10QSB 1 pocqtr-b.txt PYRAMID OIL COMPANY FORM 10QSB - JUNE 30, 2001 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-QSB /X/ Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 / / For the quarterly period ended June 30, 2001 OR Transition report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from to ------------------------- Commission File Number 0-5525 ------------------------- PYRAMID OIL COMPANY (Exact name of registrant as specified in its charter) CALIFORNIA 94-0787340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2008 - 21ST. STREET, BAKERSFIELD, CALIFORNIA 93301 (Address of principal executive offices) (Zip Code) (661) 325-1000 (Registrant's telephone number, including area code) 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. COMMON STOCK WITHOUT PAR VALUE 2,494,430 (Class) (Outstanding at June 30, 2001) 2 FINANCIAL STATEMENTS PYRAMID OIL COMPANY BALANCE SHEETS ASSETS

June 30, December 31, 2001 2000 (Unaudited) (Audited) ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 172,685 $ 151,727 Short-term investments 1,200,000 700,000 Trade accounts receivable 213,646 212,714 Crude oil inventory 57,698 56,156 Prepaid expenses 37,681 84,230 Deferred income taxes 18,863 22,012 ------------ ------------ TOTAL CURRENT ASSETS 1,700,573 1,226,839 ------------ ------------ PROPERTY AND EQUIPMENT, at cost Oil and gas properties and equipment (successful efforts method) 10,294,375 10,343,773 Drilling and operating equipment 3,095,336 3,118,778 Land, buildings and improvements 921,767 921,767 Automotive, office and other property and equipment 1,076,390 1,067,625 ------------ ------------ 15,387,868 15,451,943 Less: accumulated depletion, depreciation, amortization and valuation allowance (13,824,323) (13,846,912) ------------ ------------ 1,563,545 1,605,031 ------------ ------------ $3,264,118 $2,831,870 ============ ============ The Accompanying Notes Are an Integral Part of These Financial Statements.

3 PYRAMID OIL COMPANY BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY

June 30, December 31, 2001 2000 (Unaudited) (Audited) ------------ ------------ CURRENT LIABILITIES: Accounts payable $ 50,546 $ 66,362 Accrued professional fees 16,333 18,750 Accrued taxes, other than income taxes -- 22,645 Accrued payroll and related costs 36,078 36,040 Accrued royalties payable 70,629 82,621 Accrued insurance 7,550 29,864 Current maturities of long-term debt 30,878 27,500 ------------ ------------ TOTAL CURRENT LIABILITIES 212,014 283,782 ------------ ------------ LONG-TERM DEBT, net of current maturities 5,654 29,080 ------------ ------------ DEFERRED INCOME AND OTHER TAXES 18,863 22,012 ------------ ------------ COMMITMENTS and CONTINGENCIES (note 3) STOCKHOLDERS' EQUITY: Common stock-no par value; 10,000,000 authorized shares; 2,494,430 shares issued and outstanding 1,071,610 1,071,610 Retained earnings 1,955,977 1,425,386 ------------ ------------ 3,027,587 2,496,996 ------------ ------------ $3,264,118 $2,831,870 ============ ============ The Accompanying Notes Are an Integral Part of These Financial Statements.

