1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-5525
PYRAMID OIL COMPANY
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 94-0787340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2008 - 21ST. STREET,
BAKERSFIELD, CALIFORNIA 93301
(Address of principal executive offices) (Zip Code)
(661) 325-1000
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the preceding 12 months (or
for such shorter periods that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the last practicable date:
COMMON STOCK WITHOUT PAR VALUE 3,741,721
(Class) (Outstanding at September 30, 2006)
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PYRAMID OIL COMPANY
BALANCE SHEETS
ASSETS
September 30, December 31,
2006 2005
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 496,194 $1,300,475
Short-term investments 1,350,000 1,350,000
Trade accounts receivable 367,120 327,173
Interest receivable 126,014 91,717
Employee loan receivable 8,874 8,015
Crude oil inventory 72,616 58,962
Prepaid expenses 69,384 120,367
Income taxes receivable 32,930 --
Deferred income taxes 60,954 60,954
------------ ------------
TOTAL CURRENT ASSETS 2,584,086 3,317,663
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Oil and gas properties and equipment
(successful efforts method) 13,185,849 11,505,375
Capitalized asset retirement costs 304,199 294,600
Drilling and operating equipment 2,004,397 1,945,882
Land, buildings and improvements 978,702 976,965
Automotive, office and other
property and equipment 1,059,965 961,902
------------ ------------
17,533,112 15,684,724
Less: accumulated depletion,
depreciation, amortization
and valuation allowance (13,518,674) (13,307,424)
------------ ------------
4,014,438 2,377,300
------------ ------------
OTHER ASSETS
Deposits 250,000 250,000
Other assets 7,380 13,178
Assets held for resale 9,633 9,633
------------ ------------
267,013 272,811
------------ ------------
$6,865,537 $5,967,774
============ ============
The Accompanying Notes Are an Integral Part of These Financial Statements.
3
PYRAMID OIL COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2006 2005
(Unaudited) (Audited)
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 112,258 $ 83,749
Accrued professional fees 31,089 51,741
Accrued taxes, other than income taxes 22,866 29,151
Accrued payroll and related costs 49,865 51,039
Accrued royalties payable 130,839 115,762
Accrued insurance -- 54,826
Accrued income taxes -- 54,050
Accrued termination costs 142,997 146,047
Current maturities of long-term debt 35,921 37,073
Deferred income taxes 60,954 60,954
------------ ------------
TOTAL CURRENT LIABILITIES 586,789 684,392
------------ ------------
LONG-TERM DEBT, net of current maturities 17,823 26,858
------------ ------------
LIABILITY FOR TERMINATION COSTS 141,333 141,333
------------ ------------
LIABILITY FOR ASSET RETIREMENT OBLIGATION 977,385 955,169
------------ ------------
COMMITMENTS (note 3)
STOCKHOLDERS' EQUITY:
Preferred stock-n par value (Note 8);
10,000,000 authorized shares;
no shares issued or outstanding -- --
Common stock-no par value (Note 7 and 8);
50,000,000 authorized shares;
3,741,721 shares issued and outstanding 1,071,610 1,071,610
Retained earnings 4,070,597 3,088,412
------------ ------------
5,142,207 4,160,022
------------ ------------
$6,865,537 $5,967,774
============ ============
The Accompanying Notes Are an Integral Part of These Financial Statements.
4 PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
REVENUES $1,080,199 $1,015,138 $3,089,074 $2,582,578
--------- --------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 432,907 345,483 1,113,110 1,054,517
General and administrative 209,457 133,549 471,763 353,775
Taxes, other than income
and payroll taxes 27,127 17,171 60,255 47,071
Provision for depletion,
depreciation and
amortization 75,087 58,582 211,250 176,229
Accretion expense 5,331 4,809 15,339 14,429
Other costs and expenses 30,469 5,682 54,508 18,431
--------- --------- --------- ---------
780,378 565,276 1,926,225 1,664,452
--------- --------- --------- ---------
OPERATING INCOME 299,821 449,862 1,162,849 918,126
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 33,580 12,656 49,513 21,536
Gain on sale of fixed assets -- 291,868 -- 291,868
Loss on disposal of assets -- (2,055) -- (8,547)
Termination costs -- (424,000) -- (424,000)
Other income 3,600 3,600 12,619 15,972
Interest expense (4,648) ( 280) (6,771) ( 983)
--------- --------- --------- ---------
32,532 (118,211) 55,361 (104,154)
--------- --------- --------- ---------
INCOME BEFORE
INCOME TAX PROVISION 332,353 331,651 1,218,210 813,972
Income tax provision -- 38,200 236,025 39,325
--------- --------- --------- ---------
NET INCOME $ 332,353 $ 293,451 $ 982,185 $ 774,467
========= ========= ========= =========
BASIC INCOME PER COMMON SHARE $0.09 $0.12 $0.26 $0.31
========= ========= ========= =========
DILUTED INCOME PER
COMMON SHARE $0.09 $0.12 $0.26 $0.31
========= ========= ========= =========
Weighted average number of
common shares outstanding 3,741,721 2,494,430 3,741,721 2,494,430
========= ========= ========= =========
The Accompanying Notes Are an Integral Part of These Financial Statements.
