10QSB 1 pocqtr-c.txt FORM 10QSB SEPTEMBER 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 September 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 September 30, 2001) 2 FINANCIAL STATEMENTS PYRAMID OIL COMPANY BALANCE SHEETS ASSETS
September 30, December 31, 2001 2000 (Unaudited) (Audited) ------------ ------------ CURRENT ASSETS: Cash $ 222,407 $151,727 Short-term investments 1,300,000 700,000 Trade accounts receivable 207,668 212,714 Crude oil inventory 58,341 56,156 Prepaid expenses 78,098 84,230 Deferred income taxes 19,430 22,012 ------------ ------------ TOTAL CURRENT ASSETS 1,885,944 1,226,839 ------------ ------------ PROPERTY AND EQUIPMENT, at cost Oil and gas properties and equipment (successful efforts method) 10,286,875 10,343,773 Drilling and operating equipment 2,845,322 3,118,778 Land, buildings and improvements 936,681 921,767 Automotive, office and other property and equipment 913,834 1,067,625 ------------ ------------ 14,982,712 15,451,943 Less: accumulated depletion, depreciation, amortization and valuation allowance (13,465,008) (13,846,912) ------------ ------------ 1,517,704 1,605,031 ------------ ------------ $3,403,648 $2,831,870 ============ ============ See Accompanying Notes to Financial Statements.
3 PYRAMID OIL COMPANY BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 2001 2000 (Unaudited) (Audited) ------------ ------------ CURRENT LIABILITIES: Accounts payable $ 61,424 $ 66,362 Accrued professional fees 17,750 18,750 Accrued taxes, other than income taxes 45,335 22,645 Accrued payroll and related costs 39,044 36,040 Accrued royalties payable 70,625 82,621 Accrued insurance 155 29,864 Current maturities of long-term debt 15,442 27,500 ------------ ------------ TOTAL CURRENT LIABILITIES 249,775 283,782 ------------ ------------ LONG-TERM DEBT, net of current maturities 1,084 29,080 ------------ ------------ DEFERRED INCOME AND OTHER TAXES 19,430 22,012 ------------ ------------ COMMITMENTS (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 2,061,749 1,425,386 ------------ ------------ 3,133,359 2,496,996 ------------ ------------ $3,403,648 $2,831,870 ============ ============ See Accompanying Notes to Financial Statements.
4 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- REVENUES $445,698 $561,860 $1,377,634 $1,499,198 --------- --------- --------- --------- COSTS AND EXPENSES: Operating expenses 259,837 245,287 793,337 698,964 Exploration costs 983 3,251 42,788 19,659 General and administrative 90,722 88,205 269,522 278,590 Taxes, other than income and payroll taxes 11,241 13,538 33,001 34,872 Provision for depletion, depreciation and amortization 43,110 50,924 130,179 156,496 Other costs and expenses 3,760 2,520 14,086 11,620 --------- --------- --------- --------- 409,653 403,725 1,282,913 1,200,201 --------- --------- --------- --------- OPERATING INCOME 36,045 158,135 94,721 298,997 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest income 17,904 7,677 44,344 15,480 Gain on settlement -- -- 395,708 -- Gain on sale of assets 48,922 43,000 74,860 58,750 Other income 3,600 14,596 30,698 25,396 Interest expense (699) (1,495) (2,943) (3,960) --------- --------- --------- --------- 69,727 63,778 542,667 95,666 --------- --------- --------- --------- INCOME BEFORE INCOME TAX PROVISION (BENEFIT) 105,772 221,913 637,388 394,663 Income tax provision (benefit) -- (14,150) 1,025 (27,275) --------- --------- --------- --------- NET INCOME $ 105,772 $ 236,063 $ 636,363 $ 421,938 ========= ========= ========= ========= BASIC INCOME PER COMMON SHARE $0.04 $0.09 $0.26 $0.17 ========= ========= ========= ========= DILUTED INCOME PER COMMON SHARE $0.04 $0.09 $0.26 $0.17 ========= ========= ========= ========= Weighted average number of common shares outstanding 2,494,430 2,494,430 2,494,430 2,494,430 ========= ========= ========= ========= See Accompanying Notes to Financial Statements.
5 PYRAMID OIL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30,
--------------------------- 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 636,363 $ 421,938 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depletion, depreciation and amortization 130,179 156,496 Exploration costs 42,788 19,659 Gain on sale of assets (74,860) (58,750) Income tax benefit -- (28,300) Changes in assets and liabilities: Decrease (increase) in trade accounts receivable 5,046 (70,410) Increase in crude oil inventory (2,185) -- Decrease in prepaid expenses 6,132 41,847 Decrease in accounts payable and accrued liabilities (21,949) ( 4,088) --------- --------- Net cash provided by operating activities 721,514 478,392 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (125,380) (130,893) Proceeds from sales of assets 114,600 60,750 Net change in short-term investments (600,000) (500,000) --------- --------- Net cash used in investing activities (610,780) (570,143) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (55,054) (33,019) Proceeds from issuance of long-term debt 15,000 70,000 --------- --------- Net cash (used in) provided by financing activities (40,054) 36,981 --------- --------- Net increase (decrease) in cash 70,680 (54,770) Cash at beginning of period 151,727 109,775 --------- --------- Cash at end of period $222,407 $ 55,005 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the nine months for interest $2,943 $3,390 ========= ========= Cash paid during the nine months for income taxes $1,025 $1,025 ========= ========= See Accompanying Notes to Financial Statements.
