1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2003
[ ] Transition report under 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
(Name of small business issuer in its charter)
CALIFORNIA 94-0787340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2008 - 21st. Street, P. O. Box 832 93302
Bakersfield, California
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (661) 325-1000
Securities registered under Section 12 (b) of the Exchange Act: NONE
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period 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
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's revenues for the fiscal year ended December 31, 2003 were
$2,070,414.
The aggregate market value on March 11, 2004, of the voting shares held by
non-affiliates was approximately $1,229,000 based on the average closing sales
prices of the registrant's Common Stock on such date.
At March 30, 2004, there were 2,494,430 shares of Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2004 Annual
Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the registrant's fiscal year are
incorporated by reference into Part III.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (check one): Yes No X
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PYRAMID OIL COMPANY
2003 FORM 10-KSB ANNUAL REPORT
Table of Contents
Page
PART I
Item 1. Description of Business . . . . . . . . 4
Item 2. Description of Property . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . 12
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters. . . . . . . . . . 12
Item 6. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . 13
Item 7. Financial Statements . . . . . . . . . . 20
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure . . . 49
Item 8A. Controls and Procedures . . . . . . . . . 49
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section
16(a) of the Exchange Act . . . . . . . 49
Item 10. Executive Compensation . . . . . . . . . 49
Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters . . . . . . . . . 50
Item 12. Certain Relationships and Related Transactions 50
Item 13. Exhibits and Reports on Form 8-K . . . . . 50
Item 14. Principal Accountant Fees and Services . . 52
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CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 AND OTHER FEDERAL SECURITIES LAWS
Pyramid Oil Company is including the following discussion to inform existing
and potential security holders generally of some of the risks and
uncertainties that can affect the Company and to take advantage of the "safe
harbor" protection for forward-looking statements afforded under federal
securities laws. Statements made in this Annual Report on Form 10-KSB may be
forward-looking statements. In addition, from time to time, the Company may
otherwise make forward-looking statements to inform existing and potential
security holders about the Company. These statements may include projections
and estimates concerning the timing and success of specific projects and the
Company's future (1) income, (2) oil and gas production, (3) oil and gas
reserves and reserve replacement and (4) capital spending. Forward-looking
statements are generally accompanied by words such as "estimate," "project,"
"predict," "believe," "expect," "anticipate," "plan," "goal" or other words
that convey the uncertainty of future events or outcomes. In addition, except
for the historical information contained in this report, the matters discussed
in this report are forward-looking statements. These statements by their
nature are subject to certain risks, uncertainties and assumptions and will be
influenced by various factors. Should any of the assumptions underlying a
forward- looking statement prove incorrect, actual results could vary
materially.
PART I
------
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL BUSINESS DESCRIPTION
Pyramid Oil Company is a California corporation that has been in the oil and
gas business continuously, since it was incorporated on October 9, 1909.
Pyramid Oil Company, hereinafter referred to as "Pyramid" or the "Company," is
engaged in the business of exploration, development and production of crude
oil and natural gas.
Pyramid acquires interests in land and producing properties through
acquisition and lease on which it drills and/or operates crude oil or natural
gas wells in efforts to discover and/or to produce oil and gas. Crude oil and
natural gas produced from these properties are sold to various refineries and
pipeline companies. The majority of all oil and gas properties that Pyramid
owns and operates is for its own account. Pyramid also participates in
specific joint ventures with other companies in the development of oil and gas
properties. Pyramid's interests in these properties will vary depending on
the availability of said interests and their locations. Although the Company
owns some minor oil and gas interests in New York and Wyoming, all of the
Company's operations and major revenue producing properties are in California.
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The Company's executive offices are located at 2008 21st Street, Bakersfield,
California, 93301, telephone (661) 325-1000, facsimile (661) 325-0100.
DESCRIPTION OF BUSINESS - OIL AND GAS OPERATIONS
EXPLORATION AND DEVELOPMENT
Pyramid operates in a highly competitive industry wherein many companies, from
large multinational companies to small independent producers, are competing
for a finite amount of oil and gas resources. The Company seeks out
properties to explore for oil and gas by drilling and also seeks out producing
oil and gas properties that can be purchased and operated. Management
believes that under the right economic conditions, several of the producing
properties that the Company owns could have further developmental potential.
Certain oil properties currently owned and operated by the Company may be
receptive to enhanced oil recovery procedures under certain economic
conditions.
OIL AND GAS PRODUCTION OPERATIONS
Pyramid owns and operates 27 oil and gas leases (properties) located within
Kern and Santa Barbara Counties in the State of California. All of these
properties are capable of producing oil or natural gas, although not all of
these properties are considered profitable under certain economic conditions.
During 2003, the Company operated 20 leases within California, with total
annual gross oil production exceeding 500 barrels per lease. Production
activities primarily consist of the daily pumping of oil from a well(s) into
tanks, maintaining the production facilities both at the well and tank
settings, preparing and shipping the crude oil to buyers. Daily operations
differ from one property to another, depending on the number of wells, the
depth of the wells, the gravity of the oil produced and the location of the
property. All of Pyramid's oil production is classified as primary recovery
production at this time; although certain properties may be conducive to
secondary recovery operations in the future, depending on the prevailing price
of oil.
Primary recovery of oil and gas is by means of natural flow(s) or artificial
lift of oil and gas from a single well bore. Natural gas and petroleum fluids
enter the well bore by means of reservoir pressure or gravity flow; fluids and
gases are moved to the surface by natural pressure or by means of artificial
lift (pumping). In secondary recovery operations, liquids or gases are
injected into the reservoirs for the purpose of augmenting reservoir energy or
increasing reservoir temperatures. Secondary recovery operations, usually, but
not always, are done after the primary-recovery phase has passed.
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The Company employs field level personnel (i.e., pumpers, rig crews,
roustabouts and equipment operators) that perform basic daily activities
associated with producing oil and gas. Daily operations include inspections of
surface facilities and equipment, gauging, reporting and shipping oil, and
routine maintenance and repair activities on wells, production facilities and
equipment. The Company owns and maintains various pieces of equipment
necessary for employees to perform various repair and maintenance tasks on
Company properties. Such equipment consists of service rigs, mobile pumps,
vacuum trucks, hot oil truck, backhoe, trucks and trailers.
Occasionally, the Company drills new wells or redrills existing wells on
properties owned by the Company in an attempt to increase oil and gas
production. In the last five years, the Company has utilized the services of
outside drilling contractors for drilling new wells and redrilling existing
wells. Maintenance and repairs of existing wells to maintain or increase oil
and gas production are carried out by Company personnel on a continuing basis.
Most maintenance and repair work is performed with Company rigs.
Economic factors associated with the price of oil and gas and the productive
output of wells determine the number of active wells the Company operates.
Under certain economic conditions, the Company has the potential to operate
approximately 121 wells, and of these, approximately 65 were in operation
during 2003. Operations continue to be reduced on specific properties that
are currently generating a marginal gross profit in an effort to hold the
properties until economic conditions warrant full scale operations. The
Company also owns other oil and gas interests outside of California that it
does not operate. These interests are located in Wyoming and New York.
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. During the fourth quarter of 2001, the Company
received a full and complete refund of the prospect fee. This prospect was
cancelled by the operator after additional structural geology work and
analysis.
MARKETING OF CRUDE OIL AND NATURAL GAS
The Company sells its crude oil to ConocoPhillips and Kern Oil & Refining,
accounting for approximately 50.4% and 45.4%, respectively, of Pyramid's crude
oil and gas sales in 2003. While revenue from these customers is significant,
and the loss of any one could have an adverse effect on the Company, it is
management's opinion that the oil and gas it produces could be sold to other
crude oil purchasers, refineries or pipeline companies. ConocoPhillips and
Kern Oil have been customers of the Company for over ten years. Natural
gas is sold to companies in the area of operations. The Company sells its oil
pursuant to short-term contracts. Accordingly, the amount of oil the Company
sells is dependent upon market demand. Market demand for Pyramid's production
is subject to various influences and can never be assured, especially in an
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era of changing prices. The base values for crude oil the Company sells is
set by major oil companies in response to area and market strengths and
international influences. Types and qualities of crude oil vary substantially
in base values posted by crude oil buyers in various areas of the country.
Pyramid's crude oil sales are not seasonal, but uniform throughout the year.
RISKS, COMPETITION AND INDUSTRY CONDITIONS
The profitability of the Company's operations depends primarily on the
production of oil and gas in commercially profitable quantities. Oil and gas
properties often fail to provide a return sufficient to repay the substantial
sums of money required for their acquisition, exploration and development.
The acquisition, exploration and development of oil and gas properties is a
highly competitive business. Many entities with which the Company competes
have significantly greater financial and staff resources. Such competitive
disadvantages could materially and adversely affect the Company's ability to
acquire new properties or develop existing properties.
