December 31, 2005 Form 10-KSB/A amend. 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-KSB/A
(Amendment No. 1)

[ x ]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended: December 31, 2005
 
[  ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
Commission file number: 0-14731
 
 
 
HALLADOR PETROLEUM COMPANY

COLORADO
(State of incorporation)
 
84-1014610
(IRS Employer Identification No.)

1660 Lincoln Street, Suite 2700, Denver, Colorado
(Address of principal executive offices)
 
80264-2701
(Zip Code)
 
 
 
Issuer's telephone number: 303.839.5504
 
Fax: 303.832.3013

Securities registered under Section 12(b) of the Exchange Act:  NONE
 
Securities registered under Section 12(g) of the Exchange Act:  Common Stock, $.01 par value
 
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  [  ]
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [ ]   No [x]
 
Our revenue from continuing operations for the year ended December 31, 2005 was about $1.1 million.
 
At April 4, 2006, we had 12,168,135 shares outstanding and the aggregate market value of such shares held by non-affiliates was about $4 million based on a closing price of $4.10.
 
DOCUMENTS INCORPORATED BY REFERENCE: NONE

1


Explanatory Note

We are filing this amendment to comply with generally accepted accounting principles (GAAP)  and the Securities and Exchange Commission's (SEC) rules and regulations.
 
1.  We had included changes in stockholders' equity in Note 1 to our financial statements.  This amendment includes a statement of stockholders' equity and we deleted the stockholders' equity table from Note 1.

2.     We have included the name of the individual who prepared our reserve report.  The person's name is Edwin James and such name appears in Note 7 to our financial statements.

3.     We have changed our statement of cash flows as follows:

a. For 2005, we moved $1,200,000 from financing activities to investing activities relating to the purchase of limited partners interest.

 
b.
For 2005, we moved $407,000 from financing activities to operating activities relating to repurchase of employee stock options.

 
c.
For 2004, we moved $1,305,000 from financing activities to operating activities relating to repurchase of employee stock options.

4.     We have provided additional disclosure regarding the accounting treatment of our repurchase of employee stock options. Note 4 to our financial statements reflects such addition disclosures.

5.     In December 2005 we sold stock to Yorktown Energy Partners VI and concurrently acquired a 32% interest in Savoy Energy. We received cash of $2.20 per share.  We have treated the cash element as non-substantive and valued the shares based on the market price at the time which was $3.25 per share. Therefore, we have increased our investment in Savoy by about $2 million and also increased stockholders' equity by the same.

6.     No changes were made to our statement of operations.

2



ITEM 7.  FINANCIAL STATEMENTS
 
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 
 

 
Report of Independent Registered Public Accounting Firm
4
 
 
 
 
Consolidated Balance Sheet, December 31, 2005
5
 
 
 
 
Consolidated Statement of Operations, Years ended December 31, 2005 and 2004
6
 
 
 
 
Consolidated Statement of Cash Flows, Years ended December 31, 2005 and 2004
7
 
     
Statement of Stockholders' Equity
8
  
 
 
 
Notes to Consolidated Financial Statements
9
 

 

3


 
 
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM


 
To the Board of Directors and Stockholders
Hallador Petroleum Company
Denver, Colorado
 
We have audited the consolidated balance sheet of Hallador Petroleum Company and Subsidiaries as of December 31, 2005 and the consolidated statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 2005 and 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with 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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial condition of Hallador Petroleum Company and Subsidiaries, as of December 31, 2005 and the results of their operations and their cash flows for the years ended December 31, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the consolidated financial statements as of December 31, 2005 and December 31, 2004 have been restated.
 
