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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, 2004
[ ] 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, 2004 were
$2,674,902.
The aggregate market value on March 29, 2005, of the voting shares held by
non-affiliates was approximately $3,600,000 based on the closing sales price
of the registrant's Common Stock on such date.
At March 29, 2005, 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 2005 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
2004 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 . . . . . . . . . . 23
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure . . . 52
Item 8A. Controls and Procedures . . . . . . . . . 52
Item 8B. Other Information . . . . . . . . . . . . 52
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section
16(a) of the Exchange Act . . . . . . . 52
Item 10. Executive Compensation . . . . . . . . . 52
Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters . . . . . . . . . 53
Item 12. Certain Relationships and Related Transactions 53
Item 13. Exhibits . . . . . . . . . . . . . . . . 54
Item 14. Principal Accountant Fees and Services . . 54
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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 the 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 2004, the Company operated 18 leases within California, with total
annual gross oil production exceeding 1,000 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 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 119 wells, and of these, approximately 64 were in operation
during 2004. 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.
MARKETING OF CRUDE OIL AND NATURAL GAS
The Company sells its crude oil to ConocoPhillips and Kern Oil & Refining,
accounting for approximately 52.2% and 43.2%, respectively, of Pyramid's crude
oil and gas sales in 2004. 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
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.
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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, 2004, three of
whom were office or administrative personnel, and the rest of whom were field
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, 2004.
All of the Company's revenues during 2004 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, 2004, 2003 and 2002.
(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, 2005 522,000 83,000
2004 555,000 83,000
2003 554,000 105,000
2002 323,000 37,000
2001 341,000 72,000
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, 2004.
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 $4,636,000 at December 31, 2004,
$4,617,000 at December 31, 2003, $4,325,000 at December 31, 2002, $1,250,000
at December 31, 2001, and $2,311,000 at December 31, 2000.
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.
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Crude oil (Bbls) 72,000 74,000 66,000 74,000 71,000
Natural gas (MCF) 8,300 7,500 11,000 9,000 9,000
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:
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Sales price:
Crude oil $36.24 $27.60 $25.86 $21.02 $26.16
===== ===== ===== ===== =====
Natural gas $ 5.89 $ 5.77 $ 3.08 $ 4.80 $ 3.14
===== ===== ===== ===== =====
Production costs $18.20 $15.80 $15.30 $13.30 $13.60
===== ===== ===== ===== =====
The average selling price of Pyramid's crude oil at December 31, 2004, was
approximately $32.42 per barrel and the average selling price of Pyramid's gas
at December 31, 2004, was approximately $7.88 per MCF.
As of December 31, 2004, 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 21,387 5,844
=== === ====== =====
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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 two new wells in 2004, one on the Santa Fe lease and one
joint-venture well. The Company participated with two other oil companies as
operator in the drilling of the joint venture well. The Company also drilled
a well in 2003 on the Anderson lease in the Carneros Creek Field. No wells
were drilled in 2002, 2001 and 2000, 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, 2004, 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, 2004, 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 2004.
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 2004 and 2003, and reflect inter-dealer prices without retail markup,
markdown or commission.
High Low
---- -----
Fiscal Quarter Ending 2004
March 31, $2.1200 $0.7500
June 30, 1.3500 1.0600
September 30, 1.9000 1.1600
December 31, 4.3500 1.5000
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
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At December 31, 2004, the Company had 347 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 had received a proposal from a shareholder to pay a cash
dividend in 2004. This dividend proposal was included in the proxy statement
for the 2004 Annual Meeting of Shareholders and was voted upon by the
shareholders. The dividend proposal was defeated.
The Company did not issue or repurchase any securities during 2004.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
IMPACT OF CHANGING PRICES
Average prices increased by approximately $8.50 per equivalent crude oil and
gas barrel sold during 2004 as compared with average prices for 2003. In 2004
there were 216 separate crude oil price changes, as compared with 204 price
changes in 2003. The difference between the highest and lowest posted prices
in 2004 was $17.40 per barrel. By comparison, this same differential in 2003
was $14.50 per barrel.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $816,216 at December 31, 2004 for
an increase of $209,417 when compared to December 31, 2003. Operating
activities in 2004 generated cash of $914,797. During 2004, cash was consumed
by capital spending of $732,738, a cash deposit with the state of California
Division of Oil and Gas in the amount of $250,000 and principal payments on
the Company's long-term debt totaling $48,434. This was offset by proceeds
from the sale of property and equipment in the amount of $281,500 and the
issuance of long-term debt of $59,849. The components of the changes in cash
for 2004 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 2004, 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 $200,000 line of credit,
unused at December 31, 2004, also provided additional liquidity during 2004.
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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, 2005. In addition to its current assets,
the Company also has a credit facility for $200,000 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, 2004, the amount of cash, cash equivalents, and other
current assets was equal to $2,167,000 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, 2004.
As of December 31, 2003, the Company had approximately $2,167,000 in
current assets, and only $545,000 of current liabilities.
As of December 31, 2003, the Company had only $64,000 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 in drilling
and exploration prospects 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 to
raise capital for the benefit of these programs.
The Company drilled two wells in the year ended December 31, 2004. 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, 2004 and 2003, were stable. The Company was
able to replace current production by drilling the well in 2003. One of the
wells drilled in 2004, during the second quarter, was not capable of producing
economic quantities of crude oil and is scheduled to be abandoned in 2005.