5 PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
---------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 982,185 $ 774,647
Adjustments to reconcile net income
to cash provided by (used in)
operating activities:
Provision for depletion,
depreciation and amortization 211,250 176,229
Accretion expense 15,339 14,429
Costs incurred for asset
retirement obligations (2,722) (10,635)
Loss on disposal of fixed assets -- 8,547
Gain on sale of fixed assets -- (291,868)
Accrued termination costs -- 141,333
Changes in assets and liabilities:
Increase in trade accounts
and interest receivable (107,174) (257,405)
(Increase) Decrease in
crude oil inventories (13,654) 170
Decrease in prepaid expenses 50,983 79,809
Increase (decrease) in accounts
payable and accrued liabilities (96,451) 159,523
--------- --------
Net cash provided by operating activities 1,039,756 794,779
--------- --------
The Accompanying Notes Are an Integral Part of These Financial Statements.
6
PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
---------------------------
2006 2005
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of certificate of deposit $ 100,000 $ --
Purchase of short-term investments (100,000) (500,000)
Proceeds from sale of fixed assets -- 333,143
Increase in deposits (1,380) --
Capital expenditures (1,838,789) (393,945)
--------- --------
Net cash used in investing activities (1,840,169) (560,802)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 452,000 --
Principal payments on line of credit (452,000) --
Proceed from issuance of long-term debt 32,393 --
Loans to employees ( 3,300) --
Principal payments on loans to employees 9,619 7,191
Principal payments on long-term debt ( 42,580) ( 38,039)
-------- --------
Net cash (used in) financing activities ( 3,868) ( 30,848)
-------- --------
Net (decrease) increase in cash (804,281) 203,129
Cash at beginning of period 1,300,475 816,216
--------- ---------
Cash at end of period $ 496,194 $1,019,345
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the nine months for interest $ 6,771 $ 983
======== ========
Cash paid during the nine months for income taxes $268,955 $1,125
======== ========
The Accompanying Notes Are an Integral Part of These Financial Statements.
7 PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements include the accounts of Pyramid Oil Company (the
Company). Such financial statements included herein have been prepared by the
Company, without an audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
A summary of the Company's significant accounting policies is contained in its
December 31, 2005 Form 10-KSB which is incorporated herein by reference. The
financial data presented herein should be read in conjunction with the
Company's December 31, 2005 financial statements and notes thereto, contained
in the Company's Form 10-KSB.
In the opinion of the Company, the unaudited financial statements, contained
herein, include all adjustments necessary to present fairly the Company's
financial position as of September 30, 2006 and the results of its operations
and its cash flows for the nine month periods ended September 30, 2006 and
2005. The results of operations for an interim period are not necessarily
indicative of the results to be expected for a full year.
(2) DIVIDENDS
No cash dividends were paid during the nine months ended September 30, 2006
and 2005.
(3) COMMITMENTS AND CONTINGENCIES
The Company has entered into an employment agreement with the President of the
Company, John H. Alexander. In the event that Mr. Alexander is dismissed, the
Company would incur approximately $600,000 in costs.
(4) INCOME TAX PROVISION
The Company's income tax provision consists mainly of the current tax
provision for Federal and California income taxes.