 
 
/s/ Ehrhardt Keefe Steiner & Hottman PC
 
March 31, 2006, except for Note 1
as to which the date is April 4, 2007
Denver, Colorado
  

                                                                                            

4


 Consolidated Balance Sheet
December 31, 2005
(in thousands)
(as restated, see Note 1)


 
ASSETS
  
 
  
Current assets:
      
     Cash and cash equivalents
  
$
12,261
  
     Accounts receivable-
      
         Oil and gas sales
    
950
  
         Well operations
    
1,198
  
              Total current assets
    
14,409
  
 
      
Oil and gas properties, at cost (successful efforts):
      
     Unproved properties
    
2,909
  
     Proved properties
    
2,388
  
     Less - accumulated depreciation, depletion, amortization and impairment
    
(1,776
)
 
    
3,521
  
Investment in CELLC
    
223
  
Investment in Savoy
    
6,193
  
Other assets
    
246
  
 
  
$
24,592
  
 
      
LIABILITIES AND STOCKHOLDERS’ EQUITY
      
Current liabilities:
      
     Accounts payable and accrued liabilities
  
$
1,346
  
     Oil and gas sales payable
    
1,494
  
     Income tax payable
    
208
  
              Total current liabilities
    
3,048
  
 
        
Stockholders’ equity:
      
     Preferred stock, $.10 par value; 10,000,000 shares authorized; none issued
      
     Common stock, $ .01 par value; 100,000,000 shares authorized, 8,986,319 issued
    
90
  
     Additional paid-in capital
    
24,195
  
     Accumulated deficit
    
(2,741
)
 
    
21,544
  
 
  
$
24,592
  
 
 
See accompanying notes.
 
 

5


Consolidated Statement of Operations
(in thousands)
 

 
  
Years ended December 31,
  
 
  
2005
  
2004
  
Revenue:
  
 
  
    Gas
  
$
1,012
  
$
822
  
    Oil
    
90
    
83
  
    Interest
    
544
    
167
  
 
    
1,646
    
1,072
  
Costs and expenses:
          
    Lease operating
    
227
    
149
  
    Delay rentals
    
57
    
102
  
    Impairment - unproved properties
    
183
    
144
  
    Equity loss in CELLC
   
103
      
    Depreciation, depletion and amortization
    
43
    
42
  
    General and administrative
    
612
    
852
  
 
    
1,225
    
1,289
  
 
          
Income (loss)  from continuing operations before minority interest
    
421
    
(217
)
Minority interest
    
(84
)
  
65
  
Income (loss) from continuing operations before taxes
    
337
    
(152
)
Income tax-current
    
(145
)
  
-
  
Income (loss) from continuing operations
    
192
    
(152
)
 
          
Income (loss)  from discontinued operations net of minority interest of $(18) and $592
    
(30
)
  
1,380
  
 
          
Gain on sale of discontinued operations, net of taxes of $1,085 and minority interest of $4,168
   
-
    
8,642
  
 
          
Net income
  
$
162
  
$
9,870
  
Net Income (loss)  per share - basic
          
Continuing operations
  
$
.027
  
$
(.02
)
Discontinued operations
    
(.004
)
  
.19
  
Gain on sale of discontinued operations
    
-
    
1.22
  
Net earnings per share
  
$
.023
  
$
1.39
  
 
          
Weighted average shares outstanding-basic
    
7,155
    
7,093
  
               

 
See accompanying notes.


6

 
Consolidated Statement of Cash Flows
(in thousands)
(as restated, see Note 1)

 
  
Years ended December 31,
  
   
2005
  
2004
  
Cash flows from operating activities:
          
Net income
 
$
162
  
$
9,870
  
Equity loss in CELLC
    
103
        
Depreciation, depletion, and amortization
    
43
    
721
  
Minority interest
    
66
    
4,695
  
Impairment of undeveloped properties
    
183
    
144
  
Change in accounts receivable
    
(1,197
)
  
812
  
Gain on sale of discontinued operations exclusive of $1,705 of bonuses paid in connection with sale
          
(16,905
)
Discontinued operations
    
(407
)
      
Change in payables and accrued liabilities
    
1,235
    
(623
)
Income taxes payable
    
(92
)
  
300
  
Key employee bonus plan
          
(253
)
Other
    
10
    
90
  
Net cash provided by (used in) operating activities
    
106
    
(1,149
)
 
          
Cash flows from investing activities:
          