The other well was drilled in the fourth quarter of 2004.
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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 2005, crude oil prices have increased by $11.80 per
barrel as of March 28, 2005, compared to prices at December 31, 2004. There
have been 47 separate price changes since December 31, 2004.
The Company's 2005 capital budget provides funds for drilling several new
developmental wells in the Company's Carneros Creek area. Additionally, this
budget provides funds for reworking and stimulating certain existing Company
wells and for specific lease acquisitions within California.
Management has participated in discussions with another independent oil
company headquartered in Bakersfield, CA, investigating the possibility of a
joint venture exploration drilling project within California. Management
believes that this prospect has merit and has entered into a Letter of Intent
with the other company.
The Company's growth in 2005 will be highly dependant on the amount of success
the Company has in its operations and capital investments, including the
outcome of wells that have not yet been drilled. The Company's capital
investment program may be modified during the year due to explorations and
development successes or failures, market conditions and other variables. The
production and sales of oil and gas involves many complex processes that are
subject to numerous uncertainties, including reservoir risk, mechanical
failures, human error and market conditions.
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 2005, by drilling new wells and 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
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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 2004. 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.
ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
Results of Operations for the Fiscal Year Ended December 31, 2004
Compared to the Fiscal Year Ended December 31, 2003
REVENUES
Oil and gas sales increased by 29% for the year ended December 31, 2004, when
compared with the same period for 2003. Oil and gas sales increased by 30%
due to higher average prices for 2004. The average price of the Company's oil
and gas increased by approximately $8.50 per equivalent barrel for 2004 when
compared to 2003. This was offset by a decrease in crude oil production/sales
of approximately 900 barrels.
OPERATING EXPENSES
Operating expenses increased by approximately 13% for the year ended December
31, 2004, when compared with the same period of 2003. The cost to produce an
equivalent barrel of crude oil increased by approximately $2.20 per barrel for
2004 when compared to 2003. Operating costs for the twelve months ended
December 31, 2004, increased due to a number of differing factors.
The Company worked on a well on one of its leases in the Carneros Creek area
during 2004, increasing operating costs by approximately 6%. The work on this
well was been done to explore a different producing zone in an effort to
increase production and to test this zone for application on other wells on
this same property. The work on this well did not generate any additional
production for this lease.
Expenses increased by 5% on a property that the Company returned to production
during the fourth quarter of 2004. This property has been shut-in for over
two years due to problems with economically disposing of produced waste water.
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As a result of the higher crude oil prices during 2004, it became economical
for the Company to cover the costs of disposing of the waste water.
Labor costs increased by approximately 2% due to increases in hourly wage
rates, overtime and the addition of one new field employee in August of 2004,
bringing the total number of field personnel from seven to eight employees.
Operating expenses were generally higher in 2004, as a result of the Company
placing greater emphasis on maintaining and enhancing crude oil production to
take advantage of the higher crude oil prices during 2004.
EXPLORATION COSTS
In April 2004, the Company entered into a Joint Venture Agreement with two oil
companies, Prime Natural Resources, LLC of Houston, Texas and North Arm
Resources, Inc. Of Wayzata, Minnesota for the drilling of a 5,500 foot
exploratory well in the Blackwell's Corner area of Kern Country California.
This drilling prospect contains approximately 1,100 acres and was developed by
employing 3-D seismic technology and geology. The Company purchased a 25%
position in the prospect for approximately $53,000 and will be the Operator.
The new well was drilled in May of 2004, with an estimated cost of
approximately $400,000 for a dry-hole look and $560,000 to complete as a
producer. The Company's share of these costs would be 25%. As of December
31, 2004, the Company's share of costs for drilling and competing the new well
was approximately $201,000. In the fourth quarter of 2004, a decision was made
by the Company and its joint venture partners to abandon this well. It was
determined in the fourth quarter of 2004, that the well could not produce
economic quantities of oil and gas. Therefore, the Company reclassified its
share of costs of $201,000 for drilling and completing this well as
exploration costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by approximately 59% for the
year ended December 31, 2004, when compared with the same period for 2003.
General and administrative expenses increased by approximately 49% due to the
settlement of the employment contract with J. Ben Hathaway. Mr. Hathaway
voluntarily resigned as President of Pyramid Oil Company and pursuant to the
terms of his employment contract, he received a payment of approximately
$170,000. General and administrative expenses also increased due to increased
administrative salaries of approximately 5%. Legal services also increased by
approximately 2% due to additional compliance efforts required by the recently
enacted Sarbanes-Oxley legislation.
PROVISION FOR DEPLETION, DEPRECIATION, AMORTIZATION
AND VALUATION ALLOWANCES
The provision for depletion, depreciation and amortization increased by
approximately 28% for the twelve months ended December 31, 2004, when compared
with the same period for 2003. The increase is due primarily to an increase of
18
12% in valuation allowances. At December 31, 2004, the Company was required
to provide a valuation allowance against an oil and gas property whose book
value exceeded the undiscounted net value of its future net cash flows in the
amount of approximately $21,000. Depletion also increased by approximately
11%. The increase in depletion is due to an increase in the depletion rate
due to an increase in the depletable asset base at January 1, 2005 and a
decline in proved developed reserves. Depreciation of fixed assets also
increased by 5% due primarily to the replacement of fully depreciated pickup
trucks with new trucks.
