removal. Asset removal technologies and costs are constantly changing, as are
regulatory, political, environmental, safety and public relations
considerations.
On
January 1, 2003, the Company adopted the provisions of SFAS 143.
SFAS 143 significantly changed the method of accruing for costs an entity
is legally obligated to incur related to the retirement of fixed assets.
SFAS 143, together with the related FASB Interpretation No. 47,
“Accounting for Conditional Asset Retirement Obligations, an Interpretation
of
FASB Statement No. 143” (“FIN 47”), requires the Company to record a
separate liability for the discounted present
value of
the Company’s asset retirement obligations, with an offsetting increase to the
related oil and gas properties on the balance sheet.
Inherent
in the present value calculation are numerous assumptions and judgments
including the ultimate settlement amounts, inflation factors, credit adjusted
discount rates, timing of settlement, and changes in the legal, regulatory,
environmental and political environments. To the extent future revisions to
these assumptions impact the present value of the existing asset retirement
obligations, a corresponding adjustment is made to the oil and gas property
balance.
The
Company’s asset retirement obligations primarily relate to the future plugging
and abandonment of proved properties and related facilities. The Company has
no
assets that are legally restricted for purposes of settling asset retirement
obligations. The following table summarizes the Company’s asset retirement
obligation transactions recorded in accordance with the provisions of SFAS
143
during the years ended December 31, 2005, 2004, and 2003.
|
|
|
|
December
31,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Beginning
asset retirement obligations
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
assumed in acquisitions (1)
|
|
$
|
92,108
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
asset retirement obligations
participants,
net
|
|
$
|
92,108
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The
Company’s portion of the liability for the plugging and abandonment of the wells
acquired from the Temblor Valley and Pleasant Valley acquisitions
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.
Other
Properties and Equipment
Properties
and equipment are depreciated using the straight-line method over the following
estimated useful lives:
Office
furniture and fixtures
Vehicle,
machinery & equipment
Building
|
3
-
7 years
5
-
10 years
15
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.
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration
of Credit Risk and Fair Value of Financial Instruments
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 is estimated to approximate the related book
value, unless otherwise indicated, based on market information available to
the
Company.
Stock
Based Compensation Plans
Pursuant
to the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,”
the Company has elected to continue using the intrinsic value method of
accounting for its stock-based employee compensation plans in accordance with
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees.” Accordingly, the Company has not recognized compensation expense
for its stock-based awards to employees. See Note 5 for a further discussion
related to the Company’s Stock Incentive Plan. The Company will adopt SFAS No.
123 (Revised), “Share-Based Payment,” effective January 1, 2006, which will
require the Company to measure and recognize the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. The following table reflects pro forma net income
and
income per average common share had the Company elected to adopt the fair value
based method of SFAS No. 123:
|
|
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
(restated
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
As
reported
|
|
$
|
(9,730,071
|
)
|
$
|
(1,171,005
|
)
|
$
|
496,109
|
|
Deduct:
Stock-based compensation expense determined under fair value based
method
for all awards, net of tax
|
|
|
|
|
|
631,000
|
|
|
--
|
|
|
97,100
|
|
Pro
forma
|
|
|
|
|
|
(10,361,071
|
)
|
|
(1,171,005
|
)
|
|
399,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
As
reported
|
|
|
(0.43
|
)
|
|
(0.06
|
)
|
|
0.02
|
|
Pro
forma
|
|
|
|
|
|
(0.46
|
)
|
|
(0.06
|
)
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
As
reported
|
|
|
(0.39
|
)
|
|
(0.05
|
)
|
|
0.02
|
|
Pro
forma
|
|
|
|
|
|
(0.41
|
)
|
|
(0.05
|
)
|
|
0.01
|
|
Reclassification
Certain
amounts in the financial statements have been reclassified to be consistent
and
comparable from year-to-year.
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
April
2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and
64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS 145,
which is effective for fiscal years beginning after May 15, 2002, provides
guidance for income statement classification of gains and losses on
extinguishment of debt and accounting for certain lease modifications that
have
economic effects that are similar to sale-leaseback transactions. The adoption
of this statement did not impact the Company's financial position, results
of
operations, or cash flows.
In
June
2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." SFAS 146 nullifies the guidance of the Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for
a
cost that is associated with an exit or disposal activity be recognized when
the
liability is incurred. SFAS 146 also establishes that fair value is the
objective for the initial measurement of the liability. The provisions of SFAS
146 are required for exit or disposal activities that are initiated after
December 31, 2003. The adoption of this statement did not impact the Company's
financial position, results of operations, or cash flows.
In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends FASB Statement No.
123, "Accounting for Stock-Based Compensation" to provide alternative methods
of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for
stock-based employee compensation and the effect of the method used on the
reported results. The provisions of SFAS 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of
this
statement did not impact the Company's financial position, results of
operations, or cash flows.
During
January 2003, the Financial Accounting Standards Board issued interpretation
No.
46, "Consolidation of Variable Interest Entities" ("FIN46"), which requires
the
consolidation of certain entities that are determined to be variable interest
entities ("VIE's"). An entity is considered to be a VIE when either (i) the
entity lacks sufficient equity to carry on its principal operations, (ii) the
equity owners of the entity cannot make decisions about the entity's activities
or (iii) the entity's equity neither absorbs losses or benefits from
gains.
In
May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150
addresses certain financial instruments that, under previous guidance, could
be
accounted for as equity, but now must be classified as liabilities in statements
of financial position. These financial instruments include: (1) mandatorily
redeemable financial instruments, (2) obligations to repurchase the issuer’s
equity shares by transferring assets, and (3) obligations to issue a variable
number of shares. With limited exceptions, SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15,
2003. The Company does not expect that the adoption of SFAS 150 will have a
material impact on its results of operations and financial
position.
In
November 2004, the FASB issued SFAS No. 151,”Inventory Costs”. SFAS No. 151
amends the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) under the guidance in ARB No.
43,
Chapter 4,"Inventory Pricing”. Paragraph 5 of ARB No. 43, Chapter 4, previously
stated that ". . . under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so
abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not expect adoption
of SFAS No. 151 to have a material impact on the Company’s financial
statements.
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently
Issued Accounting Pronouncements
(Continued)
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
an amendment to Opinion No. 29, “Accounting for Nonmonetary Transactions”.
Statement No. 153 eliminates certain differences in the guidance in Opinion
No.
29 as compared to the guidance contained in standards issued by the
International Accounting Standards Board. The amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Such an exchange
has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective
for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring
in
periods beginning after December 16, 2004. Management does not expect adoption
of SFAS No. 153 to have a material impact on the Company’s financial
statements.
Share-Based
Payment
In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”
(“SFAS No. 123 (R)”). This Statement revises SFAS No. 123 and
supersedes APB No. 25. SFAS No. 123(R) focuses primarily on the
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires companies
to recognize in the statement of operations the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards. This Statement is effective and will be adopted
in
the first quarter of 2006. The Company plans to adopt SFAS
No. 123(R) using the modified prospective method, whereby the Company
will expense the remaining portion of the requisite service under previously
granted unvested awards outstanding as of January 1, 2006 and new
share-based payment awards granted or modified after January 1, 2006. The
Company intends to use the Black-Scholes valuation method to estimate the fair
value of its options. The Company expects that implementation of SFAS
No. 123(R) will result in additional expense related to share-based
compensation of approximately $250,000 before tax in 2006. This estimate
includes the effect of options granted in January 2006. However, the actual
expense in 2006 depends on a number of factors, including fair
value of awards at the time of grant and the number of share-based awards
granted in 2006.
Asset
Retirement Obligation
In
March
2005, the Financial Accounting Standards Board issued FASB Interpretation
No. 47, “Accounting for Conditional Asset Retirement Obligations.”, Under
the provisions of FIN No. 47, the term conditional asset retirement
obligation as used in SFAS No. 143, “Accounting for Asset Retirement
Obligations”,
refers
to
a legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity while the obligation to perform the
asset retirement activity is unconditional. Accordingly, an entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
The
fair value of a liability for the conditional asset retirement obligation is
required to be recognized when incurred—generally upon acquisition,
construction, or development and/or through the normal operation of the asset.
We have adopted FIN No. 47 as of December 31, 2005. Adoption of this
pronouncement did not have a significant effect on our 2005 consolidated
financial statements, and we do not expect this pronouncement to have a
significant effect on our future reported financial position or earnings.
Sarbanes-Oxley
Act Of 2002
Section
404 of the Sarbanes-Oxley Act of 2002 requires public Companies to report on
both internal control over financial reporting and disclosure controls and
procedures. Internal control over financial reporting refers to:
|
(a)
|
controls
to ensure that a Company’s information systems record financial
information that allows the Company to issue fair and accurate financial
statements;
|
|
(b)
|
controls
that ensure against unauthorized receipts and expenditures;
and
|
|
(c)
|
controls
to prevent and detect unauthorized acquisition, use or disposition
of the
assets.
|
Disclosure
controls and procedures refer to controls that ensure that all information
that
must be reported to the Securities and Exchange Commission is received by
management on a timely basis.