8
(5) CHANGE IN ACCOUNTING PRINCIPLE
The Company recognizes a liability at discounted fair value for the future
retirement of tangible long-lived assets and associated assets retirement cost
associated with the petroleum and natural gas properties. The fair value of
the liability is capitalized as part of the cost of the related asset and
amortized to expense over its useful life. The liability accretes until the
date of expected settlement of the retirement obligations. The related
accretion expense is recognized in the statement of operations. The provision
will be revised for the effect of any changes to timing related to cash flow
or undiscounted abandonment costs. Actual expenditures incurred for the
purpose of site reclamation are charged to the asset retirement obligations to
the extent that the liability exists on the balance sheet. Differences between
the actual costs incurred and the fair value of the liability recorded are
recognized in income in the period the actual costs are incurred.
A reconciliation of the Company's asset retirement obligations from the
periods presented are as follows:
9 Months 12 Months
Ended Ended
9/30/06 12/31/05
--------- ----------
Beginning Balance $955,169 $ 946,566
Incurred during the period (2,722) ( 10,635)
Additions for new wells 9,926 --
Accretion expense 15,012 19,238
Revisions in estimates -- --
------- --------
Ending Balance $977,385 $ 955,169
======= ========
(6) DEPOSITS
In April 2004, the Company replaced its $250,000 state of California oil and
gas blanket performance surety bond, with a cash bond in the form of an
irrevocable certificate of deposit in the amount of $250,000.
9
(7) STOCK SPLIT
On March 28, 2006, the Company's Board of Directors approved a 3 for 2 stock
split payable on May 1, 2006, to shareholders of record as of April 17, 2006.
Common Stock
---------
Shares outstanding at December 31, 2005 2,494,430
Shares issued 3 for 2 stock split May 1, 2006 1,247,291
---------
Shares outstanding at September 30, 2006 3,741,721
=========
(8) CHANGE IN AUTHORIZED SHARES
At the Annual Meeting of Shareholders held on June 1, 2006, the Shareholders
approved an amendment to the Company's Articles of Incorporation to increase
the number of authorized shares of Common Stock from 10,000,000 to 50,000,000
and to authorize the issuance of up to 10,000,000 shares of a newly created
class of Preferred Stock.
(9) 2006 EQUITY INCENTIVE PLAN
At the Annual Meeting of Shareholders held on June 1, 2006, the Shareholders
approved the Pyramid Oil Company 2006 Equity Incentive Plan (the Plan). The
Plan authorizes the granting of the following types of awards to persons who
are employees, officers or directors of the Company or its subsidiaries or
who are consultants or advisers to such entities:
INCENTIVE STOCK OPTIONS that are intended to satisfy the
requirements of Section 422 of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder;
NON-QUALIFIED STOCK OPTIONS that are not intended to be incentive
options;
Shares of Common Stock that are subject to specified restrictions;
and
Stock appreciation rights that permit the holder to receive the
excess of the fair market value of the Common Stock on the exercise
date over its fair market value (or a greater specified base value)
on the grant date, either in tandem with options or as separate and
independent grants.
A summary of the plan is contained in the Company's Schedule 14a, Proxy
Statement dated May 10, 2006 which is incorporated herein by reference. A
copy of the Plan is attached as Appendix A to the Proxy Statement. As of the
date of the filing of this Form 10-QSB, no shares have been awarded under this
Plan.
PAGE <10>
(10) IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No.140 (SFAS 156). The
provisions of SFAS 156 are effective for fiscal years beginning after
September 15, 2006. This statement was issued to simplify the accounting for
servicing rights and to reduce the volatility that results from using
different measurement attributes. The Company is currently assessing the
impact that the adoption of SFAS 156 will have on its results of operations
and financial position. Management does not expect adoption of SFAS No. 156
to have a material impact on the Company's financial statements.
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting and reporting for uncertainties in
income tax law. This interpretation prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax returns.
This statement is effective for fiscal years beginning after December 15,
2006. The Company is currently in the process of evaluating the expected
effect of FIN 48 on its results of operations and financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company is required to
adopt the provision of SFAS 157, as applicable, beginning in fiscal year 2008.
Management does not believe the adoption of SFAS 157 will have a material
impact on the Company's financial position or results of operations.
EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That Is,
Gross versus Net Presentation) (EITF 06-3). In June 2006, the EITF reached a
consensus on EITF 06-3 to address any tax assessed by a governmental authority
that is directly imposed on a revenue-producing transaction between a seller
and a customer and may include, but are not limited to, sales, use, value
added, and some excise taxes. For taxes within the issue's scope, the
consensus requires that entities present such taxes on either a gross (i.e.
included in revenues and costs) or net (i.e. exclude from revenues) basis
according to their accounting policies, which should be disclosed. If such
taxes are reported gross and are significant, entities should disclose the
amounts of those taxes. Disclosures may be made on an aggregate basis. The
consensus is effective for The Company beginning January 1, 2007. The Company
does not anticipate the adoption of EITF Issue No. 06-3 will have any material
impact on its consolidated results of operations.
11
Item 2. Management's Discussion and Analysis or Plan of Operation
IMPACT OF CHANGING PRICES
The Company's revenue is affected by crude oil prices paid by the major oil
companies. Average crude oil prices for the third quarter of 2006 increased
by approximately $5.60 when compared with the same period for 2005. Average
crude oil prices for the first nine months of 2006 increased by approximately
$14.00 per equivalent barrel when compared with the same period for 2005. At
the end of the third quarter of 2006, crude oil prices had increased by
approximately $2.25 per barrel when compared with crude oil prices at
December 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments decreased by $804,281 for
the nine months ended September 30, 2006. During this period, operating
activities provided cash of $1,039,756. This was offset by capital
expenditures of $1,838,789, purchase of short-term investments of $100,000 and
principal payments on long-term debt totaling $42,580 during the first nine
months of 2006. Additional funds were provided by the redemption of a
certificate of deposit in the amount of $100,000 and proceeds from the
issuance of long term debt in the amount of $32,393. See the Statements of
Cash Flows for additional detailed information.
FORWARD LOOKING INFORMATION
Crude oil prices have decreased by approximately $3.40 per barrel as of
November 10, 2006, when compared to prices at September 30, 2006.
The Company's 2006 plans for drilling several new wells and re-drilling
existing wells is waiting on a contract drilling rig. The Company is
dependant upon drilling contractors and drilling rig availability when it
comes to new wells or re-drills. The Company does not own or operate a
drilling rig.
During the third quarter the Company focused on production activities,
property and equipment maintenance and ongoing environmental operations.
Maintenance activities included substantial work and repairs to certain
existing field facilities (tanks and gathering systems) and several pieces of
major equipment. One well servicing rig and pump unit were overhauled.
The Company's growth in 2006 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.
12
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 2006, 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
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 2005. 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.
Portions of the Quarterly Report, including Management's Discussion and
Analysis, contain forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the Company's actual results
and performance in future periods to be materially different from any future
results or performance suggested in forward-looking statements in this
release. Such forward-looking statements speak only as of the date of this
report and the Company expressly disclaims any obligation to update or revise
any forward-looking statements found herein to reflect any changes in Company
expectations or results or any change in events. Factors that could cause
results to differ materially include, but are not limited to: the timing and
extent of changes in commodity prices of oil, gas and electricity,
environmental risk, drilling and operational costs, uncertainties about
estimates of reserves and government regulations.
Item 4. Controls and Procedures
The Company is a non-accelerated filer and is required to comply with the
internal control disclosure requirements of Section 404 of the Sarbanes-Oxley
Act for fiscal years ending on or after July 15, 2006. The Company is
currently in the documentation phase of its Section 404 compliance and will be
required to comply with these disclosure requirements for its fiscal year
ending December 31, 2006.
13
ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2006
COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2005
REVENUES
Oil and gas revenues increased by 6.4% for the three months ended September
30, 2006 when compared with the same period for 2005. Oil and gas revenues
increased by 9.7% due to higher average crude oil prices for the third quarter
of 2006. The average price of the Company's oil and gas for the third quarter
of 2006 increased by approximately $5.60 per equivalent barrel when compared
to the same period of 2005. Revenues decreased by 3.3% due to lower crude oil
production/shipments. The Company's net revenue share of crude oil
production/sales decreased by approximately 600 barrels for the third quarter
of 2006. The decrease in sales volumes is due to a temporary decline
in production on two leases offset by an increase in production on the
Anderson and the Santa Fe leases due to the drilling and completion of two new
wells that was put on production in 2006.
OPERATING EXPENSES
Operating expenses increased by approximately 25% for the third quarter of
2006. The cost to produce an equivalent barrel of crude oil increased
by approximately $5.60 for the third quarter of 2006, for a total cost of
approximately $24.75 per equivalent barrel, when compared with the same period
for 2005. The increase in operating expenses is due to an increase of 13% in
labor costs, an increase of 8% in equipment rental and a 3% increase in gas
engine repairs and maintenance.