GAIN ON SALES OF PROPERTY AND EQUIPMENT
The Company sold a well servicing hoist in the first quarter of 2004 for a
gain of approximately $134,000 and a minor piece of production equipment in
the second quarter of 2004 for a gain of $4,000. The Company sold another
well servicing hoist in the third quarter of 2004 for a gain of approximately
$56,000. The Company sold a piece of equipment in the third quarter of 2004,
from the category, assets held for resale, for a gain of $28,000. The Company
also sold another piece of equipment in the fourth quarter of 2004, from the
category, assets held for resale, for a gain of $26,000. The Company sold
three excess pickups in 2004 for a gain of $8,600. All of the assets sold in
2004 had little or no net book values.
OTHER INCOME
The Company sold excess tubing and sundry used oilfield supplies and
production equipment during 2004, which resulted in approximately $53,000 of
other income.
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
19
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.
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.
CRITICAL ACCOUNTING POLICIES
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.
20
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. The Company recorded an impairment reserve of $21,699 at December
31, 2004. There were no material impairment reserves recorded in the two
years ended 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 2004, 2003 and 2002
were $1.50, $0.95 and $1.21, 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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, 'Inventory Costs'. SFAS No.
151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance in
ARB No. 43, Chapter 4, 'Inventory Pricing'. Paragraph 5 of ARB No. 43,
Chapter 4, previously stated that '. . . under some circumstances, items such
as idle facility expense, excessive spoilage, double freight, and rehandling
costs may be so abnormal as to require treatment as current period charges. .
21
. .' This Statement requires that those items be recognized as current-
period charges regardless of whether they meet the criterion of 'so
abnormal'. In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. This statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not expect adoption of SFAS No. 151 to have a material impact
on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 152, 'Accounting for Real Estate
Time-Sharing Transactions'. The FASB issued this Statement as a result of
the guidance provided in AICPA Statement of Position (SOP) 04-2, 'Accounting
for Real Estate Time-Sharing Transactions'. SOP 04-2 applies to all real
estate time-sharing transactions. Among other items, the SOP provides
guidance on the recording of credit losses and the treatment of selling costs,
but does not change the revenue recognition guidance in SFAS No. 66,
'Accounting for Sales of Real Estate', for real estate time-sharing
transactions. SFAS No. 152 amends Statement No. 66 to reference the guidance
provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, 'Accounting for
Costs and Initial Rental Operations of Real Estate Projects', to state that
SOP 04-2 provides the relevant guidance on accounting for incidental
operations and costs related to the sale of real estate time-sharing
transactions. SFAS No. 152 is effective for years beginning after June 15,
2005, with restatements of previously issued financial statements prohibited.
This statement is not applicable to the Company.
In December 2004, the FASB issued SFAS No. 153, 'Exchanges of Nonmonetary
Assets', an amendment to Opinion No. 29, 'Accounting for Nonmonetary
Transactions'. Statement No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in standards
issued by the International Accounting Standards Board. The amendment to
Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. Such
an exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS No.
153 is effective for nonmonetary asset exchanges occurring in periods
beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. Management does not expect adoption of SFAS No. 153 to have a material
impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123(R), 'Share-Based Payment'.
SFAS 123(R) amends SFAS No. 123, 'Accounting for Stock-Based Compensation',
and APB Opinion 25, 'Accounting for Stock Issued to Employees'. SFAS
No.123(R) requires that the cost of share-based payment transactions
(including those with employees and non-employees) be recognized in the
financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in amounts
based (even in part) on the price of the entity's shares or other equity
22
instruments, or (2) that require (or may require) settlement by the issuance
of an entity's shares or other equity instruments. This statement is
effective, as of the first interim period or fiscal year beginning after
December 15, 2005. Management is currently assessing the effect of SFAS No.
123(R) on the Company's financial statements.
23
ITEM 7- FINANCIAL STATEMENTS
PYRAMID OIL COMPANY
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . 24
FINANCIAL STATEMENTS:
Balance sheets - December 31, 2004 and 2003 . . . . . . . . . . 25-26
Statements of operations - years ended
December 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . 27-28
Statements of shareholders' equity - years ended
December 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . 29
Statements of cash flows - years
ended December 31, 2004, 2003 and 2002 . . . . . . . . . . . 30-31
Notes to financial statements . . . . . . . . . . . . . . . . . 32
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Pyramid Oil Company
Bakersfield, California
We have audited the balance sheets of Pyramid Oil Company as of December 31,
2004 and 2003, 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the 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
audits provided 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, 2004 and 2003, and the results of their operations and their cash
flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
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, 2005
25
FINANCIAL STATEMENTS
PYRAMID OIL COMPANY
BALANCE SHEETS
ASSETS
December 31,
--------------------------
2004 2003
---------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 816,216 $ 606,799
Short-term investments 850,000 850,000
Trade accounts receivable
(net of reserve for doubtful accounts
of $4,000 in 2004 and 2003) 216,821 217,460
Interest receivable 70,628 63,430
Employee loan receivable 8,801 --
Crude oil inventory 66,339 48,417
Prepaid expenses 110,164 114,411
Deferred income taxes 25,698 27,927
--------- ----------
Total current assets 2,164,667 1,928,444
--------- ----------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties and equipment
(successful efforts method) 11,208,833 10,769,838
Capitalized asset retirement costs 294,600 290,450
Drilling and operating equipment 2,067,006 1,819,360
Land, buildings and improvements 947,426 947,426
Automotive, office and
other property and equipment 961,519 967,244
---------- ----------
15,479,384 14,794,318
Less - accumulated depletion,
depreciation, amortization
and valuation allowances (13,294,764) (12,925,901)
---------- ----------
2,184,620 1,868,417
---------- ----------
OTHER ASSETS
Deposits 250,000 --
Other assets 15,556 --
Assets held for resale
(net of accumulated depreciation and
valuation allowance of $382,346
And $1,033,493 in 2004 and 2003) 9,633 38,237
---------- ----------
$ 4,624,476 $ 3,835,098
========== ==========
The accompanying notes are an integral part of these balance sheets.