The
effectiveness of internal control over financial reporting must be assessed
by
management, and reported in the Company’s annual report filed with the SEC. The
Company’s independent auditors must attest to management’s assessment of
internal control over financial reporting, and must issue their report, stating
whether they agree with management’s assessment. In addition, the Company is
required to report any changes in their internal control over financial
reporting in their annual reports and quarterly reports filed with the
SEC.
NOTE
3 - PROPERTY AND EQUIPMENT
Properties,
equipment and fixtures consist of the following:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Oil
and gas - California
|
|
|
|
|
|
Proved
properties, gross
|
|
$
|
1,795,653
|
|
$
|
752,705
|
|
Accumulated
depletion
|
|
|
(649,550
|
)
|
|
(621,323
|
)
|
Proved
properties, net
|
|
|
1,146,103
|
|
|
131,382
|
|
Unproved
properties
|
|
|
3,009,564
|
|
|
1,381,667
|
|
Total
oil and gas properties
|
|
|
4,155,667
|
|
|
1,513,049
|
|
|
|
|
|
|
|
|
|
Other
property and equipment
|
|
|
|
|
|
|
|
Land
|
|
|
21,281
|
|
|
12,281
|
|
Building
|
|
|
2,739,442
|
|
|
50,395
|
|
Leasehold
improvements
|
|
|
577,619
|
|
|
5,748
|
|
Machinery
and Equipment
|
|
|
5,096,271
|
|
|
-
|
|
Vehicles
|
|
|
1,414,416
|
|
|
85,943
|
|
Transmission
tower
|
|
|
51,270
|
|
|
45,000
|
|
Office
furniture and equipment
|
|
|
202,587
|
|
|
253,895
|
|
|
|
|
10,102,886
|
|
|
453,262
|
|
Accumulated
depreciation
|
|
|
(622,572
|
)
|
|
(188,103
|
)
|
Total
other property and equipment, net
|
|
|
9,480,314
|
|
|
265,159
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
13,635,981
|
|
$
|
1,778,208
|
|
NOTE
4 - NOTES PAYABLE
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Note
payable to Union Bank dated January
|
|
|
|
|
|
15,
2000; secured by a vehicle; interest at 8.5%;
|
|
|
|
|
|
payable
in 60 monthly installments of $380.
|
|
$
|
-
|
|
$
|
4,332
|
|
|
|
|
|
|
|
|
|
Note
payable to Union Bank dated July 29, 2002;
|
|
|
|
|
|
|
|
secured
by vehicle; interest at 8.3%; payable
|
|
|
|
|
|
|
|
in
60 monthly installments of $602.
|
|
|
10,705
|
|
|
12,452
|
|
|
|
|
|
|
|
|
|
Note
payable to Rabobank dated October
|
|
|
|
|
|
|
|
5,
2005; secured by a vehicle; interest at 6.5%;
|
|
|
|
|
|
|
|
payable
in 60 monthly installments of $599.
|
|
|
29,238
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Jim Burke Ford dated November 18,
|
|
|
|
|
|
|
|
2005;
secured by a vehicle; interest at 6.49%; payable
|
|
|
|
|
|
|
|
in
60 monthly installments of $714.
|
|
|
35,893
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Rabobank dated May 15, 2005;
|
|
|
|
|
|
|
|
secured
by a building; interest at 6.789%; payable
|
|
|
|
|
|
|
|
in
119 monthly installments of $13,120 and one final
|
|
|
|
|
|
|
|
Payment
of $1,482,704.
|
|
|
1,670,374
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Sealaska Corporation dated July 15,
|
|
|
|
|
|
|
|
2005;
secured by mining machines and equipment;
|
|
|
|
|
|
|
|
imputed
interest at 7.5%; payable in 10 yearly
|
|
|
|
|
|
|
|
installments
of $200,000. Face amount $2,000,000
|
|
|
1,420,006
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Jim Burke Ford dated November 18,
|
|
|
|
|
|
|
|
2005;
secured by a vehicle; interest at 6.49%; payable
|
|
|
|
|
|
|
|
in
60 monthly installments of $493.
|
|
|
24,759
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Lee Financial Services dated April 05,
|
|
|
|
|
|
|
|
2005;
secured by vehicles; interest at 13.446%;
|
|
|
|
|
|
|
|
payable
in 30 monthly installments of $2,664.
|
|
|
51,679
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Financial Federal Credit Inc. dated
|
|
|
|
|
|
|
|
September
2, 2005; secured by vehicles, machines
|
|
|
|
|
|
|
|
and
equipment; interest at 8.878%; payable in 12
|
|
|
|
|
|
|
|
monthly
installments of $40,000 and 36 monthly
|
|
|
|
|
|
|
|
installments
of $19,301.
|
|
|
882,832
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Financial Federal Credit Inc. dated
|
|
|
|
|
|
|
|
October
1, 2005; secured by mining machines and
|
|
|
|
|
|
|
|
equipment;
interest at 9.079%; payable in 12 monthly
|
|
|
|
|
|
|
|
installments
of $8,500 and 36 monthly installments of
|
|
|
|
|
|
|
|
$5,269.
|
|
|
228,332
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Financial Federal Credit Inc. dated
|
|
|
|
|
|
|
|
November
6, 2005; secured by vehicles; interest at
|
|
|
|
|
|
|
|
9.021%;
payable in 12 monthly installments of $9,700
|
|
|
|
|
|
|
|
and
36 monthly installments of $3,968
|
|
|
208,848
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Financial Federal Credit Inc. dated
|
|
|
|
|
|
|
|
November
13, 2005; secured by vehicles; interest at
|
|
|
|
|
|
|
|
9.011%;
payable in 12 monthly installments of $14,000
|
|
|
|
|
|
|
|
and
36 monthly installments of $8,028
|
|
|
368,608
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Note
payable to Financial Federal Credit Inc. dated
|
|
|
|
|
|
|
|
December
16, 2005; secured by a loader; interest at
|
|
|
|
|
|
|
|
9.046%;
payable in 1 monthly installments of $76,551,
|
|
|
|
|
|
|
|
12
monthly installments of $10,000 and 36 monthly
|
|
|
|
|
|
|
|
installments
of $5,417.
|
|
|
269,884
|
|
|
-
|
|
|
|
|
5,201,158
|
|
|
16,784
|
|
Less
current portion
|
|
|
966,649
|
|
|
9,985
|
|
|
|
|
|
|
|
|
|
Long-term
portion of notes payable
|
|
$
|
4,234,509
|
|
$
|
6,799
|
|
Maturities
of long-term debt for the years subsequent to December 31, 2005 are as
follows:
2006
|
|
$
|
966,649
|
|
2007
|
|
|
609,040
|
|
2008
|
|
|
630,946
|
|
2009
|
|
|
568,062
|
|
2010
|
|
|
207,789
|
|
2011-2015
|
|
|
2,218,672
|
|
|
|
|
|
|
|
|
$
|
5,201,158
|
|
NOTE
5 - RELATED PARTY TRANSACTIONS
Employee
Stock Options
The
Company has a qualified and a nonqualified stock option plan, which provides
for
the granting of options to key employees, consultants, and nonemployee directors
of the Company.
The
option price, number of shares and grant date are determined at the discretion
of the Company’s board of directors. Options granted under the plans are
exercisable immediately; however, the plan expires in August 2008.
The
purpose of the Company's stock option plans is to further the interest of the
Company by enabling officers, directors, employees, consultants and advisors
of
the Company to acquire an interest in the Company by ownership of its stock
through the exercise of stock options and stock appreciation rights granted
under its various stock option plans.
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes American option-pricing model with the following weighted-average
assumptions used for grants in 2005.
