-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AB3UBZvs7fZfAlAVzCUQboS4AcEvjSgykQ8+Kdsp994pJanS9/ElaP1JU60QefKt HOndNVzf58mQKh9FZeaKGA== 0000788965-03-000004.txt : 20030415 0000788965-03-000004.hdr.sgml : 20030415 20030415164848 ACCESSION NUMBER: 0000788965-03-000004 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALLADOR PETROLEUM CO CENTRAL INDEX KEY: 0000788965 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841014610 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-14731 FILM NUMBER: 03650958 BUSINESS ADDRESS: STREET 1: 1660 LINCOLN ST STE 2700 CITY: DENVER STATE: CO ZIP: 80264 BUSINESS PHONE: 3038395505 MAIL ADDRESS: STREET 1: 1660 LINCOLN STREET STREET 2: SUITE 2700 CITY: DENVER STATE: CO ZIP: 80264 FORMER COMPANY: FORMER CONFORMED NAME: KIMBARK INC DATE OF NAME CHANGE: 19860624 FORMER COMPANY: FORMER CONFORMED NAME: KIMBARK OIL & GAS CO /CO/ DATE OF NAME CHANGE: 19900102 10KSB 1 s10k123102.txt 12/31/02 FORM 10-KSB HALLADOR PETROLEUM UNITED STATES 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, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-14731 HALLADOR PETROLEUM COMPANY COLORADO 84-1014610 (State of incorporation) (IRS Employer Identification No.) 1660 Lincoln Street, Suite 2700, Denver, Colorado 80264-2701 (Address of principal executive offices) (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 (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 the 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 is not 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] Our revenue for the year ended December 31, 2002 was about $7.8 million. At April 4, 2003, we had 7,093,150 shares outstanding and the aggregate market value of such shares held by non-affiliates was about $1.2 million based on a price of $1.01, which was the last reported trade on that date. DOCUMENTS INCORPORATED BY REFERENCE: NONE ITEM 1. DESCRIPTION OF BUSINESS Hallador Petroleum Company, a Colorado corporation, was organized by our predecessor in 1949. About six years ago, Yorktown Energy Partners II and affiliates (Yorktown) invested $5,025,000 in Hallador Petroleum, LLP, a newly formed limited liability limited 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. As general partner, we consolidate the activity of the partnership and present the 30% limited partners' interest as a minority interest. We and our principal operating subsidiaries, Hallador Production Company and Hallador Petroleum, LLP, are engaged in the exploration, development and production of oil and natural gas. Our principal and administrative offices are located at 1660 Lincoln Street, Suite 2700, Denver, Colorado 80264, phone 303.839.5504, fax 303.832.3013. The South Cuyama field office is located in New Cuyama, California. We have no website. 88% of our oil and gas revenue is attributable to the South Cuyama field (the "SC Field") located in Santa Barbara County, California, approximately 75 miles southwest from Bakersfield, California. We own 92% of Santa Barbara Partners (SBP), an Oklahoma general partnership, which has a 93% working interest (78% net revenue interest) in the SC Field. The SC Field's oil reserves consist of light oil at 29( gravity. We operate oil and natural gas properties for our own account and for the account of others. We also review and evaluate producing oil and natural gas properties, companies, or other entities, which meet certain guidelines for acquisition purposes. Occasionally, we engage in the trading and acquisition of non-producing oil and gas mineral leases and fee-simple minerals. Markets - ------- Our products are sold to various purchasers in the geographic area of the properties. Natural gas, after processing, is distributed through pipelines. Oil and natural gas liquids (NGLs) are distributed through pipelines or hauled by trucks. The principal uses for oil and natural gas are heating, manufacturing, power, and transportation. At March 27, 2003, we were receiving $27.51 per barrel for our California oil production, which is $3.79 more than the average price received during 2002 and $1.44 less than the December 31, 2002 price. The SC Field's oil is sold to Pacific Marketing and Transportation LLC (an affiliate of Anschutz Exploration Company), pursuant to a "spot market" contract, which can be cancelled by either party with 30 days notice. The contract pays a $.20 per barrel premium to "spot market" postings. The SC Field's natural gas is sold to Coral Energy (an affiliate of Shell Oil Corporation), pursuant to a "spot market" contract, which can be cancelled by either party with 30 days notice. Competition - ----------- The oil and gas industry is highly competitive. We encounter competition from major and independent oil companies in acquiring economically desirable producing properties, drilling prospects, and even the equipment and labor needed to drill, operate and maintain our properties. Competition is intense with respect to the acquisition of producing and partially developed properties. We compete with companies having financial resources and technical staffs significantly larger than our own. We do not own any refining or retail outlets and have minimal control over the prices of our products. Generally, higher costs, fees and taxes assessed at the producer level cannot be passed on to our customers. We also face competition from imported products as well as alternative sources of energy such as coal, nuclear, hydro-electric power, and a growing trend toward solar. We could incur delays or curtailments of the purchase of our available production. We may also encounter increasing costs of production and transportation while sale prices remain stable or decline. Any of these competitive factors could have an adverse effect on our operating results. Environmental and Other Regulations - ----------------------------------- Our operations are affected in varying degrees by federal, state, regional and local laws and regulations, including, but not limited to, laws governing allowable rates of production, well spacing, air emissions, water discharges, endangered species, marketing, prices and taxes. We are further affected by changes in such laws and by constantly changing administrative regulations. Most natural gas pricing is presently deregulated and the remaining regulation has no material impact on our prices. We cannot predict the long-term