Proceeds from property sale (Cuyama)*
    
3,538
    
18,110
  
Investment in COALition
    
(326
)
    
Investment in Savoy
    
(4,205
)
    
Acquisition of Hallador Petroleum LLP minority interests
    
(1,200
)
      
Decrease in bonds
    
252
      
Properties
    
(4,696
)
  
(253
)
Prospect sale
    
1,616
    
 
  
Other assets
    
(35
)
  
(100
)
Net cash (used in) provided by  investing activities
    
(5,056
)
  
17,757
  
 
          
Cash flows from financing activities:
          
Distributions to limited partners
    
(6,881
)
    
Stock sale to Yorktown Energy VI, L.P.
    
4,165
      
Net cash used in financing activities
    
(2,716
)
      
 
          
Net (decrease) increase in cash and cash equivalents
    
(7,666
)
  
16,608
  
Cash and cash equivalents, beginning of year
    
19,927
    
3,319
  
Cash and cash equivalents, end of year
  
$
12,261
  
$
19,927
  
 
          
Taxes paid
  
$
225
  
$
785
  
------------------------
* In 2004 we received a $3,500,000 note receivable in connection with the sale of Cuyama, which was a non-cash investing activity.
 
 
  See accompanying notes.


7

Statement of Stockholders' Equity
(in thousands)
(as restated, see Note 1)
 

   
 
Common Stock
  
Additional
Paid in Capital
  
 
Accumulated Deficit
  
 
 
Total
  
                   
Balance December 31, 2003
  
$
71
  
$
18,061
  
$
(14,495
)
$
3,637
  
                           
Net income
     -      -     
9,870
    
9,870
  
                           
Balance December 31, 2004
    
71
    
18,061
    
(4,625
)
  
13,507
  
                           
Proceeds from stock sale (1,893,169 shares)
   
19
    
4,146
          
4,165
  
                           
      Additional non-cash value assigned to stock sale
        (Note 1)
          
1,988
          
1,988
  
                           
Retirement of Hallador Petroleum LLP minority interest
                
1,722
    
1,722
  
                           
Net income
     -      -     
162
    
162
  
                           
Balance December 31, 2005
  
$
90
  
$
24,195
  
$
(2,741
)
$
21,544
  
                           
 
 
 
 
 
See accompanying notes.


8

Notes to Consolidated Financial Statements
 
(1)  RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying balance sheet and cash flow statements have been restated to comply with GAAP and the SEC's rules and regulations.  The following table sets forth previously reported and restated cash flow statements and balance sheets.
   
Years ended December 31, *
  
   
2005
  
2004
  
   
Previously Reported
  
Restated
  
Previously Reported
  
Restated
  
Cash flows from operating activities:
                      
 Net income
 
$
162
  
$
162
  
$
9,870
  
$
9,870
  
 Equity loss in CELLC
    
103
    
103
              
 Depreciation, depletion, and amortization
    
43
    
43
    
721
    
721
  
 Minority interest
    
66
    
66
    
4,695
    
4,695
  
 Impairment of undeveloped properties
    
183
    
183
    
144
    
144
  
 Change in accounts receivable
    
(1,197
)
  
(1,197
)
  
812
    
812
  
 Gain on sale of discontinued operations exclusive of  $1,705 of bonuses paid in connection with sale
                
(15,600
)
  
(16,905
)
 Discontinued operations
          
(407
)
            
 Change in payables and accrued liabilities
    
1,235
    
1,235
    
(623
)
  
(623
)
 Income taxes payable
    
(92
)
  
(92
)
  
300
    
300
  
 Key employee bonus plan
                
(253
)
  
(253
)
 Other
    
10
    
10
    
90
    
90
  
Net cash provided by (used in) operating activities
    
513
    
106
    
156
    
(1,149
)
Cash flows from investing activities:
                  
 Proceeds from property sale (Cuyama)*
    
3,538
    
3,538
    
18,110
    
18,110
  
 Investment in COALition
    
(326
)
  
(326
)
        
 Investment in Savoy
    
(4,205
)
  
(4,205
)
        