Year
|
|
Expected
Life
|
|
Expected
Dividends
|
|
Expected
Volatility
|
|
Risk-Free
Interest Rates
|
2005
|
|
3
|
|
None
|
|
70%
|
|
4.60
|
A
summary
of the status of the Company's fixed stock option plan as of December 31, 2005,
2004 and 2003 and changes during the years ending on those dates is presented
below:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Fixed
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
|
2,553,600
|
|
$
|
1.28
|
|
|
3,018,600
|
|
$
|
1.27
|
|
|
2,960,500
|
|
$
|
1.25
|
|
Granted
|
|
|
271,000
|
|
$
|
5.82
|
|
|
-
|
|
$
|
-
|
|
|
100,000
|
|
$
|
1.33
|
|
Exercised
|
|
|
(67,000
|
)
|
$
|
1.94
|
|
|
(465,000
|
)
|
$
|
1.20
|
|
|
(41,900
|
)
|
$
|
0.50
|
|
Cancelled
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at end of year
|
|
|
2,757,600
|
|
$
|
2.03
|
|
|
2,553,600
|
|
$
|
1.28
|
|
|
3,018,600
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
|
2,757,600
|
|
|
|
|
|
2,553,600
|
|
|
|
|
|
3,018,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
fair value of options granted during the year
|
|
|
|
|
|
$
|
3.32
|
|
|
|
|
|
n/a
|
|
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for issuance
|
|
|
119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes information about fixed stock options outstanding
at
December 31, 2004:
|
|
Options
Outstanding and Exercisable
|
|
|
|
|
Weighted-Average
|
|
|
|
|
Number
Outstanding
|
|
Remaining
|
|
Weighted-Average
|
Range
of Exercise Prices
|
|
at
December 31, 2005
|
|
Contractual
Life
|
|
Exercise
Price
|
|
|
|
|
|
|
|
$.50
- $10.00
|
|
2,757,600
|
|
2.64
years
|
|
$2.03
|
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
5 - RELATED PARTY TRANSACTIONS
Partnerships
Tri-Valley
sells oil and gas drilling prospects to partnerships that are sponsored by
Tri-Valley and sold to private investors for the purpose of oil and gas drilling
and development. The Company accounts for these partnerships on the prorata
combination method. Drilling and development revenue related to the Opus-I
partnership for the fiscal year ended December 31, 2005, 2004 and 2003 are
as
follows:
|
|
|
|
December
31,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Drilling
and development revenue
|
|
$
|
11,422,234
|
|
$
|
3,559,500
|
|
$
|
5,440,780
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
and development costs
|
|
$
|
9,267,621
|
|
$
|
2,224,793
|
|
$
|
4,014,889
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from joint venture
participants,
net
|
|
$
|
5,318,645
|
|
$
|
6,321,676
|
|
$
|
5,647,150
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
and development revenue includes $6,814,734 from the sale of seventy-five
(75%) of two new acquisitions to the Opus I partnership which cost
was
included in the drilling and development costs in the amount of
$6,419,435.
|
|
Oil
and gas income from the Tri-Valley Oil & Gas Exploration Programs
1971-1 for fiscal year ended December 31, 2005, 2004 and 2003 are
as
follows:
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
income, net of expenses
|
|
$
|
30,000
|
|
$
|
30,000
|
|
$
|
30,000
|
|
NOTE
6 - EARNINGS PER SHARE
Year
|
|
Full
Year Basic Earnings (Loss) Per Share
|
|
Weighted-Average
Shares Outstanding
|
|
Diluted
Earnings (Loss) Per Share
|
|
Diluted
Weighted-Average Common Stock Equivalents Outstanding
|
|
Common
Stock Equivalents Excluded from Diluted Earnings Per
Share
|
2005
|
|
$
(0.43)
|
|
22,426,580
|
|
$
(0.39)
|
|
2,603,888
|
|
$
-
|
2004
|
|
(0.06)
|
|
20,507,342
|
|
(0.05)
|
|
2,553,600
|
|
-
|
2003
|
|
0.02
|
|
19,801,785
|
|
0.02
|
|
3,018,600
|
|
-
|
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. Common stock equivalents
excluded from the calculation of diluted earnings per share due to the effect
was antidilutive.
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
7 - INCOME TAXES
At
December 31, 2005, the Company had available net operating loss carry forwards
for financial statements and federal income tax purposes of approximately
$13
million.
The
components of the net deferred tax assets were as follows:
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
5,184,000
|
|
$
|
776,000
|
|
$
|
345,727
|
|
Statutory
depletion carryforwards
|
|
|
384,000
|
|
|
356,000
|
|
|
339,007
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
5,568,000
|
|
|
1,132,000
|
|
|
684,734
|
|
Valuation
allowance
|
|
|
(5,568,000
|
)
|
|
(1,132,000
|
)
|
|
(684,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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 net operating loss expires in 2023 for
federal purposes and 2024 for state purposes. Depletion carryforwards have
an
indefinite life.
The
reconciliation of federal taxable income follows:
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
Income
(loss) before tax
|
|
$
|
(9,730,071
|
)
|
$
|
(1,171,005
|
)
|
$
|
495,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed
"expected" tax (benefit)
|
|
$
|
(3,308,000
|
)
|
$
|
(398,000
|
)
|
$
|
168,000
|
|
|
|
|
|
|
|
|
|
|
|
|
State
tax liability
|
|
|
-
|
|
|
-
|
|
|
39,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization
(non-utilization) of operating loss carryover
|
|
|
3,308,000
|
|
|
398,000
|
|
|
(168,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax provision
|
|
$
|
-
|
|
$
|
-
|
|
$
|
39,000
|
|
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
8 - MAJOR CUSTOMERS
Oil
and Gas
Substantially
all oil and gas sales have occurred in the northern California gas market.
The
Company received substantially all of its oil and gas revenue from one customer.
The oil and gas sales to this customer amounted to $901,359, $799,474, and
$901,739 for the year ended December 31, 2005, 2004, and 2003,
respectively.
NOTE
9 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
The
Company reports operating segments according to SFAS No. 131, “Disclosure about
Segments of an Enterprise and Related Information”.
The
Company identifies reportable segments by product. 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
Company's operations are classified into three principal industry segments.
Following is a summary of segmented information for 2005, 2004, and
2003:
|
|
Oil
and Gas
|
|
|
|
Drilling
and
|
|
|
|
|
|
Production
|
|
Minerals
|
|
Development
|
|
Total
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
932,042
|
|
$
|
200
|
|
$
|
11,422,234
|
|
$
|
12,354,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
$
|
118,609
|
|
$
|
2,295
|
|
$
|
-
|
|
$
|
120,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
2,115
|
|
$
|
375,829
|
|
$
|
-
|
|
$
|
377,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets
|
|
$
|
1,260,884
|
|
$
|
9,490,540
|
|
$
|
-
|
|
$
|
10,751,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion, and amortization
|
|
$
|
58,319
|
|
$
|
442,134
|
|
$
|
-
|
|
$
|
500,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
8,427,037
|
|
$
|
9,614,726
|
|
$
|
1,696,967
|
|
$
|
19,738,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
income tax benefit(expense)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(5,615,595
|
)
|
$
|
(6,269,089
|
)
|
$
|
2,154,613
|
|
$
|
(9,730,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
9- FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
(Continued)
|
|
Oil
and Gas
|
|
|
|
Drilling
and
|
|
|
|
|
|
Production
|
|
Minerals
|
|
Development
|
|
Total
|
|
Year
ended December 31, 2004
|
|
|
|
|
|
(restated)
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
830,148
|
|
$
|
-
|
|
$
|
3,559,500
|
|
$
|
4,389,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
$
|
45,990
|
|
$
|
-
|
|
$
|
-
|
|
$
|
45,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
33,332
|
|
$
|
-
|
|
$
|
-
|
|
$
|
33,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets
|
|
$
|
369,181
|
|
$
|
-
|
|
$
|
-
|
|
$
|
369,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion, and amortization
|
|
$
|
21,699
|
|
$
|
-
|
|
$
|
-
|
|
$
|
21,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
14,473,326
|
|
$
|
-
|
|
$
|
-
|
|
$
|
14,473,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
income tax benefit (expense)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(400,046
|
)
|
$
|
(1,029,898
|
)
|
$
|
258,939
|
|
$
|
(1,171,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
932,268
|
|
$
|
-
|
|
$
|
5,440,780
|
|
$
|
6,373,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
revenue
|
|
$
|
34,479
|
|
$
|
-
|
|
$
|
-
|
|
$
|
34,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
2,572
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for segment assets
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion, and amortization
|
|
$
|
29,216
|
|
$
|
-
|
|
$
|
-
|
|
$
|
29,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
8,320,992
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,341,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
income tax benefit (expense)
|
|
$
|
54,000
|
|
$
|
31,000
|
|
$
|
(124,000
|
)
|
$
|
(39,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(624,280
|
)
|
$
|
(366,039
|
)
|
$
|
1,446,428
|
|
$
|
456,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
10 - COMMON STOCK
During
2005 the Company 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
private individual purchased 326,667 common stock shares for total
$3,015,005 during the year: 125,000 shares at $7.50 per share, 35,000
shares at $6.50 per share, 50,000 shares at $12.00 per share, and
16,667
shares at $15.00 per share, and 100,000 shares at $10.00 per
share
|
- |
Another
private individual purchased 25,000 shares at $12.00 per share for
a total
of $300,000.
|
- |
The
company issued 320,000 shares to four individuals to exchange mining
claims in Alaska. The stocks ranged in value from $10.05 to $7.75
per
share at the time of the exchange.
|
- |
The
Company issued total 8,000 shares to directors of the Company for
services
rendered during the year. At the time of the issuance the stocks
were
valued at $8.13 per share.
|
The
Company issued 5,000 shares to one employee in accordance with his employment
contract.