4 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED)

Three months ended Six months ended June 30, June 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- REVENUES $485,258 $482,280 $931,936 $937,338 --------- --------- --------- --------- COSTS AND EXPENSES: Operating expenses 258,766 230,678 533,500 453,677 Exploration costs 41,805 16,408 41,805 16,408 General and administrative 85,214 83,707 178,800 190,385 Taxes, other than income and payroll taxes 9,633 10,051 21,760 21,334 Provision for depletion, depreciation and amortization 39,214 52,113 87,069 105,572 Other costs and expenses 9,746 8,226 10,326 9,100 --------- --------- --------- --------- 444,378 401,183 873,260 796,476 --------- --------- --------- --------- OPERATING INCOME 40,880 81,097 58,676 140,862 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest income 16,767 4,481 26,440 7,803 Gain on settlement -- -- 395,708 -- Gain on sale of assets 7,800 -- 25,938 15,750 Other income 20,574 3,300 27,098 10,800 Interest expense (1,012) (1,156) (2,244) (2,465) --------- --------- --------- --------- 44,129 6,625 472,940 31,888 --------- --------- --------- --------- INCOME BEFORE INCOME TAX PROVISION (BENEFIT) 85,009 87,722 531,616 172,750 Income tax provision (benefit) 800 (13,350) 1,025 (13,125) --------- --------- --------- --------- NET INCOME $ 84,209 $ 101,072 $ 530,591 $ 185,875 ========= ========= ========= ========= BASIC INCOME PER COMMON SHARE $0.03 $0.04 $0.21 $0.07 ========= ========= ========= ========= DILUTED INCOME PER COMMON SHARE $0.03 $0.04 $0.21 $0.07 ========= ========= ========= ========= Weighted average number of common shares outstanding 2,494,430 2,494,430 2,494,430 2,494,430 ========= ========= ========= ========= The Accompanying Notes Are an Integral Part of These Financial Statements.

5 PYRAMID OIL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Six months ended June 30,

--------------------------- 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 530,591 $ 185,875 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depletion, depreciation and amortization 87,069 105,572 Exploration costs 41,805 16,408 Gain on sale of fixed assets (25,938) (15,750) Income tax benefit -- (14,150) Changes in assets and liabilities: Increase in trade accounts receivable (932) (43,868) Increase in crude oil inventories (1,542) -- Decrease in prepaid expenses 46,549 32,587 Decrease in accounts payable and accrued liabilities (75,146) (38,643) --------- --------- Net cash provided by operating activities 602,456 228,031 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (89,550) (74,347) Proceeds from sales of fixed assets 28,100 15,750 Net change in short-term investments (500,000) (250,000) --------- --------- Net cash used in investing activities (561,450) (308,597) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (35,048) (19,485) Proceeds from issuance of long-term debt 15,000 40,000 --------- --------- Net cash (used in) provided by financing activities (20,048) 20,515 --------- --------- Net increase (decrease) in cash 20,958 (60,051) Cash at beginning of period 151,727 109,775 --------- --------- Cash at end of period $172,685 $ 49,724 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the six months for interest $2,244 $2,465 ========= ========= Cash paid during the six months for income taxes $1,025 $1,025 ========= ========= The Accompanying Notes Are an Integral Part of These Financial Statements.

6 PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements include the accounts of Pyramid Oil Company (the Company). Such financial statements included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. A summary of the Company's significant accounting policies is contained in its December 31, 2000 Form 10-KSB which is incorporated herein by reference. The financial data presented herein should be read in conjunction with the Company's December 31, 2000 financial statements and notes thereto, contained in the Company's Form 10-KSB. In the opinion of the Company, the unaudited financial statements, contained herein, include all adjustments necessary to present fairly the Company's financial position as of June 30, 2001 and the results of its operations and its cash flows for the six month periods ended June 30, 2001 and 2000. The results of operations for an interim period are not necessarily indicative of the results to be expected for a full year. (2) DIVIDENDS No cash dividends were paid during the six months ended June 30, 2001 and 2000. (3) COMMITMENTS AND CONTINGENCIES During 1998, the Company entered into a joint venture project, with several other oil and gas companies, to explore for and develop potential natural gas reserves in the Solano County area of California. This project is employing 3-D seismic technology and exploratory drilling, in hopes of finding and developing natural gas reserves on approximately 3,200 acres of leased ground. The Company's position is that of a non-operator. Drilling operations on the first well began early in the first quarter of 2000. This well encountered substantial mechanical problems prior to reaching its intended depth and was abandoned due to these problems. The Company participated in the drilling of