26
PYRAMID OIL COMPANY
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
----------------------------
2004 2003
---------- ----------
CURRENT LIABILITIES:
Accounts payable $ 62,229 $ 95,651
Accrued professional fees 28,220 33,972
Accrued taxes, other than
income taxes 24,090 19,785
Accrued payroll and related costs 214,255 38,727
Accrued royalties payable 85,186 78,084
Accrued insurance 52,094 47,825
Current maturities of long-term debt 50,740 44,049
Deferred income taxes 25,698 27,927
--------- ----------
Total current liabilities 542,512 386,020
--------- ----------
LONG-TERM DEBT, net of current
maturities 63,972 59,248
--------- ----------
LIABILITY FOR ASSET RETIREMENT OBLIGATION 946,566 930,306
--------- ----------
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 1,999,816 1,387,914
---------- ----------
3,071,426 2,459,524
---------- ----------
$ 4,624,476 $ 3,835,098
========== ==========
The accompanying notes are an integral part of these balance sheets.
27
PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
REVENUES: $ 2,674,902 $ 2,070,414 $ 1,616,041
---------- ---------- ----------
COSTS AND EXPENSES:
Operating expenses 1,337,542 1,186,632 1,046,690
Exploration costs 201,388 -- 7,007
General and administrative 551,926 346,568 403,603
Taxes, other than income and
payroll taxes 54,064 53,521 55,531
Provision for depletion,
depreciation and amortization 214,673 168,268 172,360
Accretion expense 18,221 54,262 --
Other costs and expenses 19,350 18,663 16,488
--------- --------- ----------
2,397,164 1,827,914 1,701,709
--------- --------- ----------
OPERATING INCOME (LOSS) 277,738 242,500 ( 85,668)
--------- --------- ----------
OTHER INCOME (EXPENSE):
Interest income 16,551 20,246 36,935
Gain on sales of property
and equipment 252,421 -- 300
Loss on disposal of assets -- -- ( 10,100)
Other income 67,251 14,400 31,912
Interest expense ( 934) ( 2,095) ( 5,566)
---------- --------- ---------
335,289 32,551 53,481
---------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION 613,027 275,051 ( 32,187)
Income tax provision 1,125 1,125 1,125
---------- --------- ---------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 611,902 273,926 ( 33,312)
Cumulative effect on prior years
of change in method of accounting
for asset retirement obligation -- ( 810,115) --
---------- --------- ---------
NET (LOSS) INCOME $ 611,902 $( 536,189) $( 33,312)
========== ========= =========
The accompanying notes are an integral part of these statements.
28
PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
EARNINGS PER COMMON SHARE
Basic:
Income (loss) before
cumulative effect of change
in accounting principle $ .25 $ .11 $ (.01)
Cumulative effect on prior
Years of change in method of
Accounting for asset
Retirement obligation -- (.32) --
---------- --------- ---------
BASIC (LOSS) INCOME $ .25 $ (.21) $ (.01)
========== ========= =========
Diluted:
Income (loss) before
cumulative effect of change
in accounting principle $ .25 $ .11 $ (.01)
Cumulative effect on prior
Years of change in method of
Accounting for asset
Retirement obligation -- (.32) --
---------- --------- ---------
DILUTED (LOSS) INCOME $ .25 $ (.21) $ (.01)
========== ========= =========
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.
29
PYRAMID OIL COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
Common Shares
Issued and Common Retained
Outstanding Stock Earnings
------------- ---------- ----------
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
Net income -- -- 611,902
--------- --------- ---------
Balances, December 31, 2004 2,494,430 $1,071,610 $1,999,816
========= ========= =========
The accompanying notes are an integral part of these statements.
30
PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
Year ended December 31,
--------------------------------
2004 2003 2002
--------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 611,902 $(536,189) $( 33,312)
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 214,673 168,268 172,390
Accretion expense 18,221 54,262 --
Decrease in asset
retirement obligation ( 1,961) ( 3,973) --
Exploration costs 201,388 -- 7,007
Gain on sale of
property and equipment (252,421) -- ( 300)
Loss on disposal of fixed assets -- 7,000 10,100
Changes in operating assets
and liabilities:
(Increase) in trade accounts
and interest receivable ( 6,559) (24,424) (94,985)
(Increase) decrease in crude
oil inventories (17,922) 1,736 ( 2,598)
(Increase) decrease in
prepaid expenses 4,247 (11,087) ( 9,734)
Increase in accounts payable
and accrued liabilities 152,030 64,265 12,917
------- ------- -------
Net cash provided by
operating activities 923,598 529,973 61,485
------- ------- -------
The accompanying notes are an integral part of these statements.