- |
The
Company issued 200,000 shares as consideration to acquire Pleasant
Valley
Energy Corporation. The stock was valued at $12.32 per share at the
date
of closing.
|
- |
During
the year various directors and employees of the Company exercised
stock
options previously granted. The new shares issued pursuant to the
stock
option plan amounted to 67,000 shares. Cash consideration received
totaled
to $130,000.
|
- |
During
the year the common stock issuance cost amounted to approximately
$432,067.
|
During
2004 the Company 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
private individual purchased 1,090,000 common stock shares for total
$5,385,000 during the year: 300,000 shares at $4.50 per share, 200,000
shares at $4.75 per share, and 500,000 shares at $5.00 per share,
and
90,000 shares at $6.50 per share
|
- |
Another
private individual purchased 3,000 shares at $4.05 per
share.
|
- |
Companies
issued 160,000 shares to two individuals to exchange mining claims
in
Alaska. The stocks were valued at $4.45 per share at the time of
the
exchange.
|
- |
The
Company issued total 20,000 shares to directors of the Company for
services rendered during the year. At the time of the issuance the
stocks
were valuated at $4.60 per share.
|
- |
During
the year various directors and employees of the Company exercised
stock
options previously granted. The new shares issued pursuant to the
stock
option plan amounted to 465,000 shares. Cash consideration received
totaled to $560,000.
|
- |
During
the year the common stock issuance cost amounted to approximately
$646,200.
|
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
NOTE
11 - COMMITMENTS AND CONTINGENCIES
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.
Natural
Gas Contracts
The
Company sells its gas under three separate gas contracts. Each of the contracts
is effective for a twelve-month period and is renegotiated annually. During
2005, 2004, and 2003, the Company sold all of its produced gas under these
agreements. The terms of the agreements are identical among the contracts.
During 2005, 2004, and 2003, the terms of the agreements were as follows: 100%
of the produced gas was sold at the monthly spot 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 ventures. The balance at December 31, 2005
consists primarily of the following projects:
Opus
In
May of
2001 the Company began raising funds for a one hundred million dollar
exploration drilling program named OPUS-I. The program calls for the drilling
of
26 prospects, 23 in California and 3 in Nevada. As of December 31, 2005
the
program has drilled eleven wells. The drilling portion of these prospects is
turn-keyed, meaning the drilling portion is done for a fixed cost and the
completion portion is done at the actual cost.
The
Opus
Drilling Program joint venture status at December 31, 2005 is as
follows:
Total
Opus Contributions
|
|
$
|
44,135,837
|
|
Total
Opus Expenditures
|
|
$
|
39,075,516
|
|
Advances
|
|
$
|
5,060,321
|
|
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. As
of
May 2004 the Opus-1 Partnership took over approximately 93% of the Ekho Project
from the original majority joint interest partners for the assignment of an
overriding royalty interest. On February 24th,
2005 a
major mechanically successful hydrautic fracturing job was done on Ekho #1.
However this process did not result in producing commercial hydrocarbon rates
from the Vedder Zone. Plans have tentatively been made to temporarily
mechanically plug off the Vedder Zone and move-up into the Santos Shale interval
just above the Vedder Zone and to hydraulically fracture this zone. Rig
availability to recomplete this particular well has been a problem during all
of
2005 to the current date.
Coincidently,
while waiting on a drilling rig to recomplete and re-configure Ekho #1,
Tri-Valley has been conducting additional investigations on deep, tight
reservoirs to determine if any follow-up procedures exist that should be
conducted on the Vedder prior to hydraulically fracturing the Santos
Shale.
Total
Ekho joint venture contributions
|
|
$
|
10,604,300
|
|
Total
Ekho joint venture expenditures
|
|
$
|
10,878,236
|
|
Interest
credited to the joint account
|
|
$
|
246,749
|
|
Leases
The
Company moved to new corporate headquarters in March 2006. The lease terms
are
for five years at a monthly payment of $15,470.
NOTE
12 - ACQUISITIONS
In
2005,
the Company spent $4.7 million in making three significant
acquisitions:
Brea
acquisition.
During
2005, the Company spent $855,375 to acquire 25% working interest in the Kern
County area for proved oil properties (in the Edison and Carneros fields)
including the assumption of approximately $80,813 in asset retirement
obligations.
Pleasant
Valley acquisition. During
2005, the Company spent $881,250 to acquire 25% working interest in the Oxnard
area for unproved oil properties, including the assumption of approximately
$11,295 in asset retirement obligations.
Mining
Claims acquisitions. During
2005, the Company spent $3,004,500 to acquire various working interests in
the
State of Alaska. The Company does not have any asset retirement obligations
for
this property.
NOTE
13 - SUBSEQUENT EVENTS
In
February 2006, the Company formed Great Valley Production Services, Inc. as
a
wholly owned subsidiary to operate a fleet of production rigs to work on its
own
oil and gas producing properties and contract out to other companies when not
being used on its own projects. We have acquired two drilling rigs and have
an
option to purchase a third one.
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
SUPPLEMENTAL
INFORMATION (unaudited)
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
SUPPLEMENTAL
INFORMATION (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, 2005,
2004,
and 2003. 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,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
(restated)
|
|
Aggregate
capitalized costs:
|
|
|
|
|
|
|
|
Proved
properties
|
|
$
|
1,795,653
|
|
$
|
752,705
|
|
$
|
752,705
|
|
Unproved
properties
|
|
|
3,009,564
|
|
|
1,381,667
|
|
|
1,251,953
|
|
Accumulated
depletion, depreciation and amortization
|
|
|
(649,550
|
)
|
|
(621,323
|
)
|
|
(604,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
capitalized assets
|
|
$
|
4,155,667
|
|
$
|
1,513,049
|
|
$
|
1,400,435
|
|
TRI-VALLEY
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and 2004 and 2003
Supplemental
Information (unaudited)
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,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
(restated)
|
|
Acquisition
of producing properties and productive and non-productive
acreage
|
|
$
|
1,736,625
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration
costs and development activities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
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,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
(restated)
|
|
Sales
to unaffiliated parties
|
|
$
|
932,042
|
|
$
|
830,148
|
|
$
|
932,268
|
|
Production
costs
|
|
|
(93,429
|
)
|
|
(144,101
|
)
|
|
(183,362
|
)
|
Depletion,
depreciation and amortization
|
|
|
(28,226
|
)
|
|
(17,100
|
)
|
|
(26,551
|
)
|
|
|
|
810,387
|
|
|
668,947
|
|
|
722,355
|
|
Income
tax expense
|
|
|
(291,739
|
)
|
|
(240,820
|
)
|
|
(264,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Results
of operations from activities before
|
|
|
|
|
|
|
|
|
|
|
extraordinary
items (excluding corporate
|
|
|
|
|
|
|
|
|
|
|
Overhead
and interest costs)
|
|
$
|
518,648
|
|
$
|
161,096
|
|
$
|
457,387
|
|
Supplemental
Information (unaudited)
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, 2005, 2004, and 2003, and changes
in
such quantities during each of the years then ended, were as
follows:
|
|
December
31, 2005
|
|
December
31, 2004
|
|
December
31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
Gas
|
|
Oil
|
|
Gas
|
|
Oil
|
|
Gas
|
|
|
|
(BBL)
|
|
(MCF)
|
|
(BBL)
|
|
(MCF)
|
|
(BBL)
|
|
(MCF)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
developed and undeveloped reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
162
|
|
|
742,401
|
|
|
162
|
|
|
1,251,548
|
|
|
150
|
|
|
1,492,245
|
|
Revisions
of previous estimates extensions, discoveries and other
additions
|
|
|
-
|
|
|
165,799
|
|
|
-
|
|
|
(374,408
|
)
|
|
37
|
|
|
(115,365
|
)
|
Net
reserve additions
|
|
|
217,885
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
36,982
|
|
Production
|
|
|
(17
|
)
|
|
(128,602
|
)
|
|
-
|
|
|
(134,739
|
)
|
|
(25
|
)
|
|
(162,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
|
218,030
|
|
|
779,598
|
|
|
162
|
|
|
742,401
|
|
|
162
|
|
|
1,251,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
developed reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
162
|
|
|
742,401
|
|
|
162
|
|
|
1,251,548
|
|
|
150
|
|
|
1,492,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
|
90,555
|
|
|
779,598
|
|
|
162
|
|
|
742,401
|
|
|
162
|
|
|
1,251,548
|
|
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, 2005, 2004, and 2003.
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.
|
Supplemental
Information (unaudited)
Standardized
Measure Of Discounted Future Net Cash Flows Relating To Proved Oil And Gas
Reserves
(Continued)
(4) The
resulting future net revenue streams are reduced to present value amounts by
applying a ten percent discount.
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,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
|
|
|
|
|
Future
cash in flows
|
|
$
|
19,154,814
|
|
$
|
5,248,091
|
|
$
|
5,973,197
|
|
Future
production and development costs
|
|
|
(4,292,152
|
)
|
|
(989,549
|
)
|
|
(1,376,902
|
)
|
Future
income tax expenses
|
|
|
(659,464
|
)
|
|
(1,357,948
|
)
|
|
(1,134,811
|
)
|
Future
net cash flows
|
|
|
14,203,198
|
|
|
2,900,595
|
|
|
3,461,484
|
|
10%
annual discount for estimated timing of cash flows
|
|
|
7,147,126
|
|
|
942,358
|
|
|
1,190,852
|
|
Standardized
measure of discounted future net cash flow
|
|
$
|
7,056,072
|
|
$
|
1,958,238
|
|
$
|
2,270,632
|
|
*
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.