 Acquisition of Hallador Petroleum LLP minority interests
        
(1,200
)
            
 Decrease in bonds
    
252
    
252
          
 Properties
    
(4,696
)
  
(4,696
)
  
(253
)
  
(253
)
 Prospect sale
    
1,616
    
1,616
    
 
    
 
  
 Other assets
    
(35
)
  
(35
)
  
(100
)
  
(100
)
Net cash (used in) provided by  investing activities
    
(3,856
)
  
(5,056
)
  
17,757
    
17,757
  
Cash flows from financing activities:
                  
 Repurchase of employee stock options
    
(407
)
        
(1,305
)
      
 Distributions to limited partners
    
(8,081
)
  
(6,881
)
        
 Stock sale to Yorktown Energy VI, L.P.
    
4,165
    
4,165
    
-
    
-
  
Net cash used in financing activities
    
(4,323
)
  
(2,716
)
  
(1,305
)
   -   
Net (decrease) increase in cash and cash equivalents
    
(7,666
)
  
(7,666
)
  
16,608
    
16,608
  
Cash and cash equivalents, beginning of year
    
19,927
    
19,927
    
3,319
    
3,319
  
Cash and cash equivalents, end of year
  
$
12,261
  
$
12,261
  
$
19,927
  
$
19,927
  

* For 2005, we moved $1,200,000 from financing activities to investing activities relating to the purchase of limited partners interest; for 2005 we moved $407,000 from financing activities to operating activities relating to repurchase of employee stock options, and for 2004 we moved $1,305,000 from financing activities to operating activities relating to repurchase of employee stock options.

9

Consolidated Balance Sheet
December 31, 2005
(in thousands)
 

   
Previously Restated
  
Restated
  
           
ASSETS
            
Current assets:
            
     Cash and cash equivalents
  
$
12,261
  
$
12,261
  
     Accounts receivable-
            
     Oil and gas sales
    
950
    
950
  
     Well operations
    
1,198
    
1198
  
          Total current assets
    
14,409
    
14,409
  
 
            
Oil and gas properties, at cost (successful efforts):
            
     Unproved properties
    
2,909
    
2,909
  
     Proved properties
    
2,388
    
2,388
  
     Less - accumulated depreciation, depletion, amortization and impairment
    
(1,776
)
  
(1,776
)
 
    
3,521
    
3,521
  
Investment in CELLC
    
223
    
223
  
Investment in Savoy*
    
4,205
    
6,193
  
Other assets
    
246
    
246
  
 
  
$
22,604
  
$
24,592
  
 
            
LIABILITIES AND STOCKHOLDERS’ EQUITY
            
Current liabilities:
            
     Accounts payable and accrued liabilities
  
$
1,346
  
$
1,346
  
     Oil and gas sales payable
    
1,494
    
1,494
  
     Income tax payable
    
208
    
208
  
          Total current liabilities
    
3,048
    
3,048
  
 
              
Stockholders’ equity:
            
     Preferred stock, $.10 par value; 10,000,000 shares authorized; none issued
            
     Common stock, $ .01 par value; 100,000,000 shares authorized, 8,986,319 shares issued
    
90
    
90
  
     Additional paid-in capital
    
22,207
    
24,195
  
     Accumulated deficit
    
(2,741
)
  
(2,741
)
 
    
19,556
    
21,544
  
 
  
$
22,604
  
$
24,592
  
 
*In December 2005 we sold stock to Yorktown Energy Partners VI and concurrently acquired a 32% interest in Savoy Energy. We received cash of $2.20 per share. We have treated the cash element as non-substantive and valued the shares based on the market price at the time which was $3.25 per share. Therefore, we have increased our investment in Savoy by about $2 million and also increased stockholders' equity by the same.

10


(2)       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation and Consolidation
 
The accompanying consolidated financial statements include the accounts of Hallador Petroleum Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  We are engaged in the exploration, development, and production of oil and natural gas in the Rocky Mountain region.  We also have a 32% equity interest in an oil and gas company which has operations in Michigan.
 