31
PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(CONTINUED)
Year ended December 31,
------------------------------
2004 2003 2002
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $(732,739) $(360,416) $(302,402)
Cash deposit with the state of
California Division of Oil and Gas (250,000) -- --
Proceeds from sale of
property and equipment 281,500 -- 300
------- ------- -------
Net cash used in investing activities (701,239) (360,416) (302,102)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 100,000 -- --
Payments on line of credit (100,000) -- --
Principal payments on long-term debt ( 48,434) (136,047) ( 15,409)
Proceeds from issuance of long-term debt 59,849 70,450 144,449
Loans to employees ( 24,357) -- --
------- ------- -------
Net cash provided by (used in)
financing activities ( 12,942) ( 65,597) 129,040
------- ------- -------
Net (decrease) increase in cash
and cash equivalents 209,417 103,960 (111,577)
Cash and cash equivalents
at beginning of year 606,799 502,839 614,416
------- ------- -------
Cash and cash equivalents at end of year $ 816,216 $ 606,799 $ 502,839
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year
for interest $ 934 $ 7,609 $ --
======= ======= =======
Cash paid during the year
for income taxes $ 1,125 $ 1,125 $ 1,125
======= ======= =======
The accompanying notes are an integral part of these statements.
32
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Pyramid Oil Company (the Company), a California Corporation, has been in the
oil and gas business continuously for 96 years 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 historically 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.
33
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
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. The Company recorded an impairment reserve of $21,699 at December
31, 2004. There were no material impairment reserves recorded in the two
years ended December 31, 2003.
34
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
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 2004, 2003 and 2002
were $1.50, $0.95 and $1.21, 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
35
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
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 52.2%, and 43.2%, respectively, of Pyramid's
crude oil and gas sales in 2004. While revenue from these customers is
significant, and the loss of any one could have a short-term 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 47% and 38% attributable to ConocoPhillips and
Kern Oil and Refining respectively at December 31, 2004. Trade receivables
were approximately 55% and 44% attributable to ConocoPhillips and Kern Oil and
Refining respectively at December 31, 2003.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, 'Inventory Costs'. SFAS No.
151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance in
ARB No. 43, Chapter 4, 'Inventory Pricing'. Paragraph 5 of ARB No. 43,
Chapter 4, previously stated that '. . . under some circumstances, items such
as idle facility expense, excessive spoilage, double freight, and rehandling
costs may be so abnormal as to require treatment as current period charges. .
. .' This Statement requires that those items be recognized as current-
period charges regardless of whether they meet the criterion of 'so
abnormal'. In addition, this Statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. This statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not expect adoption of SFAS No. 151 to have a material impact
on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 152, 'Accounting for Real Estate
Time-Sharing Transactions'. The FASB issued this Statement as a result of
the guidance provided in AICPA Statement of Position (SOP) 04-2, 'Accounting
for Real Estate Time-Sharing Transactions'. SOP 04-2 applies to all real
estate time-sharing transactions. Among other items, the SOP provides
guidance on the recording of credit losses and the treatment of selling costs,
but does not change the revenue recognition guidance in SFAS No. 66,
'Accounting for Sales of Real Estate', for real estate time-sharing
36
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
transactions. SFAS No. 152 amends Statement No. 66 to reference the guidance
provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, 'Accounting for
Costs and Initial Rental Operations of Real Estate Projects', to state that
SOP 04-2 provides the relevant guidance on accounting for incidental
operations and costs related to the sale of real estate time-sharing
transactions. SFAS No. 152 is effective for years beginning after June 15,
2005, with restatements of previously issued financial statements prohibited.
This statement is not applicable to the Company.
In December 2004, the FASB issued SFAS No. 153, 'Exchanges of Nonmonetary
Assets', an amendment to Opinion No. 29, 'Accounting for Nonmonetary
Transactions'. Statement No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in standards
issued by the International Accounting Standards Board. The amendment to
Opinion No. 29 eliminates the fair value exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. Such
an exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS No.
153 is effective for nonmonetary asset exchanges occurring in periods
beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after December 16,
2004. Management does not expect adoption of SFAS No. 153 to have a material
impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123(R), 'Share-Based Payment'.
SFAS 123(R) amends SFAS No. 123, 'Accounting for Stock-Based Compensation',
and APB Opinion 25, 'Accounting for Stock Issued to Employees'. SFAS
No.123(R) requires that the cost of share-based payment transactions
(including those with employees and non-employees) be recognized in the
financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in amounts
based (even in part) on the price of the entity's shares or other equity
instruments, or (2) that require (or may require) settlement by the issuance
of an entity's shares or other equity instruments. This statement is
effective, as of the first interim period or fiscal year beginning after
December 15, 2005. Management is currently assessing the effect of SFAS No.