impact of future natural gas price regulation or deregulation. We are subject to various federal, state, regional and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the owner or the lessee for the cost of pollution clean-up resulting from operations, subject the owner or lessee to liability for pollution damages, require suspension or cessation of operations in affected areas or impose restrictions on injection into subsurface aquifers that may contaminate groundwater. Such regulation has increased the resources required in, and costs associated with, planning, designing, drilling, installing, operating and abandoning our oil and natural gas wells and other facilities. We spend a significant amount of technical and managerial time to comply with environmental regulations and permitting requirements. We have and will continue to make expenditures to comply with these requirements, which we believe are necessary business costs. Although environmental requirements do have a substantial impact upon the energy industry, generally these requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in California. Although we are not fully insured against all environmental and other risks, we maintain insurance coverage, which we believe, is customary in the industry. During 2002, we incurred about $122,000 to comply with these recurring environmental regulations. We estimate that such expenditures for 2003 and for each year thereafter, in the foreseeable future, will approximate $134,000. We will continue to use our best efforts to comply with all applicable environmental laws and regulations. See Item 6 - Management's Discussion and Analysis (MD&A) for a discussion regarding idle wells in the SC Field and the ARCO Indemnity. To the extent these environmental expenditures reduce funds available for increasing our reserves of oil and natural gas, future operations could be adversely impacted. Despite the fact that all of our competitors have to comply with similar regulations, many are much larger and have greater resources with which to deal with these regulations. Other - ----- We have no significant patents, trademarks, licenses, franchises or concessions. The oil business is not generally seasonal in nature; although unusual weather extremes for extended periods may increase or decrease demand. Natural gas prices tend to increase in the fall and winter months and to decrease in the spring and summer. We have 29 employees; seven are located at our executive office in Denver and 22 are located at the SC Field. When needed we also engage consulting petroleum engineers, environmental professionals, geologists, geophysicists, landmen, accountants and attorneys on a fee basis. ITEM 2. DESCRIPTION OF PROPERTY Location and General Character - ------------------------------ Our primary operating areas consist of (i) the SC Field located 75 miles southwest from Bakersfield, California, and (ii) the San Juan Basin, located in the northwest corner of New Mexico. Revenue from the SC Field accounted for 88% of 2002 oil and gas revenue and San Juan Basin accounted for 2%. We hold our working interests in oil and natural gas properties either through recordable assignments, leases, or contractual arrangements such as operating agreements. Consistent with industry practices, we do not make a detailed examination of title when we acquire undeveloped acreage. Title to such properties is examined by legal counsel prior to commencement of drilling operations. This method of title examination is consistent with industry practices. In the acquisition and operation of oil and natural gas properties, burdens such as royalty, overriding royalty, liens incident to operating agreements, liens by taxing authorities, as well as other burdens and minor encumbrances are customarily created. We believe that no such burdens materially affect the value or use of our properties. Proved Oil and Gas Reserves - --------------------------- Information concerning our reserve estimates is set forth in Note 7 to the financial statements. The reserve estimates were prepared by a sole-proprietor consulting petroleum engineer. All of our oil and gas reserves are located onshore. South Cuyama Field - ------------------ Discovered in 1949 in the Cuyama Valley, Santa Barbara County, California, the SC Field became the largest oil field found to date in the valley and is located approximately 75 miles southwest from Bakersfield. By 1951, the SC Field contained 200 wells producing approximately 40,000 barrels of oil per day. Since inception, the SC Field is estimated to have produced over 222 million barrels of crude oil. Current oil production to the 100% is about 1,031 barrels per day. Currently, there are 67 producing wells. The wells produce from a depth range of 3,400 to 4,800 feet. Sales and Price Data - -------------------- See Item 6 - MD&A Producing Wells - --------------- As of April 4, 2003, we had a working interest in 63 gross (55 net) oil wells and 30 gross (6 net) gas wells. Leasehold Interests - ------------------- The following table sets forth our gross and net acres of undeveloped oil and gas leases as of April 4, 2003: Gross Net -------- ------ South Cuyama, California 6,814 3,970 Montana 10,108 4,488 North Dakota 4,617 1,517 Utah 5,777 5,777 Wyoming 76,480 65,561 ------- ------- Total 103,796 81,313 ======= ======= We have an interest in 3,077 gross (2,707 net) developed acres in the SC Field. Drilling Activity - ----------------- From January 1, 2003 through April 4, 2003, there has been no drilling activity. During 2002 we drilled one successful development oil/gas well in the SC Field. Although drilling was limited, we spent over $1 million on the 3-D seismic project. Under the successful efforts method of accounting we follow, such costs were expensed as incurred. ITEM 3. LEGAL PROCEEDINGS: None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the OTC Bulletin Board under the symbol "HPCO". The following table sets forth the high and low sales price for the periods indicated:
High Low ---- ---- 2003 (January 1 through April 4, 2003) $1.05 $0.70 2002 First quarter 1.80 1.50 Second quarter 2.50 1.35 Third quarter 1.25 1.05 Fourth quarter 3.50 0.70 2001 First quarter 4.19 1.75 Second quarter 5.00 4.25 Third quarter 4.25 4.25 Fourth quarter 4.00 1.75