The oil and gas industry, in general, has been adversely affected by several
factors beyond the Company's control, including unstable oil and gas prices,
uncertainty regarding the effect of pricing agreements and production quotas
and allocations established by the Organization of Petroleum Exporting
Countries, political instability in the Middle East and the status of
ever-changing federal and state legislation and regulation.
Given the uncertainty of international and domestic political actions and
their impact on the energy markets, it is difficult, if not impossible, to
predict the price or market situation for any oil or gas which is currently
owned or which could be developed by the Company. Depressed oil and gas
prices or significant curtailment in the Company's oil and gas production
from its better properties would have a material adverse effect on the
Company's operations.
REGULATIONS
The Company's business is affected by numerous governmental laws and
regulations, including energy, environmental, conservation, tax and other laws
and regulations relating to the petroleum industry. Changes in any of these
laws and regulations could have a material and adverse effect on the Company's
business and financial stability. In view of the many uncertainties with
respect to current laws and regulations, including their applicability to the
Company, the Company cannot predict the overall effect of such laws and
regulations on future operations.
TAXATION
The operations of the Company, as is the case in the petroleum industry
generally, are significantly affected by federal tax laws. Federal, as well as
state, tax laws have many provisions applicable to corporations which could
affect the future tax liability of the Company.
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ENVIRONMENTAL
The Company's activities are subject to existing federal and state laws and
regulations governing environmental quality and pollution control. These laws
may require the acquisition of permits relating to certain ongoing operations,
for drilling, emissions, waste water disposal and other air and water quality
controls. In view of the uncertainty and unpredictability of environmental
statutes and regulations, the Company cannot ensure that such laws and
regulations will not materially and adversely affect the business of the
Company. The Company does not currently anticipate any material effect on its
capital expenditures or earnings as the result of governmental regulations,
enacted or proposed, concerning environmental protection or the discharge of
material into the environment. The Company is actively pursuing an ongoing
policy of upgrading and restoring older properties to comply with current and
proposed environmental regulations.
COMMITMENTS AND CONTINGENCIES
The Company is liable for future dismantlement and abandonment costs
associated with its oil and gas properties. These costs include down-hole
plugging and abandonment of wells, future site restoration, post closure and
other environmental exit costs. The costs of future dismantlement and
abandonment have been accrued and recorded in the financial statements. See
Note 9 of Notes to Financial Statements included in Item 7 of this Form
10-KSB.
OTHER
The Company employed twelve full-time people as of December 31, 2003, four of
whom were office or administrative personnel, and the rest of whom were field
level personnel. The Company contracts for additional labor services when
needed. The Company is not a party to any union or labor contracts.
The Company had no material research and development costs for the three years
ended December 31, 2003.
All of the Company's revenues during 2003 were derived from domestic sources.
The Company does not have any patents or trademarks, and it does not believe
that its business or operations are dependent upon owning any patents or
trademarks.
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ITEM 2 - DESCRIPTION OF PROPERTY
(a) DESCRIPTION OF PROPERTIES
The principal assets of the Company consist of proven and unproven oil and
gas properties, oil and gas production related equipment and developed and
undeveloped real estate holdings. The Company's oil and gas properties are
located exclusively in the continental United States, in California, Wyoming
and New York.
Developed oil and gas properties are those on which sufficient wells have been
drilled to economically recover the estimated reserves calculated for the
property. Undeveloped properties do not presently have sufficient wells to
recover the estimated reserves. The Company had no significant proved
undeveloped properties at December 31, 2003, 2002 and 2001.
(b) OIL AND GAS PROPERTIES
The Company's estimated future net recoverable oil and gas reserves from
proved developed properties were assembled by System Technology Associates,
Inc., independent petroleum engineers, and are as follows:
Crude Oil Natural Gas
(BBLS) (MCF)
--------- -----------
January 1, 2004 555,000 83,000
2003 554,000 105,000
2002 323,000 37,000
2001 341,000 72,000
2000 361,000 65,000
The Company's estimated future net recoverable oil and gas reserves, noted in
the table above, have not been filed with any other Federal authority or
agency since January 1, 2003.
Using year-end oil and gas prices and lease operating expenses, the estimated
value of future net revenues to be derived from Pyramid's proved developed oil
and gas reserves, discounted at 10%, were $4,617,000 at December 31, 2003,
$4,325,000 at December 31, 2002, $1,250,000 at December 31, 2001, $2,311,000
at December 31, 2000, and $2,718,000 at December 31, 1999.
Pyramid participates in the drilling of developmental wells, no single one of
which would cause a significant change in the net reserve figure.
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Pyramid's net oil and gas production after royalty and other working interests
for the past five years ending December 31, were as follows.
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Crude oil (Bbls) 74,000 66,000 77,000 71,000 84,000
Natural gas (MCF) 7,500 11,000 9,000 9,000 24,000
Pyramid's average sales prices per barrel or per MCF of crude oil and natural
gas, respectively, and production costs per equivalent barrel (gas production
is converted to equivalent barrels at the rate of 6 MCF per barrel,
representing the estimated relative energy content of gas to oil) for the past
five years ending December 31, were as follows:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Sales price:
Crude oil $27.60 $22.86 $21.02 $26.16 $15.49
===== ===== ===== ===== =====
Natural gas $ 5.77 $ 3.08 $ 4.80 $ 3.14 $ 1.82
===== ===== ===== ===== =====
Production costs $15.80 $15.30 $13.30 $13.60 $ 8.70
===== ===== ===== ===== =====
The average selling price of Pyramid's crude oil at December 31, 2003, was
approximately $29.40 per barrel and the average selling price of Pyramid's gas
at December 31, 2003, was approximately $6.50 per MCF.
As of December 31, 2003, Pyramid had the following gross and net position in
wells and proved acres:
WELLS PROVED ACRES
----------------- -----------------
Gross (1) Net (1) Gross (2) Net (2)
-------- ------ -------- ------
144 128 21,377 5,834
=== === ====== =====
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(1) "Gross wells" represents the total number of wells in which the
Company has a working interest. "Net wells" represents the number
of gross wells multiplied by the percentage of the working
interests therein held by the Company.
(2) "Gross acreage" represents all acres in which the Company has a
working interest. "Net acres" represents the aggregate of the
working interests of the Company in the gross acres.
The Company drilled one new well in 2003 on the Anderson lease in the Carneros
Creek Field. No wells were drilled in 2002, 2001, 2000, and 1999, although
the Company did participate as a non-operator in 2001 and 2000 in the drilling
of joint-venture wells.
"Unproven" oil and gas properties are those on which the presence of
commercial quantities of reserves of crude oil or natural gas has not
been established.
"Undeveloped" acreage exists on those oil and gas properties where
economically recoverable reserves are estimated to exist in proved
reservoirs from wells to be drilled in the future.
As of December 31, 2003, Pyramid held positions in unproven acreage in the
following locations:
ACRES
------------------
Gross Net
------ ------
New York
Mount Morris and Livingston Counties 34,800 9,788
====== =====
(c) REAL PROPERTY OWNED
Pyramid owned the following real property as of December 31, 2003, all located
in California.
County of Kern
Mullaney yard 20 acres
Grazing land 160 acres
Miller property 112 acres
Ranton property 80 acres
City of Bakersfield 3 lots
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Located on the three lots of real property in the city of Bakersfield is the
Company's executive offices. This property was acquired by the Company in
1986. The office building located on this property is a one story structure
with approximately 4,200 square feet in good condition.
ITEM 3 - LEGAL PROCEEDINGS
The Company is subject to potential litigation within the normal course of
business. The resolution in any reporting period of such litigation could
have a material impact on Pyramid's financial position or results of
operations for that period. Pyramid is not party to any proceedings or
actions which management believes might have a material effect upon its
financial position or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) PRICE RANGE OF COMMON SHARES
The common stock of Pyramid is traded on the OTC Bulletin Board under the
symbol "PYOL". The following are high and low sales prices for each quarter
of 2003 and 2002, and reflect inter-dealer prices without retail markup,
markdown or commission.
High Low
---- -----
Fiscal Quarter Ending 2003
March 31, $0.9700 $0.6000
June 30, 0.9000 0.6000
September 30, 0.7000 0.6400
December 31, 0.9500 0.6300
Fiscal Quarter Ending 2002
March 31, 1.1500 0.6000
June 30, 1.1500 0.8900
September 30, 1.0100 0.6000
December 31, 0.8500 0.5700
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At December 31, 2003, the Company had 373 shareholders of record, and an
unknown number of additional holders whose stock is held in "street name".