As discussed in Item 6. (MD&A), we have entered into significant related party transactions with the Yorktown group of companies.  Yorktown and its affiliates currently own about 54% of our common stock and represents one of the five seats on our board.
 
In early January 2006, we signed a Letter of Intent with Sunrise Coal, LLC (Sunrise) in order to effect a reorganization/merger between Hallador and Sunrise, a private company not affiliated with the Yorktown group of companies.  We are working on a formal agreement which we hope to execute sometime in the second quarter 2006.  In late February 2006, we sold 3,181,816 shares for $2.20 per share (about $7 million) to our existing shareholders.  The proceeds will provide working capital for the Sunrise transaction.
 
During the first quarter of 2006, we loaned Sunrise $7 million in order for Sunrise to begin development of their second coal mine (the "Carlisle mine").   Their Howesville mine began producing coal in November 2005.  Both mines are located in Indiana.   During the second quarter of 2006, Sunrise expects to enter into a $30 million line-of- credit with two Indiana banks, at which time our $7 million will be repaid.  We have agreed to guarantee this $30 million line-of-credit.
 
We have concluded to deemphasize our oil and gas operations and concentrate our future efforts in the coal business.
 
About nine years ago, Yorktown Energy Partners II and affiliates (Yorktown) invested $5,025,000 in Hallador Petroleum, LLP, a newly formed limited liability limited partnership, (the "Partnership").  We are the general partner and received a 70% interest in the partnership in return for contributing our net assets and Yorktown representing the limited partners, received a 30% interest for its $5,025,000 cash contribution.  During the third quarter of 2005, we purchased the limited partners interest in the Partnership, and for accounting purposes the Partnership no longer exists and, as a result, there is no longer a minority interest caption on our balance sheet.  Prior to this transaction we, as general partner, consolidated the activity of the Partnership and presented the 30% limited partners’ interest as a minority interest.
 
On August 10, 2004, we entered into an agreement with E&B Natural Resources Management Corporation (a private company) to sell all of our interest in the South Cuyama field and adjacent exploration areas, all located in Santa Barbara County, California, for $23 million; consisting of $19.5 million in cash and an interest bearing (3.5%) note of $3.5 million due on September 30, 2005, which was paid.  Closing occurred on September 30, 2004 and we recorded a pre-tax gain of about $14 million.  Results from the South Cuyama field have been presented as discontinued operations in the accompanying Consolidated Statement of Operations; revenue and expenses before the minority interest were about $7 million and $5 million, respectively for 2004.
 
Due to the sale, our board of directors and the Executive Committee of the Partnership, voted to discontinue new partnership operations effective October 1, 2004.  At that time,  the Partnership's assets consisted of cash, the $3.5 million note receivable, oil and gas properties in New Mexico and Texas, and other miscellaneous assets.  On October 1, 2004, our  board of directors and the Executive Committee of the Partnership, valued the oil and gas properties in New Mexico and Texas and the other miscellaneous assets at $4 million. On May 6, 2005 we made a cash distribution of about $5.2 million to the limited partners.  During the third quarter 2005, we purchased the limited partners' interest in the Partnership for about $1.2 million and made a final cash distribution to the limited partners of $1.6 million.  After these transactions, about $1.7 million remained in the minority interest account and was recorded as a reduction in our accumulated deficit account.
 
11
In late March 2005, we invested $325,000 for a 29% interest in a newly formed entity called COALition Energy, LLC (CELLC) to pursue coal opportunities in the United States.  Some of our officers and directors also invested in CELLC.
 
Oil and Gas Properties
 
We account for our oil and gas activities using the successful efforts method of accounting.  Under the successful efforts method, the costs of successful wells, development dry holes and productive leases are capitalized and amortized on a units-of-production basis over the remaining life of the related reserves.  Exploratory dry hole costs and other exploratory costs, including geological and geophysical costs, and delay rentals are expensed as incurred.  Cost centers for amortization purposes are determined on a field-by-field basis.  Unproved properties with significant acquisition costs are periodically assessed for impairment in value, with any impairment charged to expense.
 