6 PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 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 September 30, 2001 and the results of its operations and its cash flows for the nine month periods ended September 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 nine months ended September 30, 2001 and 2000. (3) COMMITMENTS 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 expended approximately $18,000 for its share of costs on the first well during 1999, 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 Costs and Expenses on the Statements of Operations. 7 The Company has agreed to participate in the drilling of a third natural gas well in conjunction with the same operator in a new prospect area located in Solano County. In the fourth quarter of 2001, this well commenced drilling. The Company's share of the prospect fee and estimated drilling costs for this new well are expected to be approximately $32,000 for the fourth quarter of 2001. During the second quarter of 2001, the Company entered into a new joint venture project with several other independent oil and gas companies, to explore for and develop potential oil reserves in the Gap Mountain area of Nevada. The Company's position is that of a non-operator. During the second quarter of 2001, the Company's share of the prospect fee for this project was approximately $48,000. 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 during the first quarter of 2001. 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. During the third quarter of 2001, the Company sold certain fixed assets for a combined net gain of $48,900. 8 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 third quarter of 2001 decreased by approximately $6.40 per equivalent barrel when compared with the same period for 2000. Average crude oil prices for the first nine months of 2001 decreased by approximately $2.60 per equivalent barrel when compared with the same period for 2000. At the end of the third quarter of 2001, crude oil prices decreased by approximately $1.75 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 increased by $70,680 for the nine months ended September 30, 2001. During the first nine months of 2001, operating activities provided cash of $721,514. Purchases of short-term investments of $600,000, capital expenditures of $125,380 and principal payments on long-term debt of $55,054, reduced cash for the first nine months of 2001. This was offset by proceeds from sales of fixed assets of $114,600 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 September 30, 2001, provided additional liquidity during the first nine months of 2001 FORWARD LOOKING INFORMATION The Company's average crude oil price has decreased by approximately $1.25 per barrel since September 30, 2001. The Company is currently participating, on a minority basis, in two joint venture exploration drilling prospects, see Note 3 of Notes to Financial Statements, Commitments. 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 9 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 SEPTEMBER 30, 2001 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2000 REVENUES Oil and gas revenues decreased by 21% for the three months ended September 30, 2001 when compared with the same period for 2000. Oil and gas revenues decreased by 24% due to lower average crude oil prices for the third quarter of 2001. The average price of the Company's oil and gas for the third quarter of 2001 decreased by approximately $6.40 per equivalent barrel when compared to the same period of 2000. The decrease in revenues due to unfavorable prices was offset by a 3% increase in production. The Company's net revenue share of crude oil production increased by approximately 600 barrels for the third quarter of 2001. OPERATING EXPENSES Operating expenses increased by 6% for the third quarter of 2001. The cost to produce an equivalent barrel of crude oil increased by approximately thirty cents for the third quarter of 2001 when compared with the third quarter of 2000. Operating costs for the second quarter of 2001 increased by approximately 4% due to higher repair and maintenance costs for production equipment, primarily well servicing rigs and gas engines used for crude oil production. GENERAL AND ADMINISTRATIVE General and administrative expenses increased by approximately 3% for the quarter ended September 30, 2001. There are no significant variances to report for the third quarter of 2001. PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION The provision for depletion, depreciation and amortization decreased by 15% for the third 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 10 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 $6,000 for the third quarter of 2001, when compared with the same period for 2000. During the third quarter of 2001, interest income increased by approximately $10,000 due to the higher levels of short-term investments. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 REVENUES Oil and gas sales decreased by 8% for the nine months ended September 30, 2001 when compared with the same period for 2000. Oil and gas sales decreased by 10.5% due to lower average crude oil prices for the first nine months of 2001. The average price of the Company's oil and gas for the first nine months of 2001 decreased by approximately $2.60 per equivalent barrel when compared with the same period for 2000. This was offset by a 2.5% increase in revenues due to higher crude oil production. The Company's net revenue share of crude oil production increased by approximately 1,400 barrels for the nine months ended September 30, 2001. OPERATING EXPENSES Operating expenses increased by 13.5% for the nine months ended September 30, 2001. The cost to produce an equivalent barrel of crude oil increased by approximately $1.30 per barrel for the nine months ended September 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 7% is the purchase of certain down-hole tubular goods in the second and third quarter of 2001. Similar tubular goods were not purchased in the first nine months of 2000. Repair and maintenance of production equipment increased by approximately 4% for the nine months ended June 30, 2001, due to higher repair costs for well servicing rigs and gas engines. 11 GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased by 3% for the first nine months of 2001 when compared with the same period for 2000. There are no significant variances to report for the nine months ended September 30, 2001. PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION The provision for depletion, depreciation and amortization decreased by 17% for the nine months ended September 30, 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 produced amounts due to upward revisions to the estimated reserves. 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 $29,000, due primarily to higher levels of short-term investments during the first nine months 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. 12 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 142 with respect to existing goodwill on January 1, 2002. Management believes the adoption of these Statements will not have a significant impact on the Company's financial position, results of operations or cash flows. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("FAS 143") "Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. Asset retirement obligations will be initially measured at fair value. These obligations will be discounted and accretion expense will be recognized using the credit adjusted risk-free interest rate. The Company is required to adopt FAS 143 on January 1, 2003. The Company is assessing the impact FAS 143 will have on its financial statements. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("FAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement supercedes previous statements related to impairment. The requirements to allocate goodwill to long-lived assets to be tested for impairment is eliminated. A primary asset approach to determine a cash flow estimation period is established. The Company is required to adopt FAS 144 on January 1, 2002. The Company is assessing the impact FAS 144 will have on its financial statements. 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 None Item 5. - Other Information - None Item 6. - Exhibits and Reports on Form 8-K No Form 8-K's were filed during the three months ended September 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: November 13, 2001 J. BEN HATHAWAY --------------------- J. Ben Hathaway President Dated: November 13, 2001 JOHN H. ALEXANDER --------------------- John H. Alexander Vice President