The Company has paid no dividends on its common shares for the past five
years. The Company has received a proposal from a shareholder to pay a cash
dividend. This dividend proposal will be included in the proxy statement for
the 2004 Annual Meeting of Shareholders and will be voted upon by the
shareholders.
The Company did not issue or repurchase any securities during 2003.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
IMPACT OF CHANGING PRICES
Average prices increased by approximately $4.95 per equivalent crude oil and
gas barrel sold during 2003 as compared with average prices for 2002. In 2003
there were 204 separate crude oil price changes, as compared with 111 price
changes in 2002. The difference between the highest and lowest posted prices
in 2003 was $14.50 per barrel. By comparison, this same differential in 2002
and 2001 was $14.90 and $12.50 per barrel, respectively. Continuing
uncertainty in crude oil prices has made it impractical for the Company to
make any commitments to further develop its oil and gas properties. Crude oil
prices must stabilize for a long-term period, at economic levels, before
resources would be available to expand the Company's oil and gas reserves.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $606,799 at December 31, 2003 for
an increase of $103,960 when compared to December 31, 2002. Operating
activities in 2003 generated cash of $529,973. During 2003, cash was consumed
by capital spending of $360,416 and principal payments on the Company's
long-term debt totaling $136,047. This was offset by proceeds from the
issuance of long-term debt of $70,450. The components of the changes in cash
for 2003 are described in the Statements of Cash Flows included in Item 7 of
this Form 10-KSB. Adequate funds were available to carry out all necessary
oil and gas operations and to maintain its equipment. During 2003, the
Company had short-term investments of $850,000 which provided additional
liquidity. Short-term investments consist of certificates of deposit having
original maturities of three months or more. A $100,000 line of credit,
unused at December 31, 2003, also provided additional liquidity during 2003.
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The Company believes that its existing current assets and the amount of cash
it anticipates it will generate from current operations will be sufficient to
fund the anticipated liquidity and capital resource needs of the Company for
the fiscal year ended December 31, 2004. In addition to its current assets,
the Company also has a credit facility for $100,000 available in the event
that it needs other resources to fund its liquidity and capital resource
needs. Although the Company may increase its capital expenditures during the
current fiscal year to enhance its current oil production capacities, it does
not anticipate that such expenditures would exceed the amount of liquidity
currently available to the Company. The Company's beliefs that its existing
assets and the cash expected to be generated from operations will be
sufficient during the current fiscal year are based on the following:
As of December 31, 2003, the amount of cash, cash equivalents, and other
current assets was equal to $1,928,000 in the aggregate. This amount is
equal to approximately all of the operating expenses that the Company
incurred during the entire fiscal year ended December 31, 2003.
As of December 31, 2003, the Company had approximately $1,928,000 in
current assets, and only $386,000 of current liabilities.
As of December 31, 2003, the Company had only $59,000 of long-term
indebtedness (net of current maturities).
The Company is not a party to any off-balance sheet arrangements and does not
engage in trading activities involving non-exchange traded contracts. In
addition, the Company has no financial guarantees, debt or lease agreements or
other arrangements that could trigger a requirement for an early payment or
that could change the value of the Company's assets. Management continues to
examine various alternatives for increasing capital resources including, among
other things, participation with industry and/or private partners and specific
rework of existing properties to enhance production and expansion of its sales
of crude oil and natural gas in California. If necessary, Pyramid could sell
certain nonessential assets, such as idle work-over rigs, to raise capital for
the benefit of these programs.
The Company drilled one well in the year ended December 31, 2003. No wells
were drilled in the year ended December 31, 2002. The Company's crude oil
reserves for the years ended December 31, 2003 and 2002, were stable. The
Company was able to replace current production by drilling the new well in
2003.
The Company's business plan, implemented to deal with the unstable crude oil
market of the past, has been to concentrate its efforts and resources on
maintaining oil and gas production on existing properties and deferring
certain developmental and exploration activities until crude oil prices
increase. This has enabled the Company to preserve its position on certain
developmental properties during the periods of low oil prices and to conserve
its capital.
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Certain properties that the Company owns have become uneconomic and have been
shut-in. When these properties are not operated, any reserves that could be
assigned to these properties are not included in the year-end engineering
report of total Company reserves. Another major factor that directly affects
the Company's future reserve base is the price of crude oil at December 31 of
any given year. The year-end price of oil and gas has a significant impact on
the estimated future net recoverable oil and gas reserves from proved
developed properties. At certain depressed price levels, some of the
Company's oil and gas properties are not economical to operate and thus its
year-end engineering reserve reports do not assign any oil and gas reserves to
these properties. Conversely, if year-end prices should increase to a certain
level, the reserves on these leases would be economic to produce and would
increase the Company's reserves.
FORWARD-LOOKING INFORMATION
Looking forward into 2004, crude oil prices have increased by $2.95 per barrel
as of March 29, 2004, compared to prices at December 31, 2003. There have
been 45 separate price changes since December 31, 2003. The Company is unable
to predict any future price changes that would impact the remainder of 2004.
The Company has positioned itself, over the past several years, to withstand
various types of economic uncertainties, with a program of consolidating
operations on certain producing properties and concentrating on properties
that provide the major revenue sources. The drilling of a new well and
several limited work-overs of certain wells have allowed the Company to
maintain its crude oil reserves for the last three years. The Company expects
to maintain its reserve base in 2004, by routine maintenance of its existing
wells.
The Company may be subject to future costs necessary for compliance with the
new implementation of air and water environmental quality requirements of the
various state and federal governmental agencies. The requirements and costs
are unknown at this time, but management believes that costs could be
significant in some cases. As the scope of the requirements become more
clearly defined, management may be better equipped to determine the true costs
to the Company.
The Company continues to absorb the costs for various state and local fees and
permits under new environmental programs, the sum of which were not material
during 2003. The Company retains outside consultants to assist the Company in
maintaining compliance with these regulations. The Company is actively
pursuing an ongoing policy of upgrading and restoring older properties to
comply with current and proposed environmental regulations. The costs of
upgrading and restoring older properties to comply with environmental
regulations have not been determined. Management believes that these costs
will not have a material adverse effect upon its financial position or results
of operations.
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ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
Results of Operations for the Fiscal Year Ended December 31, 2003
Compared to the Fiscal Year Ended December 31, 2002
REVENUES
Oil and gas sales increased by 28% for the year ended December 31, 2003, when
compared with the same period for 2002. Oil and gas sales increased by 23%
due to higher average prices for 2003. The average price of the Company's oil
and gas increased by approximately $4.95 per equivalent barrel for 2003 when
compared to 2002. An increase in crude oil production/sales of approximately
3,700 barrels increased revenues by an additional 5%. The increase in crude
oil production is due primarily to the drilling of a new well that was placed
into production at the end of June 2003.
OPERATING EXPENSES
Operating expenses increased by approximately 13% for the year ended December
31, 2003, when compared with the same period of 2002. The cost to produce an
equivalent barrel of crude oil increased by approximately $1.14 per barrel for
2003 when compared to 2002. Operating expenses increased by 7% as a result of
fracturing procedures that were conducted on two separate wells in an attempt
to stimulate production on these wells. The costs of the frac jobs were
approximately $74,000. Operating parts and supplies increased by approximately
5% due to a number of factors, none of which increased costs by more than 2%.
These costs tend to be cyclical in nature and can vary from year to year.
Labor costs increased by approximately 4% due primarily to an increase in
hourly wages that was effective July 1, 2003 and an increase in overtime
wages. Insurance costs increased by approximately 2% for 2003 due primarily
to higher rates for employee health insurance, workers' compensation and
general liability premiums.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by approximately 14% for the
year ended December 31, 2003, when compared with the same period for 2002.
Legal services decreased by 10% during 2003. Legal fees were higher in 2002
due to activities related to certain transactions contemplated by the Board of
Directors for the acquisition of the Company's common stock from its major
shareholders.
17
Results of Operations for the Fiscal Year Ended December 31, 2002
Compared to the Fiscal Year Ended December 31, 2001
REVENUES
Oil and gas sales decreased by 4% for the year ended December 31, 2002, when
compared with the same period for 2001. Oil and gas sales increased by 7% due
to higher average prices for 2002. The average price of the Company's oil
and gas increased by approximately $1.60 per equivalent barrel for 2002 when
compared to 2001. The increase in revenues due to higher crude oil prices was
offset by an 11% decrease in crude oil production/sales for 2002. Production
for 2002 decreased by approximately 8,400 barrels when compared with
production in 2001. The decline in production/sales is due primarily to two
of the Company's oil producing properties. One property was shut-in during
2002 due to mechanical problems with the economic disposal of produced
waste water from this property. This property had been in operation for the
first eleven months of 2001. The production/sales from this lease were
approximately 4,000 barrels in 2001. Another oil and gas property has seen a
decline in production/sales of approximately 3,500 barrels in 2002.