Prior to 2003, the estimated costs of plugging and abandoning wells were accrued using the units-of-production method and were considered in determining DD&A expense.  However, in 2003 we adopted SFAS 143, Accounting for Asset Retirement Obligations.  Under this standard, we record the fair value of the future abandonment as capitalized abandonment costs in Oil and Gas properties with an offsetting abandonment liability.  The adoption of this method was not significant to our continuing operations.  The capitalized abandonment costs are amortized with other property costs using the units-of-production method. 
 
The carrying value of each field is assessed for impairment on a quarterly basis.  If estimated future undiscounted net revenues are less than the recorded amounts, an impairment charge is recorded based on the estimated fair value of the field.
 
Statement of Cash Flows
 
Cash equivalents include investments, which includes mutual funds, with maturities when purchased of three months or less.

Income Taxes
 
Income taxes are provided based on the liability method of accounting pursuant to SFAS 109, Accounting for Income Taxes.  The provision for income taxes is based on pretax financial taxable income.  Deferred tax assets and liabilities are recognized for the future expected tax consequences of temporary differences between income tax and financial reporting and principally relate to differences in the tax basis of assets and liabilities and their reported amounts, using enacted tax rates in effect for the year in which differences are expected to reverse.  If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

Earnings per Share
 
We follow the provisions of SFAS 128, Earnings Per Share.  Basic earnings per share are computed based on the weighted average number of common shares outstanding.  Diluted earnings per share are computed based on the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding stock options. 
 
12
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  Actual amounts could differ from those estimates.
 
Revenue Recognition
 
We recognize oil and natural gas revenue from our interest in producing wells as natural gas and oil is produced and sold from those wells using the entitlement method.
 
Concentration of Credit Risk
 
Our revenues are derived principally from uncollateralized sales to two customers in the oil and gas industry.  The concentration of credit risk in a single industry affects our overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions.
 

Stock Based Compensation
 
On April 15, 2005, we issued 750,000 ten-year options to employees at an exercise price of $2.25.  The exercise price was based on the sales price of a March 2005 private stock transaction between one of our shareholders and a third party.  These options vest at 1/3 per year over the next three years.  There are no more options available for issuance.
 
As allowed in SFAS 123, Accounting for Stock-Based Compensation, we continue to apply APB 25, Accounting for Stock Issued to Employees, and related interpretations in recording compensation related to our plan.  Had compensation costs for the plan been determined consistent with SFAS 123, we would have estimated the fair value of the option grant using the Black-Scholes option-pricing model, using the following assumptions for the 2005 grants: (i) risk free interest rate of 4.24%; (ii) expected life of 10 years; (iii) expected volatility of 120%; (iv) expected default rate of 5%, and (v) no dividend yield.  The average fair value of options granted during 2005 was $2.15.  Pro forma loss for the year ended December 31, 2005 would have been $183,000 or $(0.03) per share.  Pro forma results for 2004 were immaterial.

No grants were issued during 2004. 
 
 New Accounting Pronouncements
 
In December 2004, the FASB issued SFAS 123(R) that requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements.  That cost will be measured based on the fair value of the equity or liability instrument issued.  SFAS 123(R) covers a wide range of share-based awards, stock appreciation rights, and employee stock purchase plans. SFAS 123(R) replaces SFAS 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion 25, "Accounting for Stock Issued to Employees."  We will be required to apply SFAS 123(R) in the first quarter 2006, and will use the modified prospective method of adoption.  We had $1,035,000 of unvested compensation related to outstanding stock options and estimate having to expense $115,000 during the first quarter of 2006.
 
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None of the other FASB pronouncements issued during the last two years had, or will have, any effect on us.
 
(3)       INCOME TAXES (in thousands)
 
The provision for income taxes is comprised of the following:
 
 
  
 
  
2005
  
2004
  
   Current:
  
 
  
 
  
 
  
     Federal
        
$
415
  
$
265
  
     State
          
189
    
361
  
 
        
604
    
626
  
Deferred:
                
     Federal
          
(297
)
  
297
  
     State
          
(162
)
  
162
  
 
        
(459
)
  
459
  
         
$
145
  
$
1,085
  
 
The net deferred tax asset at December 31, 2005 was not material.