During the last two years no dividends were paid. We have no present intention to pay any dividends in the foreseeable future. At April 4, 2003 there were 411 holders of record of our common stock and the last recorded sales price was $1.01. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview - -------- Our financial statements should be read in conjunction with this discussion. Our primary operating areas consist of (i) the South Cuyama field (SC Field) located 75 miles southwest from Bakersfield, California, and (ii) the San Juan Basin, located in the northwest corner of New Mexico. The PV10 for SC Field represents 91% of our total PV10 and the PV10 for San Juan Basin represents 6%. Due to its significance, our value depends on the estimated future cash flows from the SC Field. We intend to maximize cash flow by continuing to increase oil and gas production and keeping operating expenses low. Future operations will also be affected by the results of the development and exploration activity discussed below. About six years ago, Yorktown Energy Partners II and affiliates (Yorktown) invested $5,025,000 in Hallador Petroleum, LLP, a newly formed limited liability limited 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. As general partner, we consolidate the activity of the partnership and present the 30% limited partners' interest as a minority interest. Our profitability in any particular accounting period will be directly related to: (i) prices, (ii) production, (iii) lifting costs, and (iv) exploration activities. Accordingly, operating results will fluctuate from period to period based on these factors, among others. What follows is a discussion of our two primary operating areas. South Cuyama Field - ------------------ Two years ago the field's daily production averaged about 750 bopd. During the past two years, we have brought on new production through the recompletion of two wells and the drilling of two wells all of which were identified in our first 3-D seismic project which was completed in October These wells raised our production to a peak of 1,190 bopd during the third quarter of 2002. Current production is at 1,031 bopd. The drop is due to a fast decline in initial production from the new wells and the normal decline rate from the old wells. During October 2002, we completed our second 3-D seismic project and during the first quarter 2003 we completed the processing of the data and we are currently interpreting the data. Several drillable prospects have been identified. The cost to the 100% was about $1.3 million and our share was about $1 million. This project covered about 36 square miles. The October 2000 3-D seismic project covered 10 square miles. When we purchased this field from ARCO twelve years ago, 3-D seismic was in its infancy and very expensive. We are very excited about the possibilities this second 3-D seismic project brought to us. SOCAL - ----- Currently gas sales in the SC Field are 1,000 MCF per day. Southern California Gas Company (SOCAL), the pipeline company and our only outlet to sell gas has imposed a 1,000 MCF per day maximum limit. If it weren't for this limit, we believe we could sell substantially more than 1,000 MCF per day. If we are unable to sell more gas, we will have to curtail our exploration and development plans. In late August 2002 we were notified by SOCAL that they would start enforcing stricter quality standards on our gas. Historically, SOCAL had accepted gas containing up to 6% inert gases and now they only accept gas containing up to 4% inert gases. Consequently, we had to install equipment costing approximately $376,000 in order to remove CO2 from our gas stream. The majority of this cost was incurred in the first quarter of 2003. While the equipment was being installed, SOCAL would not allow us to sell gas during a 50-day period. This resulted in lost gas revenue of about $54,000 during the first quarter of 2003. Hedging - ------ Through mid February 2003, we had never entered into any commodity derivative agreements since acquiring the SC Field. During mid February 2003 oil prices in the field reached an unprecedented level of about $36 per barrel. For the first time we purchased puts on 23,000 barrels of oil for the month of June 2003 (strike price of $29.00 per barrel) and 16,500 barrels of oil for the month of July 2003 (average strike price of $30.48 per barrel). As of April 4, 2003 the value of these puts was $170,000. ARCO Indemnity - -------------- The SC Field was purchased from ARCO (Atlantic Richfield which is now part of BP p.l.c.) in May 1990. As part of the Purchase and Sale Agreement, ARCO agreed to indemnify us for certain environmental liabilities connected with their 40-year ownership of the field and gas plant ("ARCO Indemnity"). Part of the gas plant has not been operational during the past twenty-five years. There is evidence of asbestos in the non-operational part of the gas plant. It is our position, and the opinion of our legal counsel, that the ARCO Indemnity covers future abandonment and clean-up costs associated with this gas plant. We have had several discussions with BP regarding this matter and have retained a San Francisco law firm to assert our rights under the ARCO Indemnity. The costs to abandon and clean up the gas plant area and other oil and gas areas at the field will be significant. There is a chance, depending on the negotiations and legal proceedings with BP, that some or all of the costs could be borne by us. At this time we are unable to estimate what these costs could ultimately be but we expect that such costs could have a material adverse effect on our financial condition, results of operations and cash flows. San Juan Basin - -------------- This gas field is located in the northwest corner of New Mexico in San Juan County. We have an interest in 20 wells and are the operator. These wells have long-lived reserves. Our WI in this field ranges from 5%-15% with NRIs between 5%-13%. At December 31, 2002, our net book value in this prospect is about $113,000. Three development wells are planned for 2003. The cost to the 100% to drill and complete each well will total about $600,000. Questar, a Salt Lake City company, will be the operator during the drilling phase. Less Significant Operating Area - ------------------------------- South Texas - Bonus ------------------- During the third and fourth quarter of 2001, we participated in