123(R) on the Company's financial statements. 37
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
2. LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt at December 31, 2004 and 2003, is summarized as follows:
December 31,
----------------------
2004 2003
--------- ---------
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. $ 11,982 $ 23,965
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
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. 24,516 37,887
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. 22,750 30,334
Note payable to GMAC, secured by equipment
purchased with the proceeds of the loan,
payable in monthly installments of $431
principal only, zero interest charges,
final payment in 2008. 19,397 --
Note payable to GMAC, secured by equipment
purchased with the proceeds of the loan,
payable in monthly installments of $1,154
principal and interest, interest at 3.9%,
final payment in 2007. 36,067 --
------- -------
114,712 103,297
Less - current maturities ( 50,740) ( 44,049)
------- -------
$ 63,972 $ 59,248
======= =======
38
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
At December 31, 2004 approximately $180,000 of gross property and equipment
was pledged as collateral to secure approximately $115,000 principal amount of
long-term debt.
Maturities of long-term debt are as follows:
Year ending December 31, 2005 $ 50,740
2006 35,998
2007 24,096
2008 3,878
-------
$114,712
=======
At December 31, 2004, the Company had an unsecured line of credit with a bank,
under which the Company may borrow up to $200,000 through May 31, 2005.
Interest on any borrowing is accrued at the bank's index rate plus 0.50
percentage points. The bank's index rate was 5.75% at December 31, 2004.
3. INCOME TAXES
Income tax provision (benefit) consists of the following:
Year Ended December 31,
-----------------------------------
2004 2003 2002
------- ------- ------
Federal income taxes:
Current $ 86,148 $ 32,016 $( 17,332)
Utilization of NOL's (86,148) (32,016) 17,332
Deferred -- -- --
------- ------- -------
-- -- --
------- ------- -------
State income taxes:
Current 14,511 ( 3,542) (25,962)
Utilization of NOL's (13,386) 4,667 27,087
Deferred -- -- --
------- ------- -------
1,125 1,125 1,125
------- ------- -------
Income tax provision $ 1,125 $ 1,125 $ 1,125
======= ======= =======
39
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
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,
-----------------------------------
2004 2003 2002
-------- -------- --------
Federal income tax expense
(benefit) at statutory rate $ 208,047 $(182,304) $( 10,944)
Net operating loss carryover ( 93,097) ( 54,438) 10,944
Statutory depletion (120,558) ( 60,047) --
Cumulative effect of change in
accounting principle -- 295,736 --
Other 6,733 2,178 1,125
-------- -------- --------
Income tax provision $ 1,125 $ 1,125 $ 1,125
======== ======== ========
The components of net deferred tax asset (liability) are as follows:
December 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Current deferred taxes:
Gross assets $ 25,698 $ 27,927 $ 22,911
Gross liabilities -- -- --
---------- ---------- ----------
25,698 27,927 22,911
---------- ---------- ----------
Noncurrent deferred taxes:
Gross assets 2,077,164 2,156,444 2,357,135
Gross liabilities ( 96,849) ( 86,164) ( 60,839)
Valuation allowance (2,006,013) (2,098,207) (2,319,207)
---------- --------- ---------
( 25,698) ( 27,927) ( 22,911)
---------- --------- ---------
$ -- $ -- $ --
========== ========= =========
40
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
The tax effect of significant temporary differences representing deferred tax
assets and (liabilities) are as follows:
December 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Accounts receivable $ 1,600 $ 1,600 $ 1,600
Net operating loss
carry forwards 377,700 456,979 683,750
Statutory depletion
carryover 1,699,464 1,699,464 1,673,385
Accrued liabilities 24,098 26,327 21,311
---------- --------- ---------
Total deferred tax assets 2,102,862 2,184,370 2,380,046
Property and equipment ( 96,849) ( 86,163) ( 60,839)
Valuation allowance (2,006,013) (2,098,207) (2,319,207)
---------- --------- ---------
$ -- $ -- $ --
========== ========= =========
At December 31, 2004, 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 $1,046,000, which expire, to the extent not used, starting in
2004 through 2022. For California franchise tax purposes, as of December 31,
2004 the Company has unused net operating loss carryforwards of approximately
$237,000, a portion of which expire each year starting in 2004.
At December 31, 2004, 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, 2004, the Company has no investment tax credit carryforward
available to reduce future taxes payable for financial reporting and federal
income tax purposes.
41
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
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 (Santa Fe Energy
lease) 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 $143,000, $122,000 and
$100,000 in 2004, 2003 and 2002, respectively.
On January 14, 2000, pursuant to specific terms, conditions and obligations
contained within the May 1984 oil and gas lease between Santa Fe Energy
Company as lessor and Pyramid Oil Company as lessee, Pyramid quit-claimed all
unearned acreage in said lease back to the lessors. Under the terms of the
lease, Pyramid retained specific producing intervals within 10 acre spacings
surrounding each well bore.
Effective April 1, 2002, the Company acquired the remaining 36.5 % working
interest in the Santa Fe oil and gas lease in the Carneros Creek field
and working interests (approximately 36.5%) 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.
As a director, Mr. Alexander has abstained from voting on any of the above
matters that have been brought before the Board of Directors, involving the
Santa Fe lease.
5. FOURTH QUARTER RESULTS (UNAUDITED)
During the fourth quarter of 2004, the Company reclassified its investment in
the costs of drilling and completing a well that was drilled in June of 2004.
The costs of drilling this well were capitalized during the second and third
quarters of 2004. A decision was made in the fourth quarter of 2004 to
abandon the well, by the Company and its joint-venture partners in the
drilling of this well. The Company's share of the costs for this well in the
amount of $201,000 were charged to exploration costs in the fourth quarter of
2004.