Our income tax is different than the expected amount computed using the applicable federal statutory income tax rate of 35% and a California state tax rate of 8.84%. The reasons for and effects of such differences are as follows:
 
 
  
2005
  
2004
  
 
  
 
  
 
  
Expected amount
  
$
115
  
$
4,864
  
Utilization of tax net operating losses
    
--
    
(2,174
)
Utilization of statutory depletion carry forwards
    
--
    
(974
)
State income taxes, net of federal benefit
    
16
    
(340
)
Change in valuation allowance and other
    
14
    
(291
)
   
$
145
  
$
1,085
  
 
At December 31, 2005, we had no federal or state net operating loss, alternative minimum tax or statutory depletion carry forwards as all amounts were utilized during the current fiscal year.
 

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(4)       STOCK OPTIONS AND BONUS PLANS
 
Stock Option Plan
 
We account for stock options in accordance with APB 25. Accordingly, no compensation expense has been recorded for options granted as those grants have been issued with exercise prices at or above market. When we sold the Cuyama oil and gas field in August 2004 we concluded to reward our employees by giving them cash bonuses and also through purchases of their respective stock options. Because our stock is (i) traded on the OTC Bulletin Board, (ii) thinly traded and (iii) over 85% of the outstanding shares are controlled by our board members and their affiliates, our board concluded our employees would not receive a fair price if they exercised their options and then sold the stock.

On October 8, 2004, we purchased from our employees 749,723 outstanding stock options at a price equal to $2.80 per share less the exercise price of each option for a total amount of $1,305,000.  The options were cancelled and are available for re-issuance.  All options were granted at fair value. Such amount was expensed in 2004 and is reflected in the Gain on sale of discontinued operations in the accompanying statement of operations. The $2.80 was determined by our non-employee board members and they concluded such amount represented a fair price. At December 31, 2004 there were no options outstanding.
 
Options to purchase up to 3% of the partnership interest in Hallador Petroleum, LLP were issued in 1997 and 1998.  As of December 31, 2004, 2.692% were outstanding and exercisable.  The exercise price for these options was based on the fair market value on the date of grant.  On January 8, 2005 we purchased back all of these outstanding options for a total of $407,000, which was accrued for as of December 31, 2004.
 
(5)       MAJOR CUSTOMERS
 
During 2005 and 2004, the San Juan Basin’s gas and NGL production was purchased by Coral Energy Resources, LP and Williams Energy Services.
 
(6)       EQUITY INVESTMENT IN SAVOY
 
In August 2005, we began negotiations to purchase from Yorktown Energy Partners II, LP its 32% interest in Savoy Energy LLP, a private company engaged in the oil and gas business primarily in the State of Michigan.  A purchase price of $4.1 million was agreed upon and closing occurred on December 31, 2005.  On December 20, 2005 we sold about 1,893,000 shares of our common stock to Yorktown Energy Partners VI,  L.P. at $2.20 per share (about $4.1 million).  We will account for our interest in Savoy using the equity method of accounting.
 
We determined that our investment in Savoy under EITF 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination, needed to be adjusted by approximately $2 million to properly reflect our stock price of $3.25 at the time of closing of this transaction.
 



 

15

 
Below (in thousands) are:   (i) a condensed balance sheet at December 31, 2005, and (ii) a condensed statement of operations for the year ended December 31, 2005.
 
                                            Condensed Balance Sheet

 
 
 
 
 
 
Current assets
$
12,393
 
 
PP&E, net
 
8,306
 
 
 
$
20,699
 
 
 
 
 
 
 
Total liabilities
$
5,450
 
 
Partners capital
 
15,249
 
 
 
$
20,699
 
 
 
                                   Condensed Statement Of Operations
 
 
Revenue
$
6,038
 
 
Gain on sale
 
3,133
 
 
 
 
9,171
 
 
 
 
 
 
 
Expenses
 
(4,364)
 
 
Net income
$
4,807
 
 
No equity income was recorded as closing on occurred on December 31, 2005.
 