a four-well developmental gas prospect in Wharton County, Texas. These wells are deep (about 14,000 feet) and expensive; the costs to drill and complete each well was about $5 million to the 100%. We have a 5.5% WI (4.3% NRI). At December 31, 2001, our net book value in the prospect was about $1.3 million. During the second quarter of 2002, production from the prospect began to drop unexpectedly. As a result we reduced the proved reserves for these wells and based on a future net cash flow analysis determined that the property had been impaired. As such, we recorded an impairment of $840,000 to reduce the net book value of these wells to estimated fair market value. Catalytic Solutions Investment - ------------------------------ During 1998, we invested $62,000 for a small ownership in Catalytic Solutions, Inc. (CSI), a private company, located in Oxnard, California (a Los Angeles suburb). CSI manufactures catalytic converters that reduce toxic emissions from internal combustion engines. During 2000, we invested another $113,000 in CSI. Our current ownership is less than 1%. Our average per share cost is about $8.20. CSI is in the process of raising additional capital and expects to sell shares at $13. Partial Self-insurance for Employee Medical and Dental Costs - ------------------------------------------------------------ Due to the rising costs in providing health care coverage for our employees we changed from a standard type of policy to a partially self-insured policy. For each year we are responsible for the first $5,700 of health care and $1,500 dental costs for each employee and their dependents. Our maximum exposure in any given year is about $130,000. Through December 31, 2002 we paid approximately $14,500 in claims and have accrued an additional $5,000. Environmental and Regulation - ---------------------------- We are directly affected by changing environmental rules and regulations. Although we believe our operations and facilities are in compliance with applicable environmental regulations, risk of substantial cost and liabilities resulting from an unintentional breach of environmental regulations are inherent to oil and gas operations. It is possible that other developments, such as increasingly strict environmental laws, regulations, and enforcement policies or claims for damages could result in significant costs and liability in the future. In January 1999, the California legislature passed a bill, which increased our operator's bond from $100,000 to $250,000 over a five-year period. In addition, an idle well bill was passed to ensure that funds would be available to properly plug and abandon (P&A) California wells upon their depletion. Over the next ten years, as the SC Field's operator, we are required to place in an interest-bearing escrow account $500 per year for each idle well in the SC Field until such well is plugged and abandoned or until $5,000 has been deposited. Through December 31, 2002 we have made four installments totaling $270,000. We estimate that after ten annual installments we will have met the current funding obligation considering the interest to be earned. As the SC Field depletes, and more wells move from the producing category to the idle-well category we will have to increase our idle well deposits. Presently, there are 280 wells in the SC Field, approximately 151 are classified as "idle". During 1999, we began amortizing, using the units-of-production method, our share of the estimated future costs ($2,200,000) to P&A the SC Field's 280 wells. Included in the DD&A expense for 2002 and 2001 was $310,000 and $154,000, respectively, associated with these estimated future costs. In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires companies to recognize the fair value of an asset retirement liability in the financial statements by capitalizing that cost as part of the cost of the related long-lived asset. The asset retirement liability should then be accreted to expense. The statement is effective January 1, 2003. Based on current estimates, upon adoption of SFAS 143, we expect to record an additional $400,000-$500,000 for these asset retirement obligations. Under our current accounting policy we have already recorded $650,000 for such obligations. These obligations relate to the projected cost to plug and abandon oil and gas wells. Liquidity and Capital Resources - -------------------------------- Cash and cash to be provided from operations are expected to enable us to meet our obligations as they become due during the next several years. At December 31, 2002, we had borrowings of $251,000 outstanding under a revolving reserve-based credit facility that bore interest at a rate of 3.652%. The borrowing base has been established at $2,200,000. The borrowing base is scheduled to be redetermined on May 1 and November 1 of each year. Borrowings under the Credit Agreement are secured by substantially all of our producing properties. Interest rates applied to borrowings under the Credit Agreement are determined by reference to the prime rate, or to LIBOR, at our election. A varying spread of 1.75% to 2.25% is added to LIBOR, based upon the loan usage ratio. Borrowings under the Credit Agreement are revolving loans until April 30, 2004, at which time all then outstanding borrowings are due. The Credit Agreement contains various financial covenants and other restrictions. We have no special purpose entities and no off-balance sheet debt nor did we enter into any related party transactions during the two years ended December 31, 2002. RESULTS OF OPERATIONS YEAR-TO-DATE COMPARISON - ----------------------- The table below (in thousands) provides sales data and average prices for the period.
2002 2001 ------------------------ ---------------------- Sales Average Sales Average Volume Price Revenue Volume Price Revenue ------- ------- ------ ------ ----- ------- Oil - barrels South Cuyama field 282 $23.09 $6,512 243 $21.74 $5,284 Other 9 18.22 164 8 18.13 145 Gas - mcf South Cuyama field 96 3.38 324 175 8.05 1,409 San Juan - New Mexico 48 2.27 109 51 3.90 199 Other 216 2.97 642 142 5.11 726
Oil revenue is up in 2002 due to higher prices and production; and gas revenue is down in 2002 primarily due to lower prices all as set forth in the table above. The table below (in thousands) shows lease operating expenses (LOE) for our two primary fields.