a second well on this lease in the fourth quarter of 2000. This well was abandoned due to insufficient gas reserves. The Company has not made any decisions about participating in any future proposed exploration wells on this project. The Company expended approximately $18,000 for its share of costs on the first well during 1999, 7 and expended an additional $15,000 during 2000. The Company expended approximately $18,000 for its share of costs on the second well during 2000. These costs are recorded in Operating Costs on the Statements of Operations. Late in the fourth quarter of 1998, the Company was notified by the United States Environmental Protection Agency (EPA) that the Company was identified as a "de minimis" contributor to the Casmalia Disposal Site in Santa Barbara County, California. The EPA claimed that all parties who contributed to the disposal site were potentially liable for a share of the cleanup costs. After extensive examination of the EPA's documentation, upon which the EPA based their claims, the Company determined that all of the materials sent to the Casmalia disposal site, by the Company, between 1980 and 1983 were found to be non-hazardous materials, specifically exempt under Federal and State statutes, specifically CERCLA, Section 101(14), 42 U.S.C. Sec 9601(14). EPA manifests identified over 97% of the materials sent by the Company to this site as being produced waste oilfield water. The remaining 3% was composed of water, crude oil and sand, from down-hole workover operations. In December 1999, the Company formally responded to the EPA, by denying all of the allegations and providing factual evidence in support of the Company's position. Currently, the EPA's position is that it does not consider parties that only sent petroleum wastes to the site liable. Therefore, management does not believe that the Company is, or will be, liable for any cleanup costs associated with the EPA's remediation of the Casmalia Disposal Site. In April 2000, the Company was contacted by a law firm representing the "Casmalia Steering Committee" requesting that the Company enter into a tolling agreement to extend the statute of limitations associated with the Casmalia Disposal Site. (The Steering Committee is a group of 54 public and private entities, who compose the largest waste contributors to the Casmalia site and under a 1997 Consent Decree with the United States, is committed to pay for and/or preform certain cleanup activities at the Casmalia site.) The Steering Committee proposed an 18-month extension of the statute of limitations that were due to expire on June 27, 2000, in order to provide the Steering Committee with additional time in which to sue the Company for alleged cleanup contributions. Since the Company throughly investigated its position concerning the issue of liability associated with the cleanup costs at the Casmalia Disposal Site before replying to the EPA, (as discussed above) the Company declined to enter into the Steering Committee's proposed tolling agreement. In July, the Company informally became aware that the Steering Committee filed a Federal lawsuit on June 26, 2000, against approximately 450 parties involved in the Casmalia site, including the Company. This suit is seeking contributions for response costs and damages incurred and to be incurred at the Casmalia Disposal Site. Through its legal counsel, the Company has contacted the Steering Committee and has requested production of any factual proof, supporting the claims and allegations made in the Steering Committee's legal action. Subsequent to these events, the Company was dismissed from this lawsuit by the Steering Committee. 8 The Company has entered into various employment agreements with key executive employees. In the event the key executives are dismissed, the Company would incur approximately $575,000 in costs. (4) OTHER INCOME In 1996, the Company filed a lawsuit in Kern County Superior Court, against Mr. Russell R. Simonson, alleging a breach of a contractual agreement. The lawsuit went to trial in 1997 and the trial court ruled that the Defendant twice breached terms of an agreement, and the court awarded the Company damages, interest and attorney's fees. The Defendant appealed the trial court's decision and the matter was reviewed by the California Appeals Court. In November 2000, the Appeals Court again ruled in favor of the Company, upholding the original award of damages, interest and attorney's fees. On March 5, 2001, the Company recorded a gain and received payment from the Defendant in the amount of $395,708, concluding this matter. The Company sold various surplus equipment and it's interest in a non-producing oil and gas lease. These assets had little or no net book value. During the second quarter of 2001, the Company sold certain fixed assets for a gain of $7,800 and surplus used tubing supplies for a gain of approximately $7,000. The Company also recorded a one-time gain of $10,000 for the sublease of certain deep drilling rights on some of its oil and gas properties. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPACT OF CHANGING PRICES The Company's revenue is affected by crude oil prices paid by the major oil companies. Average crude oil prices for the second quarter of 2001 were unchanged when compared with the same period for 2000. Average crude oil prices for the first six months of 2001 decreased by approximately $0.70 per equivalent barrel when compared with the same period for 2000. At the end of the second quarter of 2001, crude oil prices increased by approximately $2.30 per barrel when compared with crude oil prices at December 31, 2000. The Company cannot predict the future course of crude oil prices. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $20,958 for the six months ended June 30, 2001. During the first half of 2001, operating activities provided cash of $602,456. Purchase of short-term investments of $500,000, principal payments on long-term debt totaling $35,048 and capital expenditures of $89,550, reduced cash for the first six months of 2001. This was offset by proceeds from sales of fixed assets of $28,100 and from the issuance of long-term debt of $15,000. See the Statements of Cash Flows for additional detailed information. A $100,000 line of credit, unused at June 30, 2001, provided additional liquidity during the first half of 2001. 9 FORWARD LOOKING INFORMATION The Company's average crude oil price has increased by approximately forty- five cents per barrel since June 30, 2001. Since it appears that crude oil prices are going to remain at or near current levels until the end of the year, management is concentrating its efforts on returning some of the Company's previously shut-in wells to production to take advantage of the improved oil prices. Additionally, management is presently evaluating two joint venture exploration drilling prospects, that the Company may potentially participate in, on a minority basis and the possibility of drilling one new well on an existing Company property in the Midway Sunset area, of California. Portions of the Quarterly Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: the timing and extent of changes in commodity prices of oil, gas and electricity, environmental risk, drilling and operational costs, uncertainties about estimates of reserves and government regulations. ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2001 COMPARED TO THE QUARTER ENDED JUNE 30, 2000 REVENUES Oil and gas revenues increased by less than 1% for the three months ended June 30, 2001 when compared with the same period for 2000. The increase in revenues is due to a slight increase in production. The Company's net revenue share of crude oil production increased by approximately 100 barrels for the second quarter of 2001. 10 OPERATING EXPENSES Operating expenses increased by 10% for the second quarter of 2001. The cost to produce an equivalent barrel of crude oil increased by approximately $1.15 for the second quarter of 2001 when compared with the second quarter of 2000. Operating costs for the second quarter of 2001 increased primarily due to the timing of the purchases of operating supplies, equipment fuel, engine oil and lubricates. GENERAL AND ADMINISTRATIVE General and administrative expenses increased by approximately 2% for the quarter ended June 30, 2001. There are no significant variances to report for the second quarter of 2001 PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION The provision for depletion, depreciation and amortization decreased by 25% for the second quarter of 2001, when compared with the same period for 2000. The decrease is due primarily to the decrease in the depletion rate. The depletion rate decreased as a result of the estimated oil and gas reserves decreasing in an amount much less than the decline in the depletable base of the oil and gas properties. The estimated reserves did not decline in relation to the depletable base due to revisions to these estimates which offset the decline in production. OTHER INCOME Other income increased by approximately $37,000 for the second quarter of 2001, when compared with the same period for 2000. During the second quarter of 2001, interest income increased by approximately $12,000 due to the higher levels of short-term investments. During the second quarter of 2001, the Company sold certain fixed assets for a gain of $7,800 and surplus used tubing supplies for a gain of approximately $7,000. The Company also recorded a one- time gain of $10,000 for the sublease of certain deep drilling rights on some of its oil and gas properties. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000 REVENUES Oil and gas revenues decreased by 1% for the six months ended June 30, 2001 when compared with the same period for 2000. Oil and gas revenues decreased by 3% due to lower average crude oil prices for the first half of 2001. The 11 average price of the Company's oil and gas for the first six months of 2001 decreased by approximately seventy cents per equivalent barrel when compared with the same period for 2000. The decrease in revenues due to lower prices was offset by a 2% increase in production. The Company's net revenue share of crude oil production increased by approximately 10 barrels per day for the six months ended June 30, 2001. OPERATING EXPENSES Operating expenses increased by 17% for the six months ended June 30, 2001, when compared with the same period for 2000. The cost to produce an equivalent barrel of crude oil increased by approximately $1.70 per barrel for the six months ended June 30, 2001. Operating expenses have increased due primarily to higher costs for labor, operating supplies and equipment repair. Labor costs increased by approximately 5% due primarily to the hiring of one new employee. A significant component of the increase in operating supplies of approximately 6% is the purchase of certain down-hole tubular goods in the second quarter of 2001. Similar tubular goods were not purchased in the first half of 2000. Repair and maintenance of production equipment increased by approximately 3% for the six months ended June 30, 2001, due to higher repair costs for well servicing rigs and gas engines. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased by 6% for the first six months of 2001 when compared with the same period for 2000. Legal fees decreased by 13% for the first half of 2001 due to the resolution of a lawsuit that was filed by the Company in 1996. The Company received a favorable judgement in 1997 which was appealed by the defendant. The legal costs for the first half of 2000 were all related to the efforts directed at the appeal process (see Other Income below). Legal fees related to this matter were substantially lower during the first half of 2001. PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION The provision for depletion, depreciation and amortization decreased by 18% for the second half of 2001, when compared with the same period for 2000. The decrease is due primarily to the decrease in the depletion rate. The depletion rate decreased as a result of the estimated oil and gas reserves decreasing in an amount much less than the decline in the depletable base of the oil and gas properties. The estimated reserves did not decline in relation to the depletable base due to revisions to these estimates which offset the decline in production. 12 OTHER INCOME In 1996, the Company filed a lawsuit in Kern County Superior Court, against Mr. Russell R. Simonson, alleging a breach of a contractual agreement. The lawsuit went to trial in 1997 and the trial court ruled that the Defendant twice breached terms of an agreement, and the court awarded the Company damages, interest and attorney's fees. The Defendant appealed the trial court's decision and the matter was reviewed by the California Appeals Court. In November 2000, the Appeals Court again ruled in favor of the Company, upholding the original award of damages, interest and attorney's fees. On March 5, 2001, the Company recorded a gain and received payment from the Defendant in the amount of $395,708, concluding this matter. Interest income increased by approximately $18,600 due primarily to higher levels of short-term investments during the first half of 2001. INCOME TAX PROVISION The Company's income tax provision consists mostly of current minimum taxes for California and New York. The Company is utilizing its significant net operating loss carryforwards to offset Federal income taxes. RECENT ACCOUNTING DEVELOPMENTS In June 2001, the FASB issued Statements of Financial Accounting Standards No. 141 ("FAS 141") "Business Combinations" and No. 142 ("FAS 142") "Goodwill and Other Intangible Assets". These statements eliminate the pooling of interests method of accounting for business combinations as of June 30, 2001 and eliminate the amortization of goodwill for all fiscal years beginning after December 15, 2001. Goodwill will be accounted for under an impairment-only method after this date. The Company is required to adopt FAS 141 and FAS 142 with respect to new goodwill on July 1, 2001 and FAS 142 with respect to existing goodwill on January 1, 2002. Management believes adoption of these Statements well not have a significant impact on the Company's financial position, results of operations or cash flows. 13 PYRAMID OIL COMPANY PART II - OTHER INFORMATION Item 1. - Legal Proceedings None Item 2. - Changes in Securities None Item 3. - Defaults Upon Senior Securities None Item 4. - Submission of Matters to a Vote of Security Holders On June 7, 2001, the Company held its Annual Meeting of Shareholders in Bakersfield, California. Two items were voted on during the meeting; election of Directors and approval of Auditors. The shareholders elected J. Ben Hathaway, John H. Alexander, Thomas W. Ladd, Gary L. Ronning and John E. Turco to serve as the Company's Directors until the next scheduled Annual Meeting. The shareholders also approved the selection of Arthur Andersen LLP as auditors for 2001. Each item is fully described in the Company's Proxy dated April 30, 2001. Item 5. - Other Information - None Item 6. - Exhibits and Reports on Form 8-K - a. Exhibits 10.1 (1) Employment Agreement - President 10.2 (2) Employment Agreement - Vice President b. Reports on Form 8-K No Form 8-K's were filed during the three months ended June 30, 2001. 14 SIGNATURES PURSUANT TO THE REQUIREMENTS 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. PYRAMID OIL COMPANY (registrant) Dated: August 14, 2001 J. BEN HATHAWAY --------------------- J. Ben Hathaway President Dated: August 14, 2001 JOHN H. ALEXANDER --------------------- John H. Alexander Vice President