Any difference between the purchase price and our pro rata share of the equity of Savoy will be amortized based on Savoy's units of production rate.
 

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(7)       RESERVE DATA (UNAUDITED)
 
Our reserve estimates for the years ended December 31, 2005 and 2004 were prepared by Edwin James, a sole-proprietor consulting petroleum engineer based on data we supplied.  Savoy's reserve estimates were prepared by Netherland, Sewell & Associates.  Be cautious that there are many uncertainties inherent in estimating proved reserve quantities and in projecting future production rates.
 
Proved reserves are the estimated quantities of oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.  Proved developed reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods.
 
 
Analysis of Changes in Proved Developed Reserves *
(in thousands)
  
 
  
 
  
 
  
 
  
Oil
  
Gas
  
 
  
(BBLs)
  
(MCF)
  
Balance at December 31, 2003
    
1,557
    
2,384
  
     Revisions of previous estimates
   
--
    
(266
)
     Discoveries
    
--
    
141
  
     Production
    
(162
)
  
(280
)
     Cuyama sale
    
(1,392
)
  
(546
)
Balance at December 31, 2004
    
3
    
1,433
  
     Revisions of previous estimates
   
(1
)
  
(41
)
     Discoveries
        
112
  
     Production
    
(2
)
  
(104
)
Balance at December 31, 2005 (1)
    
0
    
1,400
  
 
          
*We have no significant proved undeveloped reserves.
          
 
          
Equity interest (32%) in Savoy's Reserves:
          
 
          
Proved developed
    
22
    
634
  
 
          
Proved undeveloped
    
43
    
712
  
               
 
---------------------------
(1) Our oil reserves are not material.

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The following table (in thousands) sets forth a standardized measure of the discounted future net cash flows attributable to our proved developed reserves (hereinafter referred to as "SMOG"). Future cash inflows were computed using December 31, 2005 and 2004 gas prices of $8.69 and $6.06, respectively.  Future production costs represent the estimated future expenditures to be incurred in producing the reserves, assuming continuation of economic conditions existing at year-end.  Discounting the annual net cash inflows at 10% illustrates the impact of timing on these future cash inflows. 
 
 
  
2005
  
2004
  
 
  
 
  
 
  
Future gas revenue
  
$
12,350
  
$
8,200
  
     Future cash outflows - production andabandonment costs
    
(3,600
)
  
(2,800
)
Future income taxes
    
(3,500
)
  
(2,100
)
Future net cash flows
    
5,250
    
3,300
  
10% discount factor
    
(2,450
)
  
(1,500
)
SMOG
  
$
2,800
  
$
1,800
  
 
          
Equity interest (32%) in Savoy (about 50% relates to proved undeveloped reserves)
  
$
4,400
      
               
 
The following table (in thousands) summarizes the principal factors comprising the changes in SMOG:
 
 
 
  
2005
  
2004
  
 
          
SMOG, beginning of year
  
$
1,800
  
$
11,500
  
     Sales of oil and gas, net of production costs
    
(875
)
  
(3,600
)
     Net changes in prices and production costs
    
2,160
    
(350
)
     Revisions
    
(165
)
  
(300
)
     Discoveries
    
450
    
100
  
     Change in income taxes
    
(750
)
  
(1,200
)
     Accretion of discount
    
180
    
1,150
  
     Cuyama sale
    
-
    
(5,500
)
SMOG, end of year
  
$
2,800
  
$
1,800
  
               
 
 


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ITEM 13.        EXHIBITS
 
(a)       Exhibits
 
31
SOX 302 Certification
32
SOX 906 Certification

 
 
SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.
 
 
 
 
HALLADOR PETROLEUM COMPANY
 
 
 
 
 
 
 
 
 
Dated:  April 9, 2007
 
BY:/S/ VICTOR P. STABIO
       VICTOR P. STABIO, CEO
 
 
 
 
 
 
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