2002 2001 ---- ---- South Cuyama field: LOE excluding electricity $2,883 $2,623 Electricity 1,827 1,434 ----- ----- 4,710 4,057 San Juan - New Mexico 73 70 Other 175 100 ----- ----- Total $4,958 $4,227 ===== =====
LOE per equivalent barrel was $14.15 for 2002 and $13.41 for 2001. LOE increased due to higher electricity costs in the SC Field. G&G costs relate to the October 2002 3-D seismic project in the SC Field; we did no seismic project during 2001. Impairment of proved properties more than doubled due to the $840,000 impairment charge related to the South Texas - Bonus prospect discussed above. DD&A increased due to a higher depletable base and to lower reserve estimates utilized in the depletion calculation for the first three quarters of 2002. In the fourth quarter of 2002 DD&A expense was $361,000 and DD&A expense for each of the first three quarters of 2002 averaged $639,000. This lower DD&A expense for the fourth quarter of 2002 was due to higher reserve estimates at December 31, 2002 compared to December 31, 2001. This increase in reserves was due to higher oil prices. The $300,000 expense for the purchase of employee stock options was a one-time event during 2001. We do not expect to pay income taxes in the near term. In the United States, the utilization of net operating loss carryforwards will reduce our effective federal tax rate from approximately 40% to approximately 4% in years we generate taxable income. We have recorded a $4 million asset for the future benefit of our United States carryforwards and other tax benefits. As of December 31, 2002, this asset was completely offset by a valuation allowance based upon our projection of realizability of the gross deferred tax asset. Fluctuations in industry conditions and trends will require periodic reviews of the recorded valuation allowance to determine if a decrease in the allowance is appropriate. A decrease in the allowance would result in an income tax benefit and a subsequent increase in the valuation allowance would decrease net income. Risk Factors - ------------ The six issues that cause us worry are: 1. OPEC deciding to significantly increase production, which would result in a free-fall of oil prices. 2. Although the SC Field has a 50-year operating history, the reserve estimates could be overstated. 3. We never know what adverse rules or regulations could be passed by regulatory agencies such as the EPA (Environmental Protection Agency), BLM (Bureau of Land Management), DOG (California Division of Oil & Gas), and the SBAPCD (Santa Barbara County Air Pollution Control District). 4. The SC Field is a high-water-cut oil field meaning that we move about 30,000 barrels of water per day in order to produce about 1,000 barrels of oil per day. Such fields have a high break-even point and consequently depend on a relatively high oil price to make money. 5. California is prone to earthquakes. Certain types of earthquakes could shear the casing heads of our wells resulting in catastrophic damage to the SC Field. Earthquake insurance is cost prohibitive, and we have none. 6. We have no succession plan for our CEO, Victor Stabio. The loss of his services would have an adverse affect on us. We do have a key man life insurance policy on Mr. Stabio in the amount of $2.5 million. Critical Accounting Policies and Estimates - ------------------------------------------ We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Successful Efforts Method of Accounting - --------------------------------------- We account for our exploration and development activities utilizing the successful efforts method of accounting. Under this method, costs of productive exploratory wells, development dry holes and productive wells and undeveloped leases are capitalized. Oil and gas lease acquisition costs are also capitalized. Exploration costs, including personnel costs, certain geological and geophysical expenses and delay rentals for oil and gas leases, are charged to expense as incurred. Exploratory drilling costs are initially capitalized, but charged to expense if and when the well is determined not to have found reserves in commercial quantities. The sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized as long as this treatment does not significantly affect the unit-of-production amortization rate. A gain or loss is recognized for all other sales of producing properties. The application of the successful efforts method of accounting requires managerial judgment to determine the proper classification of wells designated as developmental or exploratory which will ultimately determine the proper accounting treatment of the costs incurred. The results from a drilling operation can take considerable time to analyze and the determination that commercial reserves have been discovered requires both judgment and industry experience. Wells may be completed that are assumed to be productive and actually deliver oil and gas in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. Wells are drilled that have targeted geologic structures that are both developmental and exploratory in nature and an allocation of costs is required to properly account for the results. The evaluation of oil and gas leasehold acquisition costs requires managerial judgment to estimate the fair value of these costs with reference to drilling activity in a given area. Drilling activities in an area by other companies may also effectively condemn leasehold positions. The successful efforts method of accounting can have a significant impact on the operational results reported when we enter a new exploratory area in hopes of finding an oil and gas field that will be the focus of future development drilling activity. The initial exploratory wells may be unsuccessful and will be expensed. Seismic costs can be substantial which will result in additional exploration expenses when incurred. Reserve Estimates - ----------------- Our estimates of oil and gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable oil and gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future oil and gas prices, future operating costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from actual results The future drilling costs associated with reserves assigned to proved undeveloped locations may ultimately increase to an extent that these reserves may be later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of our oil and gas properties and/or the rate of depletion of the oil and gas properties. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material. Impairment of Developed Oil and Gas Properties - ---------------------------------------------- We review our oil and gas properties for impairment whenever events and circumstances indicate a decline in the recoverability of their carrying value. We estimate the expected future cash flows of our oil and gas properties and compare such future cash flows to the carrying amount of our oil and gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will adjust the carrying amount of the oil and gas properties to their fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected cash flows projected. At December 31, 2001 oil prices in the SC Field were $16.48. At that price cash flow from the SC Field is slightly positive. During March 2002 oil prices improved, if they had not improved, we would have taken an impairment charge on this field. Our net book value in the SC Field at December 31, 2002 was $5.7 million. Future undiscounted cash flows using December 31, 2002 prices were $27 million. If prices during 2003 decline below $20 per barrel and we conclude these low oil prices are not reasonably likely to improve, we could be required to take an impairment charge. At December 31, 2001, our net book value in the South Texas - Bonus prospect was about $1.3 million. During the second quarter of 2002, production from the prospect began to drop unexpectedly. As a result we reduced our estimates of the proved reserves for these wells and based on a future net cash flow analysis determined that the property had been impaired. As such, we recorded an impairment of $840,000 to reduce the net book value of these wells to estimated fair market value. In June 2002 we received an offer to purchase our interest in the Fulton Fuller exploratory gas well for $25,000 which we accepted in October 2002. As such, we took an additional impairment charge of $79,000 during the quarter ended June 30, 2002, to reduce the net book value to the estimated realizable value of $25,000. Impairment of Unproved Oil and Gas Properties - --------------------------------------------- We periodically assess individually significant unproved oil and gas properties for impairment, on a project-by-project basis. Our assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such projects impact the amount and timing of impairment provisions. Future Abandonment Costs - ------------------------ We make judgments based on historical experience and future expectations on the future abandonment cost, net of salvage value, of our oil and gas properties and equipment. We review our estimate of the future obligation periodically and accrue the estimated obligation monthly through the depletion calculations based on the units-of-production method. For properties other than the SC Field we estimate that the future abandonment cost, net of salvage value, will not be material. For the SC Field we are estimating such future costs to be $2.2 million, on an undiscounted unescalated basis. Based on reserve estimates we don't expect to begin plugging and abandoning activities for at least 20 years. See New Accounting Pronouncements - SFAS No. 143 discussed below. New Accounting Pronouncements - ----------------------------- In December 2002 the Financial Accounting Standards Board issued SFAS No. 148,"Accounting for Stock-Based Compensation - Transition and Disclosure: an amendment of FASB Statement No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The statement is effective for financial statements for fiscal years ending after December 15, 2002. We will continue to account for stock-based compensation using the methods detailed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not have any pending or planned exit or disposal activities and do not expect a material effect on our financial position or results of operations from the adoption of this statement. In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires that gains and losses from extinguishment of debt be evaluated under the provisions of Accounting Principles Board Opinion No. 30 and be classified as ordinary items unless they are unusual or infrequent or meet the specific criteria for treatment as an extraordinary item. This statement is effective for fiscal years beginning after May 15, 2002. We do not anticipate that the adoption of this statement will have a material effect on our financial position or results of operations. In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires companies to recognize the fair value of an asset retirement liability in the financial statements by capitalizing that cost as part of the cost of the related long-lived asset. The asset retirement liability should then be accreted to expense. The statement is effective January 1, 2003. Based on current estimates, upon adoption of SFAS 143, we expect to record an additional $400,000-$500,000 for these asset retirement obligations. Under our current accounting policy we have already recorded $650,000 for such obligations. These obligations relate to the projected cost to plug and abandon oil and gas wells. ITEM 7. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants - AA 17 Independent Auditors' Report - KPMG 18 Consolidated Balance Sheet, December 31, 2002 19 Consolidated Statement of Operations, Years ended December 31, 2002 and 2001 20 Consolidated Statement of Cash Flows, Years ended December 31, 2002 and 2001 21 Notes to Consolidated Financial Statements 22 Report of Independent Public Accountants ---------------------------------------- THE FOLLOWING REPORT IS A COPY OF THE PREVIOUSLY ISSUED REPORT FROM ARTHUR ANDERSEN LLP ("AA"). AA DID NOT PERFORM ANY PROCEDURES IN CONNECTION WITH THIS ANNUAL REPORT ON FORM 10-KSB . ACCORDINGLY, THIS REPORT HAS NOT BEEN REISSUED BY AA. To Hallador Petroleum Company: We have audited the accompanying consolidated balance sheet of Hallador Petroleum Company (a Colorado corporation) and subsidiaries as of December 31, 2001 and the related consolidated statements of operations and cash flows for each of the two years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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 Hallador Petroleum Company and subsidiaries as of December 31, 2001 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Denver, Colorado March 27, 2002 Independent Auditors' Report The Board of Directors and Stockholders Hallador Petroleum Company: We have audited the 2002 consolidated financial statements of Hallador Petroleum Company (a Colorado corporation) and subsidiaries as listed in the accompanying index. 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 audit. The 2001 consolidated financial statements of Hallador Petroleum Company and subsidiaries as listed in the accompanying index were audited by other auditors who have ceased operations. Those auditors' report dated March 27, 2002, on those consolidated financial statements was unqualified. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hallador Petroleum Company and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. KPMG Denver, Colorado April 4, 2003 Consolidated Balance Sheet December 31, 2002 (in thousands)
ASSETS Current assets: Cash and cash equivalents $ 1,647 Accounts receivable- Oil and gas sales 680 Well operations 146 ------- Total current assets 2,473 ------- Oil and gas properties, at cost (successful efforts): Unproved properties 247 Proved properties 25,058 Less - accumulated depreciation, depletion, amortization and impairment (18,836) ------- 6,469 ------- Oil and gas operator bonds 417 Investment in Catalytic Solutions 164 Other assets 38 ------- $ 9,561 ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 527 Oil and gas sales payable 185 ------- Total current liabilities 712 ------- Bank debt 251 ------- Key employee bonus plan 209 ------- Future site restoration - South Cuyama Field 653 ------- Minority interest 4,763 ------- Commitments and contingencies Stockholders' equity: Preferred stock, $.10 par value; 10,000,000 shares authorized; none issued Common stock, $ .01 par value; 100,000,000 shares authorized, 7,093,150 shares issued 71 Additional paid-in capital 18,061 Accumulated deficit* (15,159) ------- 2,973 ------- $ 9,561 =======