Supplemental
Information (unaudited)
Changes
In Standardized Measure Of Discounted Future Net Cash Flow From Proved Reserve
Quantities
(Continued)
The
"Net
change in income taxes" is computed as the change in present value of future
income taxes.
|
|
December
31,
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
(restated)
|
|
Standardized
measure - beginning of period
|
|
$
|
1,958,238
|
|
$
|
2,270,632
|
|
$
|
2,224,270
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of oil and gas produced, net of production costs
|
|
|
(807,930
|
)
|
|
(655,373
|
)
|
|
(748,906
|
)
|
Revisions
of estimates of reserves provided in prior years:
|
|
|
|
|
|
|
|
|
|
|
Net
changes in prices
|
|
|
1,412,965
|
|
|
1,705,515
|
|
|
969,281
|
|
Revisions
of previous quantity estimates
|
|
|
1,630,965
|
|
|
-
|
|
|
(171,355
|
)
|
Extensions
and discoveries
|
|
|
11,345,272
|
|
|
270,891
|
|
|
102,382
|
|
Purchases
of minerals in place
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Accretion
of discount
|
|
|
(6,204,768
|
)
|
|
248,494
|
|
|
263,451
|
|
Changes
in production rates, etc.
|
|
|
(1,580,186
|
)
|
|
(1,658,785
|
)
|
|
(436,306
|
)
|
Net
change in income taxes
|
|
|
(698,484
|
)
|
|
223,137
|
|
|
67,815
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease)
|
|
|
5,097,834
|
|
|
(312,394
|
)
|
|
46,362
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized
measure - end of period
|
|
$
|
7,056,072
|
|
$
|
1,958,238
|
|
$
|
2,270,632
|
|
Supplemental
Information (unaudited)
Quarterly
Financial Data (unaudited)
|
|
2005
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
202,108
|
|
$
|
1,846,630
|
|
$
|
6,781,574
|
|
$
|
3,698,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(3,375,111
|
)
|
$
|
(717,680
|
)
|
$
|
(345,932
|
)
|
$
|
(5,291,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per Common Share
|
|
$
|
(0.15
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.23
|
)
|
|
|
|
|
|
2004(restated)
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(restated
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
1,386,281
|
|
$
|
1,134,910
|
|
$
|
223,006
|
|
$
|
1,754,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
255,258
|
|
$
|
(940,409
|
)
|
$
|
(479,104
|
)
|
$
|
(6,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per Common Share
|
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
(restated)
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
276,780
|
|
$
|
1,190,371
|
|
$
|
3,137,062
|
|
$
|
1,860,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(421,407
|
)
|
$
|
(152,183
|
)
|
$
|
172,570
|
|
$
|
896,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per Common Share
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
0.01
|
|
$
|
0.04
|
|
|
|
|
ITEM
9A Controls and Procedures
Evaluation
of Disclosure Controls
We
evaluated the effectiveness of our disclosure controls and procedures
("Disclosure Controls") as of December 31, 2005. This evaluation ("Controls
Evaluation") was done with the participation of our president and chief
executive officer ("CEO"), vice president and chief administrative officer
(CAO)
and chief financial officer ("CFO").
Disclosure
Controls are controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 ("Exchange Act") is recorded
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure Controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our CEO, CAO and
CFO,
as appropriate to allow timely decisions regarding required
disclosure.
Limitations
on the Effectiveness of Controls
Our
management, including our CEO, CAO and CFO, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent all
error
and all fraud. A control system, no matter how well conceived and operated,
can
provide only reasonable, but not absolute, assurance that the objectives of
a
control system are met. Further, any control system reflects limitations on
resources, and the benefits of a control system must be considered relative
to
its costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Tri-Valley Corporation have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of a control. A design of a control system is also based upon certain
assumptions about potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and may not be detected.
Management’s
Report on Internal Control over Financial Reporting
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15-(f) under the Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is a process designed under the supervision
of
the Company’s Chief Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external purposes in
accordance with generally accepted accounting principles. We are required to
include in our annual report on Form 10-K, management’s assessment of internal
control over financial reporting as of December 31, 2005, and a related
auditor’s report on management’s assessment.
In
last
year’s report as of December 31, 2004, our auditors issued an adverse opinion on
the effectiveness of the Company’s internal control over financial reporting.
Management also concluded internal control over financial reporting was
ineffective. Since that time, the Company has corrected the deficiencies by
expanding the internal accounting personnel with appropriate qualifications
and
training in key accounting roles; instituted a regular risk assessment process;
improved controls to monitor results of operations and other control activities;
documented and improved policies and procedures which affect the information
and
communication controls throughout the company; improved controls over the
period-end financial reporting process and documented procedures for calculating
significant estimates, performing consolidation entries, and considering the
possibility of unrecorded transactions and disclosures; and provided for proper
segregation of duties to conform to an effective separation of check signing,
access to financial information, bank reconciliation and journal entry duties
in
compliance with the new rules for internal controls.
As
of
December 31, 2005, management assessed the effectiveness of the Company’s
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in “Internal
Control — Integrated Framework”, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the assessment, management
determined that the Company maintained effective internal control over financial
reporting as of December 31, 2005, based on those criteria. Our auditors
have reported in their Report of Independent Registered Public Firm, page 25,
that in their opinion, management’s assessment is fairly stated in all material
respects.
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
|
|
70
|
|
1974
|
|
President,
CEO, Director, TVC
|
|
|
|
|
|
|
CEO
and Director, TVOG
|
|
|
|
|
|
|
President,
CEO, Director, TVPC
|
|
|
|
|
|
|
CHOB,
CEO, Director SRC
|
|
|
|
|
|
|
CHOB,
Director TWR
|
|
|
|
|
|
|
|
Dennis
P. Lockhart(1)
|
|
58
|
|
1982
|
|
Director
|
|
|
|
|
|
|
|
Milton
J. Carlson(1)
(3)
|
|
75
|
|
1985
|
|
Director
|
|
|
|
|
|
|
|
Loren
J. Miller(1)
|
|
60
|
|
1992
|
|
Director
|
|
|
|
|
|
|
|
Henry
Lowenstein, Ph.D(2)
|
|
51
|
|
2005
|
|
Director
|
|
|
|
|
|
|
|
William
H.“Mo” Marumoto(2)
(3)
|
|
70
|
|
2005
|
|
Director
|
|
|
|
|
|
|
|
G.
Thomas Gamble
|
|
44
|
|
2006
|
|
Director
|
|
|
|
|
|
|
|
Thomas
J. Cunningham
|
|
63
|
|
1997
|
|
VP,
CAO, Treasurer and
|
|
|
|
|
|
|
Secretary,
TVC, TVOG, and TVPC
|
|
|
|
|
|
|
Director
SRC
|
|
|
|
|
|
|
|
Arthur
M. Evans
|
|
57
|
|
2005
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
Joseph
R. Kandle
|
|
63
|
|
1999
|
|
President,
TVOG
|
|
|
|
|
|
|
|
Henry
J. “Rick” Sandri
|
|
53
|
|
2005
|
|
President,
Select
|
(1)-
Member of Audit Committee
(2)
Member of Compensation Committee
(3)-
Member of Nominating and Corporate Governance Committee
F.
Lynn Blystone - 70
|
President
and Chief Executive Officer of Tri-Valley Corporation and Tri-Valley
Power
Corporation, CEO of Tri-Valley Oil & Gas Company and Select Resources
Corporation, which are three wholly owned subsidiaries of Tri-Valley
Corporation
Chairman
of Tri-Western Resources, LLC
Bakersfield,
California
|
1974
|
|
|
|
Mr.
Blystone became president of Tri-Valley Corporation in October, 1981,
and
was nominally vice president from July to October, 1981. His background
includes institution management, venture capital and various management
functions for a mainline pipeline contractor including the Trans
Alaska
Pipeline Project. He has founded, run and sold companies in several
fields
including Learjet charter, commercial construction, municipal finance
and
land development. He is also president of a family corporation, Bandera
Land Company, Inc., with real estate interests in Orange County
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 - 58
|
Director
|
1982
|
|
|
|
Mr.