OPERATING EXPENSES
Operating expenses decreased by approximately 1% for the year ended December
31, 2002, when compared with the same period of 2001. The cost to produce an
equivalent barrel of crude oil increased by approximately $1.50 per barrel for
2002 when compared to 2001. Operating expenses declined by approximately 5.5%
due to the shut-in during 2002 of one of the Company's oil producing
properties due to mechanical problems with the economic disposal of produced
waste water from this property. This property had been in operation for the
first eleven months of 2001. Operating parts and supplies decreased by
approximately 2% due primarily to the costs of certain down-hole tubular
goods purchased in 2001, no similar tubular supplies were purchased in 2002.
Labor costs increased by approximately 1% due primarily to an increase in
hourly wages that was effective September 1, 2001. Well abandonment costs
increased by approximately 1.5% due to the abandonment of two well during
2002, no wells were abandoned in 2001. The cost of chemicals increased by
approximately 1.5% for 2002. Insurance costs increased by approximately 1.5%
for 2002 due primarily to higher rates for employee health insurance and
general liability premiums.
18
EXPLORATION COSTS
The amounts for 2001 represent the costs for drilling of exploratory gas wells
with several other oil and gas companies in a joint venture to explore for and
develop natural gas reserves in the Solano County area of California. The
joint venture activities are more fully described in the Notes to Financial
Statements, No. 6, Commitments and Contingencies in Item 7 of this Form
10-KSB. The Company did not participate in the drilling of any gas wells in
2002 with this joint venture. The costs for 2002 represent the Company's
share of costs in a new joint venture project to explore for and develop oil
wells in the Kern County area of California.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by approximately 12% for the
year ended December 31, 2002, when compared with the same period for 2001.
Legal services increased by 11% during 2002 due to activities related to
certain transactions contemplated by the Board of Directors for the
acquisition of the Company's common stock from its major shareholders.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization decreased by 7%
for the year ended December 31, 2002, when compared with the same period for
2001. Depletion decreased by 10%, which is due to a decrease in the depletion
rate and the decline in crude oil production. The depletion rate decreased as
a result of the estimated oil and gas reserves increasing. The estimated oil
and gas reserves increased due primarily to higher sales prices for oil and
gas at December 31, 2002. This was offset by an increase of 3% in the
depreciation of fixed assets, primarily trucks that were acquired in the
second half of 2001.
OTHER INCOME (EXPENSE)
Interest income decreased by approximately $21,600 during the year ended
December 31, 2002, when compared with the same period for 2001. The decrease
in interest income is due primarily to a decline in interest rates. During
the year ended December 31, 2001, the Company sold certain fixed assets
and equipment and its interest in a non-producing oil and gas lease for a
gain of approximately $75,000. These assets had little or no net book value.
The loss on disposal of assets reflects the scrapping of a well servicing rig
in the first quarter of 2002 with a net book value of $10,100.
19
RECENT ACCOUNTING DEVELOPMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting and reporting for
derivative instruments and hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective
for derivative instruments and hedging activities entered into or modified
after June 30, 2003, except for certain forward purchase and sale securities.
For these forward purchase and sale securities, SFAS No. 149 is effective for
both new and existing securities after June 30, 2003. This statement is not
applicable to the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the
standard, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. SFAS No. 150 will be effective for
financial instruments entered into or modified after May 31, 2003 and
otherwise will be effective at the beginning of the first interim period
beginning after June 15, 2003. This statement is not applicable to the
Company.
20
ITEM 7- FINANCIAL STATEMENTS
PYRAMID OIL COMPANY
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. . . . . . . . . . . . . . 21-22
FINANCIAL STATEMENTS:
Balance sheets - December 31, 2003 and 2002 . . . . . . . . . . 23-24
Statements of operations - years ended
December 31, 2003, 2002 and 2001 . . . . . . . . . . . . . . 25-26
Statements of shareholders' equity - years ended
December 31, 2003, 2002 and 2001 . . . . . . . . . . . . . . 27
Statements of cash flows - years
ended December 31, 2003, 2002 and 2001 . . . . . . . . . . . 28-29
Notes to financial statements . . . . . . . . . . . . . . . . . 30
21
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Pyramid Oil Company
We have audited the accompanying balance sheet of Pyramid Oil Company (a
California corporation) as of December 31, 2003 and 2002, and the related
statements of operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pyramid Oil Company as of
December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 9 to the financial statements, the Company changed its
method of accounting for asset retirement costs effective January 1, 2003.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 24, 2004
22
THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN REPORT.
THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
Pyramid Oil Company:
We have audited the accompanying balance sheet of Pyramid Oil Company (a
California corporation) as of December 31, 2001, and the related statements of
operations, shareholders' equity and cash flows for the year ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pyramid Oil Company as of
December 31, 2001, and the results of its operations and its cash flows for
the year ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 1, 2002
23
FINANCIAL STATEMENTS
PYRAMID OIL COMPANY
BALANCE SHEETS
ASSETS
December 31,
--------------------------
2003 2002
---------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 606,799 $ 502,839
Short-term investments 850,000 850,000
Trade accounts receivable
(net of reserve for doubtful
accounts of $4,000 in 2003
and 2002) 217,460 201,777
Interest receivable 63,430 54,689
Crude oil inventory 48,417 50,153
Prepaid expenses 114,411 103,324
Deferred income taxes 27,927 22,911
--------- ----------
Total current assets 1,928,444 1,785,693
--------- ----------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties and
equipment (successful
efforts method) 10,769,838 10,521,514
Capitalized asset retirement costs 290,450 --
Drilling and operating equipment 1,819,360 1,812,109
Land, buildings and improvements 947,426 936,681
Automotive, office and
other property and equipment 967,244 880,149
---------- ----------
14,794,318 14,150,453
Less - accumulated depletion,
depreciation, amortization
and valuation allowances (12,925,901) (12,537,086)
---------- ----------
1,868,417 1,613,367
---------- ----------
OTHER ASSETS (net of accumulated
depreciation and valuation allowance
of $1,033,493 in 2003 and 2002) 38,237 38,237
---------- ----------
$ 3,835,098 $ 3,437,297
========== ==========
The accompanying notes are an integral part of these balance sheets.
24
PYRAMID OIL COMPANY
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
----------------------------
2003 2002
---------- ----------
CURRENT LIABILITIES:
Accounts payable $ 95,651 $ 44,065
Accrued professional fees 33,972 24,633
Accrued taxes, other than
income taxes 19,785 21,925
Accrued payroll and related costs 38,727 31,060
Accrued royalties payable 78,084 76,360
Accrued insurance 47,825 46,222
Interest payable -- 5,514
Loan payable to related party -- 36,166
Current maturities of long-term debt 44,049 97,652
Deferred income taxes 27,927 22,911
--------- ----------
Total current liabilities 386,020 406,508
--------- ----------
LONG-TERM DEBT, net of current
maturities 59,248 35,076
--------- ----------
LIABILITY FOR ASSET RETIREMENT OBLIGATION 930,306 --
--------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, no par value -
Authorized - 10,000,000 shares
Issued and outstanding -
2,494,430 shares 1,071,610 1,071,610
Retained earnings 1,387,914 1,924,103
---------- ----------
2,459,524 2,995,713
---------- ----------
$ 3,835,098 $ 3,437,297
========== ==========
The accompanying notes are an integral part of these balance sheets.
25
PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
REVENUES: $ 2,070,414 $ 1,616,041 $ 1,680,074
---------- ---------- ----------
COSTS AND EXPENSES:
Operating expenses 1,186,632 1,046,690 1,053,583
Exploration costs -- 7,007 43,527
General and administrative 346,568 403,603 359,854
Taxes, other than income and
payroll taxes 53,521 55,531 59,695
Provision for depletion,
depreciation and amortization 168,268 172,390 185,660
Accretion expense 54,262 -- --
Other costs and expenses 18,663 16,488 16,156
--------- --------- ----------
1,827,914 1,701,709 1,718,475
--------- --------- ----------
OPERATING INCOME (LOSS) 242,500 ( 85,668) ( 38,401)
--------- --------- ----------
OTHER INCOME (EXPENSE):
Interest income 20,246 36,935 58,520
Gain on settlement -- -- 395,708
Gain on sales of property
and equipment -- 300 74,860
Loss on disposal of assets -- ( 10,100) --
Other income 14,400 31,912 45,561
Interest expense ( 2,095) ( 5,566) ( 3,194)
---------- --------- ---------
32,551 53,481 571,455
---------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION 275,051 ( 32,187) 533,054
Income tax provision 1,125 1,125 1,025
---------- --------- ---------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 273,926 ( 33,312) 532,029
Cumulative effect on prior years
of change in method of accounting
for asset retirement obligation ( 810,115) -- --
---------- --------- ---------
NET (LOSS) INCOME $( 536,189) $( 33,312) $ 532,029
========== ========= =========
The accompanying notes are an integral part of these statements.