Labor costs increased due to an increase in hourly labor rates and a bonus
payment that was awarded to all employees. The increase in labor costs was
necessary to ensure that the Company remained competitive with the local labor
market. In addition, the Company hired an additional field level employee in
March of 2006. Equipment rental increased due to rental of equipment for the
Anderson #6 well. The Company rented a temporary crude oil storage tank,
blowout prevention equipment and gas flare for this well. This accounted for
almost all of the increase in equipment rental.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by approximately 57% for the
quarter ended September 30, 2006. The increase in general and administrative
expenses is due primarily to a 39% increase in salaries. The increase in
salaries is due primarily to bonuses that were paid during the third quarter
of 2006 and salary increases that were effective July 1, 2006. Audit fees
increased by 13% due to the additional reporting requirements.
14
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by 28%
for the third quarter of 2006, when compared with the same period for 2005.
The increase is due primarily to a 26% increase in depletion of the Companies
oil and gas properties. The increase in depletion is due primarily to an
increase in depletion on two of the Company's oil and gas properties, the
Santa Fe Energy and Anderson leases. The increase on these two properties is
due primarily to higher crude oil production due to the completion of two new
wells in the second quarter of 2006 and a new well in the third quarter of
2006.
OTHER COSTS AND EXPENSES
Other costs and expenses increased by approximately $25,000. The increase is
due to the costs associated with the listing of the Company's common stock on
the American Stock Exchange (AMEX) that was effective August 21, 2006.
INTEREST INCOME
Interest income increased by approximately $21,000 due to higher interest
rates for the third quarter of 2006.
GAIN ON SALE OF FIXED ASSETS
The Company recognized a gain on the sale of fixed assets during the third
quarter of 2005 in the amount of approximately $292,000 with the sale of a
well servicing hoist.
TERMINATION COSTS
Reflects the costs of the termination agreement (the Agreement) that was
entered into between the Company and Benny Hathaway, Vice President of the
Company. The Agreement is effective September 30, 2005, and replaced the
Employment Agreement that had been in effect since February 21, 2002. Mr.
Benny Hathaway submitted his voluntary resignation which was effective
November 11, 2005. The Agreement provides for a termination payment of
$400,000, which may be paid in three equal annual installments of $133,334,
beginning in December 2005. Under the terms of the Agreement, the Company
will continue to provide health insurance until the agreed upon termination
payments have been paid, approximately two years.
INCOME TAX PROVISION
The Company's income tax provision consists mainly of current estimated taxes
for Federal and California state income taxes.
15
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2005
REVENUES
Oil and gas revenues increased by approximately 20% for the nine months ended
September 30, 2006 when compared with the same period for 2005. Oil and gas
revenues increased by 28% due to higher average crude oil prices for the first
nine months of 2006. The average price of the Company's oil and gas for the
first nine months of 2006 increased by approximately $14.00 per equivalent
barrel when compared with the same period for 2005. Revenues decreased by 8%
due to lower crude oil production/shipments. The Company's net revenue
share of crude oil production/sales volumes decreased by approximately 4,500
barrels for the nine months ended September 30, 2006. The decrease in sales
volumes is due to a temporary decline in production on three leases offset by
an increase in production on the Anderson and the Santa Fe leases due to the
drilling and completion of two new wells that was put on production in 2006.
OPERATING EXPENSES
Operating expenses increased by approximately 6% for the nine months ended
September 30, 2006, when compared with the same period for 2005. The cost to
produce an equivalent barrel of crude oil increased by approximately $2.80 per
barrel for the nine months ended September 30, 2006, for a total cost of
approximately $21.75 per equivalent barrel, when compared with the same period
for 2005. The increase in operating expenses is due to an increase of 6% in
labor costs, an increase of 3% in equipment rental, an increase of 2% in
insurance expense and a 2% increase in gas engine repairs and maintenance.
This was offset by a decrease of 6% in outside services and a 2% decrease in
waste water disposal.