Lockhart is a professor of International Business at Georgetown
University. He was previously Managing Partner of Zephyr Management
L.P.,
an international private equity investment fund sponsor/manager
headquartered in New York. He remains a partner in this firm. He
is also
(non-executive) Chairman of the Small Enterprise Assistance Funds
(SEAF),
a not-for-profit operator of emerging markets venture capital funds
focused on the small and mid-sized company sector. He is a director
of
CapitalSource Inc. (NYSE) and SMELoan Asia/Maveo Systems (private,
Hong
Kong based). In 2002 and 2003 he was an Adjunct Professor at the
Johns
Hopkins University School of Advanced International Studies. From
1988 to
2001, he was President of Heller International Group Inc., a non-bank
corporate and commercial finance company operating in 20 countries,
and a
director of the group’s parent, Heller Financial Inc. From 1971 to 1988 he
held a variety of international and domestic positions at
Citibank/Citicorp (now Citigroup) including assignments in Lebanon,
Saudi
Arabia, Greece, Iran and the bank’s Latin American group in New York. In
1999, he was Chairman of the Advisory Committee of the U.S. Export
Import
Bank. He is a graduate of Stanford University and The John Hopkins
University School of Advanced International Studies. He also attended
the
Senior Executive Program at the Sloan School of Management, Massachusetts
Institute of Technology. Mr. Lockhart is an independent member of
our
Board of Directors.
|
|
Milton
J. Carlson - 75
|
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. Mr. Carlson is an independent member of our Board of Directors.
His former career experience included being corporate secretary of
Sugar,
a unit of Sara Lee Corporation and chairman of the Energy End Users
Committee of the California Manufacturers Association.
|
|
|
|
Loren
J. Miller, CPA - 60
|
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. Mr. Miller is an independent
member of our Board of Directors.
|
Henry
Lowenstein, Ph.D - 51
|
Director
|
2005
|
Dr.
Lowenstein is Dean of the School of Business and Public Administration
and
Professor of Management at California State University
Bakersfield. Dr. Lowenstein has broad background in
management within business, academic, government and public service
organizations. He is 2006 Chair of the California State
Universities Association of Business Deans, a director of the Western
Association of Collegiate Schools of Business, and serves on the
2005-06 World Nominating Committee for AACSB International. He previously
served as professor, department and division chairperson at universities
in Illinois, Virginia and West Virginia and is published in fields
of
human resource management, public policy and transportation. In
business he served as Director of Education for Kemper
Group- Insurance and Financial Services, Director of Education for
Dominion Bankshares Corporation, and Vice President of Americana
Furniture, Inc. Dr. Lowenstein previously served as a management
analyst for the Executive Office of the President of the United
States-Office of Management and Budget under the Gerald Ford
Administration. He was a principal consultant to the Illinois
General Assembly in the 1980's on the restructuring of the
Chicago-area Mass Transit System, and, to the West Virginia
Legislature and Governor on higher education financing in the 1990's.
In
Bakersfield, he serves on the boards of the Historic Fox Theater
Foundation, and, the Minter Field Air Museum. Dr. Lowenstein
received his Ph.D. in Labor and Industrial Relations from the University
of Illinois; an M.B.A. from George Washington University; and B.S.
in
Business Administration from Virginia Commonwealth University. He
serves on Tri-Valley's Personnel Committee. Dr. Lowenstein is an
independent member of our Board of Directors.
|
|
|
|
William
H. “Mo” Marumoto - 70
|
Director
|
2005
|
Mr.
Marumoto has over 30 years experience in the executive and personnel
search profession as chairman and chief executive officer of his
own
retained search firm, The Interface Group Ltd. Here he was named
to the
Global Top 200 Executive Recruiters and several other worldwide
professional awards and recognitions, according to the company. He
has 40
years experience in public, private and academic sectors. He worked
for
three years as presidential aide in the Nixon White House. Earlier
he was
assistant to the secretary of health, education and welfare. Mr.
Marumoto
has been part of boards of numerous organizations, colleges, public
agencies and businesses. In 2002 he was appointed by President George
W.
Bush to the advisory committee of the John F. Kennedy Center for
the
Performing Arts. Mr. Marumoto is an independent member of our Board
of
Directors.
|
|
|
|
G.
Thomas Gamble - 44
|
Director
|
2006
|
A
graduate of UCLA, Mr. Gamble is a successful rancher and businessman
with
current active investments in agriculture, food processing, educational
services, oil, gas and minerals. In 2003, the California State Senate
proclaimed privately owned Davies and Gamble, which produces critically
acclaimed wines in California’s Napa Valley, its Green Entrepreneur Of The
Year, and in 2005, Mozzarella Fresca, the nation’s premier producer of
fresh Italian cheeses, of which he is a director and original investor,
received the Certificate of Special Congressional Recognition as
business
of the year. He is also a director and original investor in Boston
Reed
College which provides educational opportunities to busy adults seeking
stable and growing careers in the California health care industry.
Mr.
Gamble is an independent member of our Board of
Directors.
|
|
|
|
Thomas
J. Cunningham - 63
|
Secretary,
Treasurer and Chief Administrative Officer of Tri-Valley Corporation,
and
its wholly owned subsidiaries, Tri-Valley Oil & Gas Company,
Tri-Valley Power Corporation and Select Resources Corporation,
Director
of Tri-Western Resources, LLC
Bakersfield,
California
|
1997
|
|
|
|
Named
as Tri-Valley Corporation’s treasurer and chief financial officer in
February 1997, and as corporate secretary on December 1998, promoted
to
Chief Administrative Officer in November 2005. 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.
|
|
Arthur
M. Evans, CPA, CMA, CFM - 57
|
Chief
Financial Officer of Tri-Valley Corporation, and its wholly owned
subsidiaries, Tri-Valley Oil & Gas Company, Tri-Valley Power
Corporation, Select Resources Corporation and Great Valley Production
Services, Inc.
CFO
of Tri-Western Resources, LLC, Bakersfield, California
|
2005
|
Named
as Tri-Valley Corporation’s chief financial officer in November 2005. Mr.
Evans has a full range of accounting, mergers and acquisitions and
financial management experience in several industries as well as
oil, gas
and mining and with Fortune 500 companies as well as independents
like
Tri-Valley. He held several senior financial management positions
with
Getty Oil and Texaco. He holds a B.S. in accounting from Weber State
University, a M.B.A. in finance from Golden State University and
a M.S. in
systems management from the University of Southern California. His
professional designations include Certified Public Accountant, Certified
Management Accountant and Certified Financial Manager.
|
|
|
|
Joseph
R. Kandle - 63
|
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.
|
|
|
|
Henry
J. Sandri - 53
|
President,
Select Resources Corporation, wholly owned subsidiary of Tri-Valley
Corporation
Director
of Tri-Western Resources, LLC
Bakersfield,
California
|
2005
|
|
Henry
J. "Rick" Sandri, Ph.D was promoted to president of Select Resources
Corporation in December 2005 after joining the company in January
2005 as
the executive vice president. Dr. Sandri has held mid- and senior-level
positions in major mining and transportation companies as well as
independent and consulting firms active in mining, transportation
and
utility operations in numerous countries. "Dr. Sandri is a broadly
seasoned mining industry executive with international experience
in
precious and base metals, gems and industrial minerals. Dr. Sandri
holds a
doctorate in mineral/energy economics and engineering minor from
the
Colorado School of Mines and undergraduate degrees from American
University and Georgetown University, both in Washington,
D.C.
|
Audit
Committee
The
independent directors that serve on the audit committee are Loren J. Miller,
Chair, Dennis P. Lockhart and Milton J. Carlson. The board of directors has
determined that Loren J. Miller is considered to be the audit committee
financial expert. Please see his biography above.
Personnel
and Compensation Committee
The
independent directors that serve on the personnel and compensation committee
are
William H. “Mo” Marumoto, Chair, and Dr. Henry Lowenstein as of year-end 2005.
Tom Gamble joined the committee in 2006.
Nominating
and Corporate Goverance Committee
The
independent directors that serve on the Nominating and Corporate Governance
Committee are Milton Carlson, Chair, and William H. “Mo” Marumoto.
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 2005.
Code
of Ethics
We
have
adopted a code of ethics that applies to our directors, officers and employees.
A copy of the code of ethics is incorporated by reference into this 10-K Report
as an exhibit. The code is also posted on our website
(www.tri-valleycorp.com).
ITEM
11 Executive Compensation
The
following table summarizes the compensation of the executive officers of the
Company and its subsidiaries for the fiscal year ended December 31, 2005, 2004,
and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
|
|
(a)
|
|
(b)
|
|
(
c
)
|
|
(d)
|
|
(e)
|
|
|
|
|
|
|
|
|
|
Other
|
|
Name
|
|
Period
Covered
|
|
Salary
|
|
Bonus
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
F.
Lynn
|
|
|
FYE
12/31/05
|
|
$
|
159,000
|
|
$
|
0
|
|
$
|
2,782
|
|
Blystone,
CEO
|
|
|
FYE
12/31/04
|
|
$
|
108,900
|
|
$
|
25,000
|
|
$
|
0
|
|
FYE
12/31/03
|
|
|
|
|
$
|
99,000
|
|
$
|
50,000
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
|
|
|
FYE
12/31/05
|
|
$
|
115,000
|
|
$
|
0
|
|
$
|
2,012
|
|
Cunningham,
CAO
|
|
|
FYE
12/31/04
|
|
$
|
99,000
|
|
$
|
0
|
|
$
|
0
|
|
FYE
12/31/03
|
|
|
|
|
$
|
90,000
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Kandle,
|
|
|
FYE
12/31/05
|
|
$
|
150,000
|
|
$
|
0
|
|
$
|
2,625
|
|
Pres.