26
PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
EARNINGS PER COMMON SHARE
Basic:
Income (loss) before
cumulative effect of change
in accounting principle $ .11 $ (.01) $ .21
Cumulative effect on prior
Years of change in method of
Accounting for asset
Retirement obligation (.32) -- --
---------- --------- ---------
BASIC (LOSS) INCOME $ (.21) $ (.01) $ .21
========== ========= =========
Diluted:
Income (loss) before
cumulative effect of change
in accounting principle $ .11 $ (.01) $ .21
Cumulative effect on prior
Years of change in method of
Accounting for asset
Retirement obligation (.32) -- --
---------- --------- ---------
DILUTED (LOSS) INCOME $ (.21) $ (.01) $ .21
========== ========= =========
Weighted average number of
common shares outstanding 2,494,430 2,494,430 2,494,430
========== ========= ==========
The accompanying notes are an integral part of these statements.
27
PYRAMID OIL COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
Common Shares
Issued and Common Retained
Outstanding Stock Earnings
------------- ---------- ----------
Balances, December 31, 2000 2,494,430 $1,071,610 $1,425,386
Net income -- -- 532,029
--------- --------- ---------
Balances, December 31, 2001 2,494,430 1,071,610 1,957,415
Net loss -- -- ( 33,312)
--------- --------- ---------
Balances, December 31, 2002 2,494,430 1,071,610 1,924,103
Net loss -- -- ( 536,189)
--------- --------- ---------
Balances, December 31, 2003 2,494,430 $1,071,610 $1,387,914
========= ========= =========
The accompanying notes are an integral part of these statements.
28
PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------
2003 2002 2001
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(536,189) $( 33,312) $ 532,029
Adjustments to reconcile net (loss)
income to net cash provided
by operating activities:
Cumulative effect on prior years of
change in method of accounting
for asset retirement obligation 810,115 -- --
Provision for depletion,
depreciation and amortization 168,268 172,390 185,660
Accretion expense 54,262 -- --
Decrease in asset
retirement obligation ( 3,973) -- --
Exploration costs -- 7,007 43,527
Gain on sale of
property and equipment -- ( 300) (74,860)
Loss on disposal of fixed assets 7,000 10,100 --
Changes in operating assets
and liabilities:
(Increase) decrease in trade
accounts and interest receivable (24,424) (94,985) 51,233
(Increase) decrease in crude
oil inventories 1,736 ( 2,598) 8,601
Increase in prepaid expenses (11,087) ( 9,734) ( 9,360)
Increase (decrease) in
accounts payable and
accrued liabilities 64,265 12,917 (19,420)
------- ------- -------
Net cash provided by
operating activities 529,973 61,485 717,410
------- ------- -------
The accompanying notes are an integral part of these statements.
29
PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(CONTINUED)
Year ended December 31,
------------------------------
2003 2002 2001
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (360,416) (302,402) (202,595)
Proceeds from sale of
property and equipment -- 300 114,600
Net change in short-term investments -- -- (600,000)
------- ------- -------
Net cash used in investing activities (360,416) (302,102) (687,995)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (136,047) ( 15,409) ( 71,727)
Proceeds from issuance of long-term debt 70,450 144,449 55,001
------- ------- -------
Net cash provided by (used in)
financing activities ( 65,597) 129,040 ( 16,726)
------- ------- -------
Net (decrease) increase in cash
and cash equivalents 103,960 (111,577) 12,689
Cash and cash equivalents
at beginning of year 502,839 614,416 601,727
------- ------- -------
Cash and cash equivalents at end of year $ 606,799 $ 502,839 $ 614,416
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year
for interest $ 7,609 $ -- $ 3,194
======= ======= =======
Cash paid during the year
for income taxes $ 1,125 $ 1,125 $ 1,025
======= ======= =======
The accompanying notes are an integral part of these statements.
30
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Pyramid Oil Company (the Company), a California Corporation, has been in the
oil and gas business continuously since it was incorporated on October 9,
1909. The Company is in the business of exploration, development and
production of crude oil and natural gas. The Company operated and has
interests in 27 oil and gas leases in Kern and Santa Barbara Counties in the
State of California. The Company also owns oil and gas interests in Wyoming
and New York that it does not operate. The Company grants short-term credit
to its customers and generally receives payment within 30 days.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents principally consist of demand deposits and
certificates of deposits having original maturities of three months or less.
INVESTMENTS
Investments consist of certificates of deposit having original maturities of
three months or more and are valued at cost.
INVENTORY
Inventories of crude oil and condensate are valued at the lower of cost,
predominately on a first-in, first-out (FIFO) basis, or market, and include
certain costs directly related to the production process.
31
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
OTHER ASSETS
Other Assets reflects the fixed assets, net of depreciation and valuation
allowances, of the Company's former well service division, that was shut-
down during 1993. These assets are non-productive and are being held for
resale.
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
The Company has adopted the "successful efforts" method of accounting for its
oil and gas exploration and development activities, as set forth in the
Statement of Financial Accounting Standards No. 19, as amended, issued by the
Financial Accounting Standards Board.
The Company initially capitalizes expenditures for oil and gas property
acquisitions until they are either determined to be successful (capable of
commercial production) or unsuccessful. The carrying value of all undeveloped
oil and gas properties is evaluated periodically and reduced if such carrying
value appears to have been impaired. Leasehold costs relating to successful
oil and gas properties remain capitalized while leasehold costs which have
been proven unsuccessful are charged to operations in the period the leasehold
costs are proven unsuccessful. Costs of carrying and retaining unproved
properties are expensed as incurred.
The costs of drilling and equipping development wells are capitalized, whether
the wells are successful or unsuccessful. The costs of drilling and equipping
exploratory wells are capitalized until they are determined to be either
successful or unsuccessful. If the wells are successful, the costs of the
wells remain capitalized. If, however, the wells are unsuccessful, the
capitalized costs of drilling the wells, net of any salvage value, are charged
to operations in the period the wells are determined to be unsuccessful.
The Company adopted the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (the
Statement). The Statement specifies when an impairment loss should be
recognized and how impairment losses should be measured for long-lived assets
to be held and used and for long-lived assets to be disposed of. In
accordance with the Statement, the costs of proved oil and gas properties and
equipment are periodically assessed on a lease by lease basis to determine if
such costs exceed undiscounted future cash flows, and if conditions warrant an
impairment reserve will be provided based on the estimated future discounted
cash flows. There were no material impairment reserves recorded in the three
years ended December 31, 2003.
32
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
DEPLETION, DEPRECIATION, AND AMORTIZATION
Depletion of leasehold costs of producing oil and gas properties is provided
on the unit-of-production method, by individual property unit, based on
estimated recoverable proved reserves. Depreciation and amortization of the
costs of producing wells and related equipment are provided on the
unit-of-production method, by individual property unit, based on estimated
recoverable proved developed reserves. Amortization of the costs of
undeveloped oil and gas properties is based on the Company's experience,
giving consideration to the holding periods of leaseholds. The average
depletion per equivalent barrel of crude oil produced for 2003, 2002 and 2001
were $0.95, $1.21 and $1.30, respectively.
Drilling and operating equipment, buildings, automotive, office and other
property and equipment and leasehold improvements are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the shorter of the estimated useful lives or the applicable lease terms (range
of 3 to 19 years). Any permanent impairment of the carrying value of property
and equipment is provided for at the time such impairments become known.
MAINTENANCE AND REPAIRS
Maintenance, repairs and replacement expenditures are charged to operations as
incurred, while major renewals and betterments are capitalized and depreciated
over their useful lives.
RETIREMENT OR DISPOSAL OF PROPERTIES AND EQUIPMENT
Costs and accumulated depletion, depreciation, amortization and valuation
allowances of property and equipment retired, abandoned, or otherwise disposed
of are removed from the accounts upon disposal, and any resulting gain or loss
is included in operations in the year of disposition. However, upon disposal
of a portion of an oil and gas property, any proceeds received are treated as
a recovery of cost and no gain or loss is recognized in the year of
disposition.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
33
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that includes the
enactment date.
CONCENTRATION OF CREDIT RISK
The Company sells its crude oil to ConocoPhillips and Kern Oil & Refining,
accounting for approximately 50.4%, and 45.4%, respectively, of Pyramid's
crude oil and gas sales in 2003. While revenue from these customers is
significant, and the loss of any one could have an adverse effect on the
Company, it is management's opinion that the oil and gas it produces could be
sold to other crude oil purchasers, refineries or pipeline companies. Trade
receivables were approximately 55% and 44% attributable to ConocoPhillips and
Kern Oil and Refining respectively at December 31, 2003. Trade receivables
were approximately 53.1% and 39.3% attributable to Kern Oil and Refining and
Tosco Refining respectively at December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting and reporting for
derivative instruments and hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective
for derivative instruments and hedging activities entered into or modified
after June 30, 2003, except for certain forward purchase and sale securities.