*Net income (loss) has been the only change in stockholders' equity during the past two years. See accompanying notes. Consolidated Statement of Operations December 31, 2002 (in thousands)
Years ended December 31, 2002 2001 ------ ------ Revenue: Oil $ 6,676 $ 5,429 Gas 1,075 2,334 Gain on prospect sale 67 Interest and other 43 130 ------ ------ 7,794 7,960 ------ ------ Costs and expenses: Lease operating 4,958 4,227 Exploration costs Geological and geophysical 1,059 Dry hole expense 15 123 Delay rentals 112 82 Impairment - proved properties 918 436 Impairment - unproved properties 22 229 Depreciation, depletion and amortization 2,279 1,300 General and administrative 951 909 California income tax (refund) (34) 63 Purchase of employee stock options 300 Interest 23 41 ------ ------ 10,303 7,710 ------ ------ Income (loss) before minority interest (2,509) 250 Minority interest 753 (75) ------ ------ Net income (loss) $(1,756) $ 175 ====== ====== Basic and diluted income (loss) per share $ (0.25) $ 0.02 ====== ====== Weighted average shares outstanding-basic 7,093 7,093 ====== ====== Weighted average shares outstanding-diluted 7,093 7,508 ====== ======
See accompanying notes. Consolidated Statement of Cash Flows December 31, 2002 (in thousands)
Year ended December 31, 2002 2001 ------ ------ Cash flows from operating activities: Net income (loss) $(1,756) $ 175 Depreciation, depletion, and amortization 2,279 1,300 Minority interest (753) 75 Impairment 940 665 Change in accounts receivable 54 419 Change in payables and accrued liabilities (45) (605) Other (36) 6 ----- ----- Net cash provided by operating activities 683 2,035 ----- ----- Cash flows from investing activities: Properties (1,052) (2,181) Other assets (62) (65) ----- ----- Net cash used in investing activities (1,114) (2,246) ----- ----- Cash flows from financing activities: Repayment of debt (200) ----- ----- Net (decrease) in cash and cash equivalents (431) (411) Cash and cash equivalents, beginning of year 2,078 2,489 ----- ----- Cash and cash equivalents, end of year $1,647 $2,078 ===== ===== Supplemental disclosure of cash flow information: Cash paid out for interest $ 18 $ 32 ===== =====
See accompanying notes. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation - --------------------------------------- The accompanying consolidated financial statements include the accounts of Hallador Petroleum Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. We are engaged in the exploration, development, and production of oil and natural gas primarily in California. On July 21, 1997, Yorktown Energy Partners II and affiliates (Yorktown) invested $5,025,000 in Hallador Petroleum, LLP, a newly formed limited liability limited 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. As general partner, we consolidate the activity of the partnership and present the 30% limited partners' interest as a minority interest. We are a 92% partner in Santa Barbara Partners (SBP), a general partnership, and proportionately consolidate our investment in SBP, which has a 93% working interest in the South Cuyama field. 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. Estimated future abandonment and site restoration costs, net of anticipated salvage values, are accrued based on units-of-production. Unproved properties with significant acquisition costs are periodically assessed for impairment in value, with any impairment charged to expense. 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. During the second quarter of 2002, production from the South Texas - Bonus prospect began to drop unexpectedly. As a result we reduced the proved reserves for these wells and based on a future net cash flow analysis determined that the property had been impaired. As such, we recorded an impairment of $840,000 to reduce the net book value of these wells to estimated fair market value. We recorded an additional impairment of $79,000 for the Fulton-Fuller exploratory gas well during the second quarter 2002. Statement of Cash Flows - ----------------------- Cash equivalents include investments (primarily commercial paper) 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. Under the treasury stock method, options to purchase 415,000 shares of common stock were included in the calculation of diluted earnings per share for the year ended December 31, 2001. We excluded all 749,723 options in 2002 because they were anti dilutive. 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. We use the sales method of accounting for our revenue. Under the sales method, revenue is recognized based on actual volumes sold to purchasers. With natural gas production operations, joint owners may take more or less than the production volumes entitled to them under the governing operating agreement. We record a natural gas imbalance in other liabilities if our excess takes of natural gas exceed our remaining proved reserves for the property. No liability has been recorded for any excess volumes taken, as they do not exceed our share of remaining proved reserves. Concentration of Credit Risk - --------------------------- Our revenues are derived principally from uncollateralized sales to 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. Catalytic Solutions Investment - ------------------------------ During 1998, we invested $62,000 in Catalytic Solutions, Inc. (CSI), a private company, located in Oxnard, California (a Los Angeles suburb). CSI manufactures catalytic converters that reduce toxic emissions from internal combustion engines. During 2000, we invested another $113,000 in CSI. Our current ownership is less than 1%. This investment is accounted for under the cost method. Stock Based Compensation - ------------------------ We account for our option plans under APB 25, Accounting for Stock Issued to Employees. Had compensation costs for the plans been determined consistent with SFAS 123, Accounting for Stock-Based Compensation, we would have estimated the fair value of each option grant using the Black-Scholes option-pricing model, with the following assumptions used for the 2002 grants (there were no grants in 2001): (i) risk free interest rate of 4.14%; (ii) expected life of 10 years; (iii) expected volatility of 120%; and (iv) no dividend yield. The average fair value of options granted during 2002 was $1.19. Pro forma net loss for 2002 would have been $1,850,000, or $0.26 per share. The effect on 2001 was immaterial. New Accounting Pronouncements - ----------------------------- In December 2002 the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure: an amendment of FASB Statement No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The statement is effective