TVOG
|
|
|
FYE
12/31/04
|
|
$
|
99,000
|
|
$
|
0
|
|
$
|
0
|
|
FYE
12/31/03
|
|
|
|
|
$
|
90,000
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry
J. Sandri,
|
|
|
FYE
12/31/05
|
|
$
|
144,250
|
|
$
|
0
|
|
$
|
2,625
|
|
Pres.
SRC
|
|
|
FYE
12/31/04
|
|
$
|
30,000
|
|
$
|
0
|
|
$
|
0
|
|
Employment
Agreement with Our President
We
have
an employment agreement with F. Lynn Blystone, our President and Chief Executive
Officer, which ended in August 2002, and has been renewed until December 31,
2006, unless terminated by giving 90 days written notice. The base salary amount
is $159,000 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. 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.
Employee
Pension, Profit Sharing or Other Retirement Plans
During
2005, the Company established a 401-K program allowing for the deferral of
employee income. The plan provides for the Company to contribute 3% of gross
wages. For the year ended December 31, 2005 the Company contributed $21,389.80
to such plan.
REPORT
OF THE COMPENSATION COMMITTEE
ON
ANNUAL COMPENSATION OF EXECUTIVE OFFICERS
The
Board’s Compensation Committee, currently composed of Messrs. William H. “Mo”
Marumoto, Chair and Dr. Henry Lowenstein, administers the Company’s compensation
plans, reviews and approves executive compensation and makes recommendations
to
the Board concerning such compensation and related matters. This report relates
to the Compensation Committee’s policies for the Company’s executive officers,
including the Named Executive Officers, for fiscal year 2005.
Overview. In
fiscal year 2005, the Compensation Committee undertook a strategic review of
the
Company’s total officer compensation, which was performed in consultation with
the Compensation Committee by a team comprised of representatives of the
Company’s executive management, finance department and outside compensation
consultants. This strategic review was initiated by the Compensation Committee
in response to the Company’s long range business plan and involved an review of
market benchmarks for competitive pay and benefits policies, the Company’s long
range business plan and the Company’s culture and values. Based on this review,
the Compensation Committee’s and the Company’s policies and goals for executive
compensation include assuring that total executive compensation is:
|
•
|
|
competitive
to attract and retain the best officer talent;
|
|
•
|
|
affordable
to the Company and appropriately aligned with shareholder interests;
|
|
•
|
|
consistent
with the Company’s long-range business plans;
|
|
•
|
|
designed
to consider individual value and contribution to the Company’s success;
|
|
•
|
|
sensitive
to, but not exclusively reliant upon, market benchmarks;
|
|
•
|
|
reasonably
sensitive to the needs of the Company’s executive officers, as those needs
change over time; and
|
|
•
|
|
flexible
with regard to the Company’s succession planning objectives.
|
The
Compensation Committee expects to continue its review of total officer
compensation in fiscal year 2006, which may lead to additional changes to the
Company’s policies and overall approach to executive compensation. The Company
has retained the Human Relations independent firm of Thomas See & Associated
to assist in its review.
Base
Salaries. Base
salaries for the Company’s executive officers, including Mr. Blystone and
the Named Executive Officers, were adjusted from the prior year. The
Compensation Committee periodically reviews base salary levels for the Company’s
executive officers in comparison with those of other companies in oil, gas
and
minerals industries, as well as other industries, and in light of its overall
strategic goals for executive officer compensation. The Company strives to
maintain executive base salaries at a level that will permit it to compete
with
other major companies for managers with comparable qualifications and abilities.
Based on information contained in the various surveys, the Compensation
Committee believes that the overall compensation of the Company’s executive
officers generally places them below the median salary compensation of similarly
situated executives in all industries covered by the surveys. But the Company
offers a stock option plan it believes mitigates this at this time.
With
respect to base salaries for fiscal year 2006, the Compensation Committee will
continue to consider market benchmarks along with the Company’s other strategic
goals for executive compensation.
We
have
an employment agreement with F. Lynn Blystone, our President and Chief Executive
Officer, until December 31, 2006, unless terminated by giving 90 days written
notice. The base salary amount is $159,000 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 $150,000. For purposes of the severance
provision, a sale of control is deemed to be the sale of ownership of 30% of
the
outstanding stock of Tri-Valley or the acquisition by one person of enough
stock
to appoint a majority of the board of directors of the company.
Section 162(m). The
Company believes that all compensation paid or payable to its executive officers
covered under Section 162(m) of the Internal Revenue Code will qualify for
deductibility under such Section.
Submitted
by the Compensation Committee of the Board of Directors.
William
H. “Mo” Marumoto, Chair
Dr.
Henry
Lowenstein
Aggregated
2005 Option Exercises and Year-End Values
The
following table summarizes the number and value of all unexercised stock options
held by the Named Executive Officers and the Directors at the end of
2005.
(
a )
|
(b)
|
(c)
|
(d)
|
(e)
|
|
|
|
Number
of Securities
|
Value
of Unexercised In-
|
|
|
|
Underlying
Unexercised
|
The-Money
Options/SARs
|
|
|
|
Options/SARs
at FY-End (#)
|
at
FY-End ($)*
|
|
Shares
Acquired
On
Exercise (#)
|
|
|
|
Name
|
Value
Realized ($)
|
Exercisable/Unexercisable
|
Exercisable/Unexercisable
|
F.
Lynn Blystone
|
12,000
|
$122,123
|
845,600/0
|
$5,483,268/0
|
Milton
Carlson
|
5,000
|
$50,400
|
|
$1,701,640/0
|
Thomas
J. Cunningham
|
0
|
0
|
523,000/0
|
$3,414,190/0
|
Joseph
R. Kandle
|
0
|
0
|
475,000/0
|
$3,139,750/0
|
Loren
J.Miller
|
50,000
|
$598,500
|
0/0
|
$0/0
|
Henry
J. Sandri
|
0
|
0
|
25,000/0
|
$0/0
|
|
|
|
|
|
*Based
on
a fair market value of $7.78 per share, which was the closing price of the
Company's Common Stock on the American Stock Exchange on December 31,
2005.
No
additional stock options were granted in 2005.
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 2005.
(a)
|
(b)
|
(c)
|
Name
|
Fees
|
Restricted
Shares
|
|
|
|
Milton
Carlson
|
$11,850
|
2,000
|
|
|
|
Dennis
P. Lockhart
|
$11,100
|
2,000
|
|
|
|
Loren
J. Miller
|
$14,250
|
2,000
|
|
|
|
C.
Chase Hoffman
|
$3,500
|
2,000
|
Performance
Graph
The
following stock price performance summary 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
table
compares the yearly percentage change in the cumulative total stockholder return
on $100 invested in our common stock with the cumulative total return of The
Ames Oil Index and the Russell 2000 Stock index (which includes Tri-Valley
Corporation) from December 31, 2000 through December 31, 2005.
[Missing
Graphic Reference]
|
December
31,
|
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
Tri-Valley
Corp
|
$100.00
|
$83.00
|
$76.00
|
$220.00
|
$611.50
|
$389.00
|
Amex
Oil
|
$100.00
|
$97.90
|
$82.89
|
$94.49
|
$134.07
|
$189.96
|
Russell
2000
|
$100.00
|
$95.82
|
$87.51
|
$68.61
|
$89.04
|
$102.44
|
ITEM
12 Security Ownership of Certain Beneficial Owners and
Management
As
of
December 31, 2005, there were 22,806,176 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
|
|
1,279,703(1)
|
|
5.4%
|
|
|
|
|
|
G.
Thomas Gamble
1250
Church Street
St.
Helena, CA 94574
|
|
1,483,333
|
|
6.4%
|
(1)
Includes
845,600 shares of stock Mr. Blystone has the right to acquire upon the exercise
of options.
The
following table sets forth the beneficial ownership of the Company's common
stock as of December 31, 2005
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
|
|
1,279,703
|
|
5.4%
|
|
|
|
|
|
Dennis
P. Lockhart
|
|
347,191
|
|
1.5%
|
|
|
|
|
|
Milton
J. Carlson
|
|
345,000
|
|
1.5%
|
|
|
|
|
|
Loren
J. Miller
|
|
308,800
|
|
1.4%
|
|
|
|
|
|
Henry
Lowenstein, Ph.D.
|
|
200
|
|
0.0%
|
|
|
|
|
|
G.