For these forward purchase and sale securities, SFAS No. 149 is effective for
both new and existing securities after June 30, 2003. This statement is not
applicable to the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the
standard, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. SFAS No. 150 will be effective for
financial instruments entered into or modified after May 31, 2003 and
otherwise will be effective at the beginning of the first interim period
beginning after June 15, 2003. This statement is not applicable to the
Company.
34
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
2. LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt at December 31, 2003 and 2002, is summarized as follows:
December 31,
----------------------
2003 2002
--------- ---------
Note payable to GMAC, secured by equipment
purchased with the proceeds of the loan,
payable in monthly installments of $999
principal only, zero interest charges,
final payment in 2005. $ 23,965 $ 35,947
Note payable to GMAC, secured by equipment
purchased with the proceeds of the loan,
payable in monthly installments of $1,111
principal only, zero interest charges,
final payment in 2004. 11,111 24,445
Note payable to GMAC, secured by equipment
purchased with the proceeds of the loan,
payable in monthly installments of $1,114
principal only, zero interest charges,
final payment in 2006. 37,888 --
Note payable to GMAC, secured by equipment
purchased with the proceeds of the loan,
payable in monthly installments of $632
principal only, zero interest charges,
final payment in 2007. 30,334 --
Notes payable to three individuals (a)
unsecured, principal and accrued interest
due April 11, 2003, interest at 7%. -- 108,502
------- -------
103,298 168,894
Less - current maturities ( 44,049) (133,818)
------- -------
$ 59,248 $ 35,076
======= =======
(a) Mr. John H. Alexander, an officer and director of the Company, is one of
the payee individuals. Mr. Alexander's share of the notes payable is $36,166.
See Note 4, Related-Party Transaction of Notes to Financial Statements for
additional information.
35
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
At December 31, 2003 approximately $157,000 of gross property and equipment
was pledged as collateral to secure approximately $103,300 principal amount of
long-term debt.
Maturities of long-term debt are as follows:
Year ending December 31, 2004 $ 44,049
2005 32,938
2006 18,727
2007 7,583
-------
$103,298
=======
At December 31, 2003, the Company had an unsecured line of credit with a bank,
under which the Company may borrow up to $100,000 through May 31, 2004.
Interest on any borrowing is accrued at the bank's index rate plus 0.50
percentage points. The bank's index rate was 4.0% at December 31, 2003.
3. INCOME TAXES
Income tax provision (benefit) consists of the following:
Year Ended December 31,
-----------------------------------
2003 2002 2001
------- ------- ------
Federal income taxes:
Current $ 32,016 $( 17,332) $ 110,704
Utilization of NOL's ( 32,016) 17,332 (110,704)
Deferred -- -- --
------- ------- -------
-- -- --
------- ------- -------
State income taxes:
Current ( 3,542) (25,962) 25,912
Utilization of NOL's 4,667 27,087 (24,887)
Deferred -- -- --
------- ------- -------
1,125 1,125 1,025
------- ------- -------
Income tax provision $ 1,125 $ 1,125 $ 1,025
======= ======= =======
36
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Differences exist between certain accounting policies and related provisions
included in federal income tax rules. The amounts by which these differences
and other factors cause the total income tax provision to differ from an
amount computed by applying the federal statutory income tax rate to financial
income is set forth in the following reconciliation:
Year Ended December 31,
-----------------------------------
2003 2002 2001
-------- -------- --------
Federal income tax expense
(benefit) at statutory rate $(182,304) $( 10,944) $ 181,238
Net operating loss carryover ( 54,438) 10,944 (110,704)
Statutory depletion ( 60,047) -- ( 55,273)
Cumulative effect of change in
accounting principle 295,736 -- --
Section 196(a) restoration of basis -- -- ( 9,256)
Other 2,178 1,125 ( 4,980)
-------- -------- --------
Income tax provision $ 1,125 $ 1,125 $ 1,025
======== ======== ========
The components of net deferred tax asset (liability) are as follows:
December 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Current deferred taxes:
Gross assets $ 27,927 $ 22,911 $ 15,490
Gross liabilities -- -- --
---------- ---------- ----------
27,927 22,911 15,490
---------- ---------- ----------
Noncurrent deferred taxes:
Gross assets 2,156,444 2,357,135 2,432,954
Gross liabilities ( 86,164) ( 60,839) ( 53,548)
Valuation allowance (2,098,207) (2,319,207) (2,394,896)
---------- --------- ---------
( 27,927) ( 22,911) ( 15,490)
---------- --------- ---------
$ -- $ -- $ --
========== ========= =========
37
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The tax effect of significant temporary differences representing deferred tax
assets and (liabilities) are as follows:
December 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
Accounts receivable $ 1,600 $ 1,600 $ 1,600
Net operating loss
carry forwards 456,979 683,750 820,519
Statutory depletion
carryover 1,699,464 1,673,385 1,612,435
Accrued liabilities 26,327 21,311 13,890
---------- --------- ---------
Total deferred tax assets 2,184,370 2,380,046 2,448,444
Property and equipment ( 86,163) ( 60,839) ( 53,548)
Valuation allowance (2,098,207) (2,319,207) (2,394,896)
---------- --------- ---------
$ -- $ -- $ --
========== ========= =========
At December 31, 2003, a valuation allowance has been provided against a
significant portion of the deferred tax assets generated by net operating loss
carryforwards and the statutory depletion carryover due to the uncertainty of
their future utilization.
The Company has federal income tax net operating loss carry forwards of
approximately $1,235,000, which expire, to the extent not used, starting in
2003 through 2022. For California franchise tax purposes, as of December 31,
2003 the Company has unused net operating loss carryforwards of approximately
$397,000, a portion of which expire each year starting in 2004.
At December 31, 2003, the Company has, for federal income tax purposes, a
statutory depletion carryover of approximately $4,998,000, which currently
has no expiration date.
As of December 31, 2003, the Company has no investment tax credit carryforward
available to reduce future taxes payable for financial reporting and federal
income tax purposes. Approximately $27,000 of these credits expired in 2001.
Upon expiration, the Company has claimed a current deduction on their federal
tax return.
38
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
4. RELATED-PARTY TRANSACTION
Effective January 1, 1990, John H. Alexander, an officer and director of the
Company participated with a group of investors that acquired the mineral and
fee interest on one of the Company's oil and gas leases in the Carneros Creek
field after the Company declined to participate. The thirty-three percent
interest owned by Mr. Alexander represents a minority interest in the investor
group. Royalties on oil and gas production from this property paid to the
investor group approximated $122,000, $100,000 and $98,000 in 2003, 2002 and
2001, respectively.
Effective April 1, 2002, the Company acquired the remaining working interest
in the above referenced oil and gas lease in the Carneros Creek field and
working interests in two other leases in the same area from the investor group
noted above. The investor group acquired these working interests from the
Company's former joint venture partner in these three oil and gas leases as
the result of a court ordered settlement agreement concluding litigation
between the investor group and the joint venture partner. The investor group
sold the working interests to the Company for $217,000. Mr. John H.
Alexander, Vice President of the Company, owns a thirty-three percent interest
in the investor group. The Company had notes payable to the investor group in
the amount of $108,502 at the end of December 31, 2002, of which $108,502 was
paid-off on the notes payable in 2003.
5. FOURTH QUARTER RESULTS (UNAUDITED)
During the fourth quarter of 2003, the Company adjusted the liability for
asset retirement obligation due to a change in the remaining life of certain
of its oil and gas properties. These changes were based on adjustments made
to the Company's oil and gas reserves by independent consultants. The effect
of these adjustments was to decrease net income by approximately $36,000 in
the fourth quarter of 2003.
6. COMMITMENTS AND CONTINGENCIES
The Company is liable for future dismantlement and abandonment costs
associated with its oil and gas properties. These costs include down-hole
plugging and abandonment of wells, future site restoration, post closure and
other environmental exit costs. The costs of future dismantlement and
abandonment have been accrued and recorded in the financial statements. See
Note 9, Change in Accounting Principles.
The Company is subject to certain litigation within the normal course of
business. In management's opinion, the resolution of such litigation would
not have a material adverse effect upon the financial position of the Company,
although the resolution in any reporting period of such litigation could have
39
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
a material impact on Pyramid's results of operations for that period.