42
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
During the fourth quarter of 2004, the Company made a payment to J. Ben
Hathaway, the former President of the Company, under the terms of the
employment contract with Mr. Hathaway and the Company. Mr. Hathaway
voluntarily resigned as President of Pyramid Oil Company and pursuant to the
terms of his employment contract, he received a payment of approximately
$170,000 in December of 2004.
During the fourth quarter of 2004, the Company made adjustments to the
carrying value of one of its oil and gas properties. The Company recorded a
valuation allowance in the amount of $20,699 to reflect the change in the
projected future undiscounted net cash flows for this property, as the
result of the analysis of the Company's oil and gas reserves by independent
consultants.
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 potential 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
a material impact on Pyramid's results of operations for that period.
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 $870,000 in costs as of December 31, 2004.
7. OTHER INCOME
The Company sold a well servicing hoist in the first quarter of 2004 for a
gain of approximately $134,000 and a minor piece of production equipment in
the second quarter of 2004 for a gain of $4,000. The Company sold another
well servicing hoist in the third quarter of 2004 for a gain of approximately
$56,000. The Company sold a piece of equipment in the third quarter of 2004,
43
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
from the category, assets held for resale, for a gain of $28,000. The Company
also sold a surplus piece of equipment in the fourth quarter of 2004, from the
category, assets held for resale, for a gain of $26,000. The Company sold
three excess pickups in 2004 for a gain of $8,600. All of the assets sold in
2004 had little or no net book values.
The Company sold surplus tubing and sundry used oilfield supplies and
production equipment during 2004, which resulted in approximately $53,000 of
other income.
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 $11,849, $11,052
and $10,587 were made during the years ended December 31, 2004, 2003 and 2002,
respectively.
(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.
44
PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004
The effect of these changes for the twelve months ending December 31, 2004 and
2003, resulted in a decrease in income from continuing operations of $23,957
and $59,698, respectively. 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, 2004 (23,957) (0.01)
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)
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, 2004 and 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, 2004 $930,306
Incurred during the period (6,111)
Settled during the period --
Accretion expense 18,221
Additions for new well 4,150
-------
Ending Balance, December 31, 2004 $946,566
=======
45
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
OIL AND GAS PRODUCING ACTIVITIES
DECEMBER 31, 2004
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, 2004, 2003 and 2002
were as follows:
2004 2003 2002
---------- ---------- ----------
Proved properties $11,030,300 $10,591,300 $10,343,000
Unproved properties
being amortized 178,600 178,600 178,600
Unproved properties
not being amortized -- -- --
Capitalized asset retirement costs 294,600 290,500 --
Accumulated depletion,
depreciation, amortization
and valuation allowances (10,510,700) (10,306,400) (10,009,200)
---------- ---------- ----------
$ 992,800 $ 754,000 $ 512,400
========== ========== ==========
46
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2004
The estimated quantities and the change in proved reserves, both developed and
undeveloped, for the Company are as follows:
2004 2003 2002
------------ ------------- -------------
Oil Gas Oil Gas Oil Gas
(MBbls) (MMCF) (MBbls) (MMCF) (MBbls) (MMCF)
----- ---- ----- ---- ----- ----
Proved reserves:
Beginning of year 555 83 554 105 323 37
Revisions of previous
estimates (10) 8 75 (15) 297 79
Extensions, discoveries
and other additions 49 -- -- -- -- --
Production (72) ( 8) (74) ( 7) (66) (11)
---- ---- ---- ---- ---- ----
End of year 522 83 555 83 554 105
==== ==== ==== ==== ==== ====
Proved developed reserves:
Beginning of year 555 83 554 105 323 37
==== ==== ==== ==== ==== ====
End of year 473 83 555 83 554 105
==== ==== ==== ==== ==== ====
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.