Thomas Gamble
|
|
1,483,333
|
|
6.5%
|
|
|
|
|
|
Thomas
J. Cunningham
|
|
540,000
|
|
2.3%
|
|
|
|
|
|
Joseph
R. Kandle
|
|
500,000
|
|
2.1%
|
|
|
|
|
|
Henry
J. Sandri
|
|
54,392
|
|
0.2%
|
|
|
|
|
|
Total
group
(all directors and
|
|
|
|
|
Executive
officers - 9 persons)
|
|
4,858,619
|
|
20.9%
|
(1)
|
Includes
shares which the listed shareholder has the right to acquire from
options
as follows: Dennis P. Lockhart 270,000; Milton J. Carlson 263,000;
F. Lynn
Blystone 845,600; G. Thomas Gamble 33,333; Thomas J. Cunningham 523,000;
Joseph R. Kandle 475,000; Henry J. Sandri
25,000
|
(2)
|
Based
on total outstanding shares of 22,806,176 as of December 31, 2005.
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.
|
ITEM
14 Principal Accountant Fees and Services
YEAR
|
AUDIT
SERVICES
|
TAX
SERVICES
|
SEC
SERVICES
|
2005
|
$106,082
|
$13,639
|
$12,986
|
2004
|
$82,419
|
$11,725
|
$17,882
|
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
of
Independent Auditors
The
Audit
Committee pre-approves all audit and non-audit services provided by the
independent auditors prior to the engagement of the independent auditors with
respect to such services. The Chairman of the Audit Committee has been
delegated the authority by the Committee to pre-approve interim services by
the
independent auditors other than the annual exam. The Chairman must report
all such pre-approvals to the entire Audit Committee at the next committee
meeting.
ITEM
15 Exhibits and Financial Statement Schedules
Exhibit
|
|
|
Number
|
|
Description
of Exhibit
|
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation, incorporated by reference
to
Exhibit A of the Company’s 2000 Proxy Statement and Definitive Schedule
14A, filed with the SEC on July 26, 2000.
|
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, filed
with the
SEC on March 24, 2000.
|
4.1
|
|
Rights
Agreement, incorporated by reference to Exhibit 99.1 of the Company’s Form
10-KSB for the year ended December 31, 1999, filed with the SEC on
March
24, 2000.
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10.1
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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 with the SEC on December 14,
2001.
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10.2
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Tri-Valley
Corporation 2005 Stock Option Plan, as amended, incorporated by reference
to Exhibit B of the Company’s 2005 Proxy Statement and Definitive Schedule
14A, filed with the SEC on August 29, 2005.
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10.3
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Articles
of Merger between Coastal Oil Sands Co. and Pleasant Valley Energy
Corporation, incorporated by reference to Exhibit 2.1 of the Company’s
Form 8-K filed with the SEC on May 12, 2005.
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10.4
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Restated
Agreement and Plan of Merger Among Tri-Valley Corporation, Coastal
Oil
Sands Co., Petrawest Ltd. And Pleasant Valley Energy Corporation,
incorporated by reference to Exhibit 2.2 of the Company’s Form 8-K filed
with the SEC on May 12 2005.
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10.5
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Amendment
No. 1 to Restated Agreement and Plan of Merger Among Tri-Valley
Corporation, Coastal Oil Sands Co., Petrawest Ltd. And Pleasant Valley
Energy Corporation, incorporated by reference to Exhibit 2.3 of the
Company’s Form 8-K filed with the SEC on May 12, 2005.
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10.6
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Purchase
and Sale Agreement by and among Sealaska Corporation and Seacal,
LLC, and
Select Resources Corporation, Inc. (April 1, 2005), incorporated
by
reference to Exhibit 2.1 of the Company’s Form 8-K filed with the SEC on
August 1, 2005.
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10.7
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Promissory
Note between Tri-Western Resources, LLC, Maker, and Financial Federal
Credit, Inc. Holder, incorporated by reference to Exhibit 10.1 of
the
Company’s Form 8-K filed with the SEC on August 26,
2005.
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10.8
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Security
Agreement, incorporated by reference to Exhibit 10.2 of the Company’s Form
8-K filed with the SEC on August 26, 2005.
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10.9
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Purchase
and Sale Agreement between Brea Oil Company, Brea Properties, Inc.,
Kurt
Sickles, Geraldine M. Barker, as Trustee of the Barker Bypass Trust
under
the Barker Trust, dated January 21, 1999, Geraldine M. Barker and
Alexander W. Barker, as Co-Trustees of the Barker Trust dated January
21,
1999, and Tri-Valley Oil and Gas Co., incorporated by reference to
Exhibit
2.1 of the Company’s Form 8-K filed with the SEC on January 10,
2006.
|
14.1
|
|
Code
of Business Conduct & Ethics, incorporated by reference to Exhibit14.1
of the Company’s Form 10-K filed with the SEC on March 31,
2005
|
21.1
|
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Subsidiaries
of the Registrant
|
31.1
|
|
Certification
Pursuant to Rule 13a-14(a) / 15d-14(a)
|
31.2
|
|
Certification
Pursuant to Rule 13a-14(a) / 15d-14(a)
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. §1350.
|
32.2
|
|
Certification
Pursuant to 18 U.S.C. §1350.
|
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
30, 2006
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|
By:/s/
F. Lynn Blystone
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|
|
|
F.
Lynn Blystone
|
|
|
|
President,
Chief Executive Officer and
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
March
30, 2006
|
|
By:/s/
Arthur M. Evans
|
|
|
|
Arthur
M. Evans
|
|
|
|
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
30, 2006
|
|
By:/s/
Milton J. Carlson
|
|
|
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Milton
J. Carlson, Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
30, 2006
|
|
By:/s/
G. Thomas Gamble
|
|
|
|
G.
Thomas Gamble, Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
30, 2006
|
|
By:/s/
Dennis P. Lockhart
|
|
|
|
Dennis
P. Lockhart, Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
30, 2006
|
|
By:/s/
Henry Lowenstein
|
|
|
|
Henry
Lowenstein, Ph.D,Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
30, 2006
|
|
By/s/
William H. “Mo” Marumoto
|
|
|
|
William
H. “Mo” Marumoto, Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
30, 2006
|
|
By:/s/
Loren J. Miller
|
|
|
|
Loren
J. Miller, Director
|
Exhibit
21.1
Tri-Valley
Corporation
Subsidiaries
The
following are wholly owned subsidiaries of Tri-Valley Corporation:
Tri-Valley
Oil and Gas Company, a California corporation
Tri-Valley
Power Corporation, a Delaware corporation
Select
Resources Corporation, Inc., a Delaware corporation
Great
Valley Production Services, Inc., a Delaware corporation
Exhibit
31.1
Certification
I,
F.
Lynn Blystone, certify that:
1. I
have
reviewed this annual report on Form 10-K of Tri-Valley Corporation;
2. Based
on
my knowledge, this 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 report;
3. Based
on
my knowledge, the financial statements and other financial information included
in this report fairly present, in all material respects, the financial
condition, results of operations and cash flows of registrant as of, and for,
the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in the Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for registrant and
have:
a. designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to registrant including its consolidated subsidiaries,
is
made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. evaluated
the effectiveness of registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
d. disclosed
in this report any change in registrant’s internal control over financial
reporting that occurred during the small business issuer’s most recent fiscal
quarter (registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to our auditors
and the audit committee of registrant’s board of directors:
a. all
significant deficiencies in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect registrant’s
ability to record, process, summarize and report financial information;
and
b. any
fraud, whether or not material, that involves management or other employees
who
have a significant role in registrant’s internal control over financial
reporting.
Date:
March 30, 2006
|
|
By:
|
|
/s/F.
Lynn Blystone
|
|
|
|
|
F.
Lynn Blystone, President and Chief Executive
Officer
|
Exhibit
31.2
Certification
I,
Arthur
M. Evans, certify that:
1. I
have
reviewed this annual report on Form 10-K of Tri-Valley Corporation;
2. Based
on
my knowledge, this 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 report;
3. Based
on
my knowledge, the financial statements and other financial information included
in this report fairly present, in all material respects, the financial
condition, results of operations and cash flows of registrant as of, and for,
the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in the Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for registrant and
have:
a. designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to registrant including its consolidated subsidiaries,
is
made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. evaluated
the effectiveness of registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
d. disclosed
in this report any change in registrant’s internal control over financial
reporting that occurred during the small business issuer’s most recent fiscal
quarter (registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to our auditors
and the audit committee of registrant’s board of directors:
a. all
significant deficiencies in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect registrant’s
ability to record, process, summarize and report financial information;
and
b. any
fraud, whether or not material, that involves management or other employees
who
have a significant role in registrant’s internal control over financial
reporting.
Date:
March 30, 2006
|
|
By:
|
|
/s/Arthur
M. Evans
|
|
|
|
|
Arthur
M. Evans, Chief Financial Officer
|
Exhibit
32.1
Certification
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
30, 2006
|
By:
|
|
F.
Lynn Blystone
|
|
|
F.
Lynn Blystone, Chief Executive Officer,
Tri-Valley Corporation
|
Exhibit
32.2
Certification
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
30, 2006
|
By:
|
|
Arthur
M. Evans
|
|
|
Arthur
M. Evans, Chief Financial Officer
|