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. During the fourth quarter of 2001, the Company
received a full and complete refund of the prospect fee. This prospect was
cancelled by the operator after additional structural geology work and
analysis. Approximately $42,000 recorded as Exploration Costs in the nine
months ended September 30, 2001 was reversed in the fourth quarter as the
Company was reimbursed for these costs due to the abandonment of an
exploration project.
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 $1,042,000 in costs.
7. 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.
8. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan (Simple IRA) available to all
employees meeting certain service requirements. Employees may contribute up
to a maximum of $6,000 of their compensation to the plan. The Company will
make a contribution to the plan in an amount equal to the employees
contributions up to 3% of their salaries. Contributions of $11,052, $10,587
and $10,324 were made during the years ended December 31, 2003, 2002 and 2001,
respectively.
40
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(9) CHANGE IN ACCOUNTING PRINCIPLE
In accordance with Statement of Financial Accounting Standards No. 143,
''Accounting for Assets Retirement Obligations'', effective January 1, 2003,
the Company changed its method of accounting for asset retirement obligations
(ARO) relating to well abandonment costs from expensing such costs in the year
the wells are abandoned to recording a liability when such costs are incurred
in order to provide a better matching of revenue and expenses and to improve
interim financial reporting.
Upon adoption of SFAS 143, the Company was required to recognize a liability
for the present value of all legal obligations associated with the retirement
of tangible long-lived assets and an asset retirement cost was capitalized as
part of the carrying value of the associated asset. Upon initial application
of SFAS 143, a cumulative effect of a change in accounting principle was also
required in order to recognize a liability for any existing ARO's adjusted for
cumulative accretion, an increase to the carrying amount of the associated
long-lived asset and accumulated depreciation on the capitalized cost.
Subsequent to initial measurement, liabilities are required to be accreted to
their present value each period and capitalized costs are depreciated over the
estimated useful life of the related assets. Upon settlement of the liability,
the Company will settle the obligation against its recorded amount and will
record any resulting gain or loss. As a result of the adoption of SFAS 143 on
January 1, 2003, the Company recorded a $290,450 and $225,983 increase in the
capitalized cost and accumulated depreciation, respectively, of its oil and
gas properties.
The effect of these changes for the twelve months ending December 31, 2003,
resulted in a decrease in income from continuing operations of $59,698. The
cumulative effect of these changes on years prior to January 1, 2003,
approximately $810,115 ($0.23 per common share), has been charged to
operations in 2003. The effect on net income of this change in accounting
methods is as follows:
Amount Per Share
-------- ---------
Cumulative effect to January 1, 2003 $(810,115) $(0.23)
Effect on twelve months ended
December 31, 2003 (59,698) (0.02)
Pro Forma effect on twelve months
ended December 31, 2002:
As reported $( 33,312) $(0.01)
Pro Forma ( 56,307) (0.02)
41
There are no legally restricted assets for the settlement of asset retirement
obligations. No income tax is applicable to the asset retirement obligation
as of December 31, 2003, because the Company records a valuation allowance on
net operating losses and deductible temporary differences due to the
uncertainty of its realization.
A reconciliation of the Company's asset retirement obligations from the
periods presented are as follows:
Amount
-------
Beginning Balance, January 1, 2003 $882,885
Incurred during the period (3,974)
Settled during the period --
Accretion expense 54,262
Revisions in estimates (2,867)
-------
Ending Balance, December 31, 2003 $930,306
=======
42
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
OIL AND GAS PRODUCING ACTIVITIES
DECEMBER 31, 2003
Statement of Financial Accounting Standards No. 19 (SFAS No. 19), "Financial
Accounting and Reporting by Oil and Gas Producing Companies", as amended,
requires disclosure of certain financial data for oil and gas operations and
reserve estimates of oil and gas. This information, presented here, is
intended to enable the reader to better evaluate the operations of the
Company. All of the Company's oil and gas reserves are located in the United
States.
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depletion, depreciation, and
amortization and valuation allowances as of December 31, 2003, 2002 and 2001
were as follows:
2003 2002 2001
---------- ---------- ----------
Proved properties $10,591,300 $10,343,000 $10,115,000
Unproved properties
being amortized 178,600 178,600 178,600
Unproved properties
not being amortized -- -- --
Capitalized asset retirement costs 290,500 -- --
Accumulated depletion,
depreciation, amortization
and valuation allowances (10,306,400) (10,009,200) (9,926,300)
---------- --------- ---------
$ 754,000 $ 512,400 $ 367,300
========== ========= =========
43
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2003
The estimated quantities and the change in proved reserves, both developed and
undeveloped, for the Company are as follows:
2003 2002 2001
------------ ------------- -------------
Oil Gas Oil Gas Oil Gas
(MBbls) (MMCF) (MBbls) (MMCF) (MBbls) (MMCF)
----- ---- ----- ---- ----- ----
Proved reserves:
Beginning of year 554 105 323 37 341 72
Revisions of previous
estimates 75 (15) 297 79 59 (26)
Extensions, discoveries
and other additions -- -- -- -- -- --
Production (74) ( 7) (66) (11) (77) ( 9)
---- ---- ---- ---- ---- ----
End of year 555 83 554 105 323 37
==== ==== ==== ==== ==== ====
Proved developed reserves:
Beginning of year 554 105 323 37 341 72
==== ==== ==== ==== ==== ====
End of year 555 83 554 105 323 37
==== ==== ==== ==== ==== ====
The foregoing estimates have been prepared by the Company from data prepared
by an independent petroleum engineer in respect to certain producing
properties. Revisions in previous estimates as set forth above resulted from
analysis of new information, as well as from additional production experience
or from a change in economic factors.
The reserve estimates are believed to be reasonable and consistent with
presently known physical data concerning size and character of the reservoirs
and are subject to change as additional knowledge concerning the reservoirs
becomes available.
44
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2003
The present value of estimated future net revenues of proved developed
reserves, discounted at 10%, were as follows:
December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Proved developed reserves
(Present value before
income taxes) $4,617,000 $4,325,000 $1,250,000
========= ========= =========
SFAS No. 69, "Disclosures About Oil and Gas Producing Activities", requires
certain disclosures of the costs and results of exploration and production
activities and established a standardized measure of oil and gas reserves and
the year-to-year changes therein.
In addition to the foregoing disclosures, SFAS No. 69 established a
"Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves".
Costs incurred, both capitalized and expensed, of oil and gas property
acquisition, exploration and development for the years ended December 31,
2003, 2002 and 2001 were as follows:
2003 2002 2001
------- ------- -------
Property acquisition costs $ -- $228,000 $ 7,000
Exploration costs -- 7,000 44,000
Development costs 255,000 -- 12,000
Asset retirement costs 290,500 -- --
45
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2003
The results of operations for oil and gas producing activities for the years
ended December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
---------- ---------- ----------
Sales $ 2,071,000 $ 1,616,000 $ 1,680,000
Production costs 1,232,000 1,095,000 1,107,000
Exploration costs -- 7,000 44,000
Accretion expense 54,000 -- --
Depletion, depreciation,
and amortization 77,000 83,000 102,000
--------- --------- ---------
708,000 431,000 427,000
Income tax (benefit) provision 1,200 1,200 1,200
--------- --------- ---------
Results of operations from
production activities $ 706,800 $ 429,800 $ 425,800
========= ========= =========
The standardized measure of discounted estimated future net cash flows
relating to proved oil and gas reserves for the years ended December 31, 2003,
2002 and 2001 were as follows:
2003 2002 2001
---------- ---------- ----------
Future cash inflows $17,380,000 $16,490,000 $ 5,529,000
Future development and
production costs 8,792,000 9,166,000 3,538,000
Future abandonment costs 736,000 -- --
Future income tax expense 12,000 12,000 12,000
---------- ---------- ----------
Future net cash flow 7,840,000 7,312,000 1,979,000
10% annual discount 3,230,000 2,994,000 736,000
Standardized measure ---------- ---------- ----------
of discounted future
net cash flow $ 4,610,000 $ 4,318,000 $ 1,243,000
========== ========== ==========
46
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2003
The principal changes in the standardized measure of discounted future net
cash flows during the years ended December 31, 2003, 2002 and 2001 were as
follows:
2003 2002 2001
---------- ---------- ----------
Extensions $ -- $ -- $ --
Revisions of previous estimates
Price changes 952,000 1,588,000 (871,000)
Quantity estimate 690,000 2,494,000 216,000
Change in production rates,
timing and Other (208,000) (611,000) ( 63,000)
Development costs incurred 255,000 -- 12,000
Changes in estimated future
development costs (255,000) -- ( 12,000)
Changes in estimated future
abandonment costs (736,000) -- --
Sales of oil and gas, net of
production costs (839,000) (521,000) (573,000)
Accretion of discount 433,000 125,000 231,000
---------- ---------- ----------
292,000 3,075,000 (1,060,000)
Net change in income taxes -- -- --
---------- ---------- ----------
Net (decrease) increase $ 292,000 $ 3,075,000 $(1,060,000)
========== ========== ==========
Estimated future cash inflows are computed by applying year-end prices of oil
and gas to year-end quantities of proved reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves, as
well as certain abandonment costs, based on year-end cost estimates and
assuming continuation of existing economic conditions. Estimated future
income tax expense is calculated by applying the year-end effective tax rate
to estimated future pretax net cash flows related to proved oil and gas
reserves, less the tax basis of the properties involved.