47
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2004
The present value of estimated future net revenues of proved developed
reserves, discounted at 10%, were as follows:
December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Proved developed reserves
(Present value before
income taxes) $4,636,000 $4,617,000 $4,325,000
========= ========= =========
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,
2004, 2003 and 2002 were as follows:
2004 2003 2002
------- ------- -------
Property acquisition costs $ 14,000 $ -- $228,000
Exploration costs 201,000 -- 7,000
Development costs 418,000 255,000 --
Asset retirement costs 4,000 290,500 --
48
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2004
The results of operations for oil and gas producing activities for the years
ended December 31, 2004, 2003 and 2002 were as follows:
2004 2003 2002
---------- ---------- ----------
Sales $ 2,675,000 $ 2,071,000 $ 1,616,000
Production costs 1,383,000 1,232,000 1,095,000
Exploration costs 202,000 -- 7,000
Accretion expense 18,000 54,000 --
Depletion, depreciation,
amortization and
valuation allowance 115,000 77,000 83,000
--------- --------- ---------
957,000 708,000 431,000
Income tax (benefit) provision 1,200 1,200 1,200
--------- --------- ---------
Results of operations from
production activities $ 955,800 $ 706,800 $ 429,800
========= ========= =========
The standardized measure of discounted estimated future net cash flows
relating to proved oil and gas reserves for the years ended December 31, 2004,
2003 and 2002 were as follows:
2004 2003 2002
---------- ---------- ----------
Future cash inflows $18,448,000 $17,380,000 $16,490,000
Future development and
production costs 9,908,000 8,792,000 9,166,000
Future abandonment costs 730,000 736,000 --
Future income tax expense 12,000 12,000 12,000
---------- ---------- ----------
Future net cash flow 7,798,000 7,840,000 7,312,000
10% annual discount 3,162,000 3,230,000 2,994,000
Standardized measure ---------- ---------- ----------
of discounted future
net cash flow $ 4,636,000 $ 4,610,000 $ 4,318,000
========== ========== ==========
49
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2004
The principal changes in the standardized measure of discounted future net
cash flows during the years ended December 31, 2004, 2003 and 2002 were as
follows:
2004 2003 2002
---------- ---------- ----------
Extensions $ 490,000 $ -- $ --
Revisions of previous estimates
Price changes 654,000 952,000 1,588,000
Quantity estimate ( 82,000) 690,000 2,494,000
Change in production rates,
timing and Other 381,000 (208,000) (611,000)
Development costs incurred 418,000 255,000 --
Changes in estimated future
development costs (348,000) (255,000) --
Changes in estimated future
abandonment costs (730,000) (736,000) --
Sales of oil and gas, net of
production costs (1,292,000) (839,000) (521,000)
Accretion of discount 535,000 433,000 125,000
---------- ---------- ----------
26,000 292,000 3,075,000
Net change in income taxes -- -- --
---------- ---------- ----------
Net (decrease) increase $ 26,000 $ 292,000 $ 3,075,000
========== ========== ==========
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.
50
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2004
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, 2004, of $26,000 is the result of several factors, both
positive and offsetting negative factors. Sales of oil and gas, net of
production costs reduced future cash flows by approximately $1,292,000. The
recognition of future abandonment costs decreased future cash flows by
$730,000. This was offset by an increase in future cash flows due to higher
crude oil prices at December 31, 2004 and the recognition of proved developed
non-producing reserves at December 31, 2004.
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.
51
PYRAMID OIL COMPANY
SUPPLEMENTAL INFORMATION (UNAUDITED)
QUARTERLY RESULTS
2004 2003
---------- ----------
REVENUES:
Quarter Ended:
March 31 $ 599,296 $ 538,608
June 30 666,871 487,222
September 30 702,899 506,801
December 31 705,836 537,783
---------- ----------
$ 2,674,902 $ 2,070,414
========== ==========
NET INCOME (LOSS):
Quarter Ended:
March 31 $ 281,358 $ (652,115) (a)
June 30 167,333 74,487
September 30 346,540 106,691
December 31 (c) (183,329) ( 62,252) (b)
---------- ----------
$ 611,902 $ (536,189)
========== ==========
INCOME (LOSS) PER COMMON SHARE:
Quarter Ended:
March 31 $ .11 $ (.26) (a)
June 30 .07 .03 (b)
September 30 .14 .04
December 31 (c) (.07) (.02)
---------- ----------
$ .25 $ (.21)
========== ==========
(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).
(c) Reflects transactions recorded for exploration costs for the drilling and
completion of an exploration well and the settlement of an employment
agreement in the fourth quarter of 2004. Also, reflects a valuation allowance
recorded in the fourth quarter of 2004 (see Note 5 of Notes to Financial
Statements included in Item 7 of this Form 10-KSB).
52
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.
ITEM 8B - OTHER INFORMATION
The Company is aware of no information that was required to be disclosed in a
report on Form 8-K during the fourth quarter of 2004 but was not reported.
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 2005 Annual Meeting
of Shareholders.
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 2005
Annual Meeting of Shareholders.
53
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 2005
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 (Santa Fe Energy
lease) 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 $143,000 in 2004, $122,000 in
2003 and $100,000 in 2002.
On January 14, 2000, pursuant to specific terms, conditions and obligations
contained within the May 1984 oil and gas lease between Santa Fe Energy
Company as lessor and Pyramid Oil Company as lessee, Pyramid quit-claimed all
unearned acreage in said lease back to the lessors. Under the terms of the
lease, Pyramid retained specific producing intervals within 10 acre spacings
surrounding each well bore.
Effective April 1, 2002, the Company acquired the remaining 36.5% working
interest in the Santa Fe oil and gas lease in the Carneros Creek field
and working interests (approximately 36.5%) 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.
As a director, Mr. Alexander has abstained from voting on any of the above
matters that have been brought before the Board of Directors, involving the
Santa Fe lease.
54
ITEM 13 - 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.
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 2005 Annual Meeting
of Shareholders. 55
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, 2005 By: JOHN H. ALEXANDER
----------------------
John H. Alexander
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.
JOHN H. ALEXANDER Director/President March 30, 2005
--------------------------- Chief Executive Officer
John H. Alexander
J. BEN HATHAWAY Director March 30, 2005
--------------------------- Chairman of the Board
J. Ben Hathaway
THOMAS W. LADD Director March 30, 2005
---------------------------
Thomas W. Ladd
GARY L. RONNING Director March 30, 2005
---------------------------
Gary L. Ronning
JOHN E. TURCO Director March 30, 2005
---------------------------
John E. Turco
LEE G. CHRISTIANSON Corporate Secretary/ March 30, 2005
--------------------------- Principal Accounting and
Lee G. Christianson Financial Officer