Labor costs increased due to an increase in hourly labor rates and a bonus
payment that was awarded to all employees. The increase in labor costs was
necessary to ensure that the Company remained competitive with the local labor
market. In addition, the Company hired an additional field level employee in
March of 2006. Equipment rental increased due to rental of equipment for the
Anderson #6 well. The Company rented a temporary crude oil storage tank,
blowout prevention equipment and gas flare for this well. This accounted for
almost all of the increase in equipment rental. The reduction in the cost of
outside services is due to lower expenditures for well work-overs. Fewer
work-overs were done in the first nine months of 2006 versus the same period
for 2005.
16
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by approximately 33% for the
nine months ended September 30, 2006. The increase in general and
administrative expenses is due primarily to a 16% increase in salaries. The
increase in salaries is due primarily to bonuses that were paid during the
third quarter of 2006 and salary increases that were effective July 1, 2006.
Audit fees increased by 6% due to the additional costs of complying with
Sarbanes-Oxley legislation. Outside consulting fees of increased by 8% due to
the hiring of a petroleum engineer on a part-time basis.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by 20%
for the nine months ended September 30, 2006, when compared with the same
period for 2005. The increase is due primarily to a 20% increase in depletion
of the Companies oil and gas properties. The increase in depletion is due
primarily to an increase in depletion on two of the Company's oil and gas
properties, the Santa Fe Energy and Anderson leases. The increase on these
two properties is due primarily to higher crude oil production due to the
completion of two new wells in the second quarter of 2006 and a new well in
the third quarter of 2006.
OTHER COSTS AND EXPENSES
Other costs and expenses increased by approximately $36,000. The increase is
due primarily to the costs associated with the listing of the Company's common
stock on the American Stock Exchange (AMEX) that was effective August 21,
2006.
INTEREST INCOME
Interest income increased by approximately $28,000 due to higher interest
rates for the first nine months of 2006.
GAIN ON SALE OF FIXED ASSETS
The Company recognized a gain on the sale of fixed assets during the third
quarter of 2005 in the amount of approximately $292,000 with the sale of a
well servicing hoist.
17
TERMINATION COSTS
Reflects the costs of the termination agreement that was entered into between
the Company and Benny Hathaway, Vice President of the Company. The Agreement
is effective September 30, 2005, and replaced the Employment Agreement that
had been in effect since February 21, 2002. Mr. Benny Hathaway submitted his
voluntary resignation which was effective November 11, 2005. The Agreement
provides for a termination payment of $400,000, which may be paid in three
equal annual installments of $133,334, beginning in December 2005. Under the
terms of the Agreement, the Company will continue to provide health insurance
until the agreed upon termination payments have been paid, approximately two
years.
INCOME TAX PROVISION
The Company's income tax provision consists mostly of current taxes for
California and minimum taxes for New York. The Company is utilizing its
net operating loss carryforwards to offset Federal income taxes.
18
PYRAMID OIL COMPANY
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
None
Item 2. - Changes in Securities
None
Item 3. - Defaults Upon Senior Securities
None
Item 4. - Submission of Matters to a Vote of Security Holders
None
Item 5. - Other Information -
None
Item 6. - Exhibits and Reports on Form 8-K -
a. Exhibits
99.1 Written Statement of the Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350
99.2 Written Statement of the Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350
b. The following Form 8-K's were filed during the three months ended
September 30, 2006.
August 15, 2006 Press Release - Pyramid Oil Company Announces
its Move to the American Stock Exchange and Second Quarter
Results
19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
PYRAMID OIL COMPANY
(registrant)
Dated: November 13, 2006
JOHN H. ALEXANDER
---------------------
John H. Alexander
President
Dated: November 13, 2006
LEE G. CHRISTIANSON
---------------------
Lee G. Christianson
Chief Financial Officer
PAGE <20>
Certification By Principal Executive Officer Pursuant
to Rule 13A-14 or 15D-14 of the SEC Exchange Act of 1934,
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John H. Alexander, the President of Pyramid Oil Company (the registrant),
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Pyramid Oil
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
PAGE <21>
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 13, 2006
By: JOHN H. ALEXANDER
-----------------------
John H. Alexander
Chief Executive Officer
PAGE <22>
Certification By Principal Financial Officer Pursuant
to Rule 13A-14 or 15D-14 of the SEC Exchange Act of 1934,
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Lee G. Christianson, the Chief Financial Officer of Pyramid Oil Company
(the registrant), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Pyramid Oil
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
PAGE <23>
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 13, 2006
By: LEE G. CHRISTIANSON
------------------------
Lee G. Christianson
Chief Financial Officer