47
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2003
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the Securities and Exchange
Commission. Because of the unpredictable variances in expenses and capital
forecasts, crude oil and natural gas price changes being largely influenced
and controlled by United States and foreign governmental 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 do not represent management's assessment of future profitability or
future actual cash flows of the Company.
It should be recognized that applying current costs and prices and a ten
percent standard discount rate allows for comparability but does not convey
absolute value. The discounted amounts arrived at are only one measure of
financial quantification of proved reserves.
The increase in the standardized measure of discounted future net cash flows
at December 31, 2003, of $292,000 is due primarily to higher crude oil
prices at year end. The changes in crude oil prices at the end of each year
has a significant impact on the valuation of the Company's reserves and
discounted future net cash flows. Higher crude oil prices at the end of 2003
increased the discounted future net cash flows by approximately $690,000 due
to revisions of previous quantity estimates and by $952,000 due to price
changes. This was offset by the recognition of future abandonment costs of
$736,000.
The increase in the standardized measure of discounted future net cash flows
at December 31, 2002, of $3,075,000 is due primarily to higher crude oil
prices at year end. The changes in crude oil prices at the end of each year
has a significant impact on the valuation of the Company's reserves and
discounted future net cash flows. Higher crude oil prices at the end of 2002
increased the discounted future net cash flows by approximately $2,494,000 due
to revisions of previous quantity estimates and by $1,588,000 due to price
changes.
The decrease of $1,060,000 in the Company's standardized measure of future net
cash flows for the year ended December 31, 2001 is due primarily to revisions
of previous estimates due to price changes. Lower crude oil prices at the
end of 2001 reduced the discounted future net cash flows by approximately
$871,000.
48
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
QUARTERLY RESULTS
2003 2002
---------- ----------
REVENUES:
Quarter Ended:
March 31 $ 538,608 $ 283,678
June 30 487,222 427,087
September 30 506,801 439,354
December 31 537,783 465,922
---------- ----------
$ 2,070,414 $ 1,616,041
========== ==========
NET INCOME (LOSS):
Quarter Ended:
March 31 (a) $ (652,115) $ ( 73,858)
June 30 74,487 ( 24,982)
September 30 106,691 15,980
December 31 (b) ( 65,252) 49,548
---------- ----------
$ (536,189) $ ( 33,312)
========== ==========
INCOME (LOSS) PER COMMON SHARE:
Quarter Ended:
March 31 (a) $ (.26) $ (.03)
June 30 .03 (.01)
September 30 .04 .01
December 31 (b) (.02) .02
---------- ----------
$ (.21) $ (.01)
========== ==========
(a) Reflects the implementation of SFAS #143, Accounting for Asset Retirement
Obligations, effective January 1, 2003 (see Note 9 of Notes to Financial
Statements included in Item 7 of this Form 10-KSB).
(b) Reflects adjustments to the asset retirement obligations made by the
Company and recorded in the fourth quarter amounts (see Note 5 of Notes to
Financial Statements included in Item 7 of this Form 10-KSB).
49
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 8A - CONTROLS AND PROCEDURES
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
Exchange Act), the Company's management, with the participation of the Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to the
disclosed in reports that the Company files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. No
change in the Company's internal control over financial reporting occurred
during the most recent fiscal quarter that materially affected, or is
reasonably likely to materially affect the Company's internal control over
financial reporting.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company hereby incorporates by reference the information to be contained
under the section entitled "Directors and Executive Officers" or a similarly
entitled section from its definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with its 2004 Annual Meeting
of Shareholders.
The Board of Directors met three times in 2003. Only non-employee directors
revceive payment for service as directors of the Company. Non-employee
directors receive $300 for each board meeting attended. Each director
received a total of $600 in directors fees during 2003. The Board meetings
were attended by all of the Directors.
The Company has adopted a code of ethics that is applicable to all of its
directors, officers and employees. A copy of the code is available at no
charge to any person who sends a request for a copy to the Corporate
Secretary, Pyramid Oil Company, P.O. Box 832, Bakersfield, California 93302.
ITEM 10 - EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information to be contained
under the section entitled "Compensation of Directors and Executive Officers"
or a similarly entitled section from its definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with its 2004
Annual Meeting of Shareholders.
50
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The Company hereby incorporates by reference the information to be contained
under the section entitled "Voting Securities and Principal Holders Thereof"
or a similarly entitled section from its definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with its 2004
Annual Meeting of Shareholders.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1, 1990, John H. Alexander, an officer and director of the
Company participated with a group of investors that acquired the mineral and
fee interest on one of the Company's oil and gas leases in the Carneros Creek
field after the Company declined to participate. The thirty-three percent
interest owned by Mr. Alexander represents a minority interest in the
investor group. Royalties on oil and gas production from this property paid
to the investor group approximated $122,000 in 2003, $100,000 in 2002 and
$98,000 in 2001.
Effective April 1, 2002, the Company acquired the remaining working interest
in the above referenced oil and gas lease in the Carneros Creek field and
working interests in two other leases in the same area from the investor group
noted above. The investor group acquired these working interests from the
Company's former joint venture partner in these three oil and gas leases as
the result of a court ordered settlement agreement concluding litigation
between the investor group and the joint venture partner. The investor group
sold the working interests to the Company for $217,000. Mr. John H.
Alexander, Vice President of the Company, owns a thirty-three percent interest
in the investor group. The Company had notes payable to the investor group in
the amount of $108,502 at the end of December 31, 2002, of which $108,502 was
paid-off on the notes payable in 2003.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
These documents are listed and included in Part II, Item 7 of this
report:
Report of Independent Public Accountants
Balance Sheets at December 31, 2003 and 2002.
Statements of Operations for the three years in the period
ended December 31, 2003.
Statements of Shareholders' Equity for the three
years in the period ended December 31, 2003.
Statements of Cash Flows for the three
years in the period ended December 31, 2003.
Notes to Financial Statements.
51
(a) 3. EXHIBITS
3.1 Registrant's Articles of Incorporation (1)
3.2 Registrant's By Laws (1)
3.2.1 Registrant's Amendment to the By Laws (2)
10.1 Employment Agreement of J. Ben Hathaway, dated August 1,
2001 (3)
10.2 Employment Agreement of John H. Alexander, dated August 1,
2001 (3)
10.3 Employment Agreement of John H. Alexander, dated February
21, 2002 (4)
10.4 Employment Agreement of Benny Hathaway, Jr. dated February
21, 2002 (4)
31.1 Certification of Chief Executive Officer Pursuant to 15 U.S.C.
Section 7241, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99 Letter to Securities and Exchange Commission regarding
Arthur Andersen's representations (4)
(1) Incorporated by reference from Exhibits 18-1 and 18-2, respectively, to
the Registrant's 1971 Form 10.
(2) Incorporated by reference from the Registrant's August 25, 1986 Proxy
Statement.
(3) Incorporated by reference from Exhibits 10.1 and 10.2 to the Registrants
June 30, 2001 Form 10-QSB.
(4) Incorporated by reference from Exhibits 10.3, 10.4 and 99 to the
Registrants December 31, 2001 Form 10-KSB.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 2003.
52
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company hereby incorporates by reference the information contained under
the section entitled ''Principal Accounting Fees and Services'' or a similarly
entitled section from its definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with its 2004 Annual Meeting
of Shareholders.
53
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PYRAMID OIL COMPANY
March 30, 2004 By: J. BEN HATHAWAY
----------------------
J. Ben Hathaway
Director/President
Chief Executive Officer
In accordance with 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 indicated.
J. BEN HATHAWAY Director/President March 30, 2004
--------------------------- Chief Executive Officer
J. Ben Hathaway
JOHN H. ALEXANDER Director/Vice President March 30, 2004
---------------------------
John H. Alexander
THOMAS W. LADD Director March 30, 2004
---------------------------
Thomas W. Ladd
GARY L. RONNING Director March 30, 2004
---------------------------
Gary L. Ronning
JOHN E. TURCO Director March 30, 2004
---------------------------
John E. Turco
LEE G. CHRISTIANSON Corporate Secretary/ March 30, 2004
--------------------------- Principal Accounting and
Lee G. Christianson Financial Officer