for financial statements for fiscal years ending after December 15, 2002. We will continue to account for stock-based compensation using the methods detailed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not have any pending or planned exit or disposal activities and do not expect a material effect on our financial position or results of operations from the adoption of this statement. In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires that gains and losses from extinguishment of debt be evaluated under the provisions of Accounting Principles Board Opinion No. 30 and be classified as ordinary items unless they are unusual or infrequent or meet the specific criteria for treatment as an extraordinary item. This statement is effective for fiscal years beginning after May 15, 2002. We do not anticipate that the adoption of this statement will have a material effect on our financial position or results of operations. In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires companies to recognize the fair value of an asset retirement liability in the financial statements by capitalizing that cost as part of the cost of the related long-lived asset. The asset retirement liability should then be accreted to expense. The statement is effective January 1, 2003. Based on current estimates, upon adoption of SFAS 143, we expect to record an additional $400,000-$500,000 for these asset retirement obligations. Under our current accounting policy we have already recorded $650,000 for such obligations. These obligations relate to the projected cost to plug and abandon oil and gas wells. (2) INCOME TAXES The net deferred tax asset as of December 31, 2002 (in thousands) is comprised of the following: Deferred tax assets Federal and state net operating loss carryforwards $ 2,838 Statutory depletion carryforwards 802 Property, plat and equipment 253 Other 109 ------ 4,002 Valuation allowance (4,002) ------ Net deferred tax asset $ 0 ====== With our history of losses, we believe that sufficient uncertainty exists regarding the realizability of our net deferred tax asset. We therefore recorded a valuation allowance to offset the entire deferred tax asset at December 31, 2002. We will continue to evaluate our net deferred tax asset and to the extent we may determine that it is more likely than not that an asset will be realized, the valuation allowance will be reduced accordingly. Income tax expense (benefit) is different than the expected amount computed using the applicable federal statutory income tax rate of 35%. The reasons for and effects of such differences (in thousands) are as follows for the year ended December 31, 2002:
Year ended December 31, 2002 --------------------------- Expected amount $ (615) Increase (decrease) from: Increase in valuation allowance 607 Permanent differences between financial statement income and taxable income 148 State taxes, net of federal benefit, and other (140) ------ Total income tax expense (benefit) $ 0 ======
At December 31, 2002, we had U.S. net operating loss carryforwards of approximately $7 million to apply against future taxable income. Losses expire within 15-20 years after the date incurred or at various times from 2003 to 2022. We also have statutory depletion carryforwards and minimum tax credit carryforwards which do not expire. U.S. net operating loss carryforwards would be subject to an annual limitation should there be a change of over 50% in the stock ownership of the Company during any three-year period. As of December 31, 2002, no such ownership change had occurred. (3) STOCK OPTIONS AND BONUS PLANS ----------------------------- Stock Option Plan - ----------------- In December 1995, we granted to our CEO 620,000 options and another 62,000 options to other employees at an exercise price of $1.00. These options are fully vested. During 1999, we issued 68,000 options with an exercise price of $1.00, which are also fully vested. No options were granted during 2000 and 2001. In January 2001, we purchased from certain employees 177,777 options leaving 572,223 options outstanding all of which were exercisable at $1.00 on December 31, 2001. In August 2002, the Company issued 177,500 incentive stock options to certain employees at an exercise price of $1.25 per share. These options, which expire August 31, 2012, vested one-third at date of grant and the remaining over two years. Total issued and outstanding options at December 31, 2002 were 749,723 of which 631,386 are exercisable. All options were granted at fair value. On January 19, 2001, we purchased from certain employees 177,777 options at a cost of $1.6875 per option (about $300,000), which was recorded as compensation expense in January 2001. Since December 1995 no options have been exercised. Options to purchase a 3% partnership interest in Hallador Petroleum, LLP are outstanding as of December 31, 2002. The exercise price for these options was based on the fair market value on the date of grant. 401-(k) Plan - ------------ We maintain a 401(k) Plan, in which all full-time employees are able to participate after six months of service. We match dollar-for-dollar up to 4% of all employee contributions when oil prices are $13.00 or greater per barrel; vesting occurs immediately. Our contributions for 2002 and 2001 were $40,000 and $44,000, respectively. Key Employee Bonus Plan - ----------------------- At present, Mr. Stabio, CEO, is the only participant in the key employee bonus plan. Bonuses are computed based on cash flow attributed to the SC Field plus accrued interest on the bonus plan liability at 30-day risk free rates. Amounts accrued for 2002 and 2001 were $24,000 and $40,000, respectively. This liability will not be paid until the earliest of the following events occur; (i) voluntary or involuntary termination of the participant's employment; (ii) our merger or sale or a sale of substantially all of our assets, or (iii) the exercise by a participant of any of our stock options which requires a payment by the participant of more than $100,000. Upon approval of the Board of Directors, in October 2002, Mr. Stabio received a distribution from the plan in the amount of $150,000. As of December 31, 2002, the liability to Mr. Stabio was $209,000. The amounts accrued are unfunded and unsecured. (4) MAJOR CUSTOMERS ---------------- During 2002, 82% of the SC Field's oil production was purchased by Pacific Marketing and Transportation LLC, and in 2001 they purchased 65%. (5) LONG-TERM DEBT: --------------- At December 31, 2002, we had borrowings of $251,000 outstanding under a reserve-based, revolving credit facility that bore interest at a rate of 3.652%. The borrowing base has been established at $2,200,000. The borrowing base is scheduled to be redetermined on May 1 and November 1 of each year. Borrowings under the Credit Agreement are secured by substantially all of our producing properties. Interest rates applied to borrowings under the Credit Agreement are determined by reference to the prime rate, or to LIBOR, at our election. A varying spread of 1.75% to 2.25% is added to LIBOR, based upon the loan usage ratio. Borrowings under the Credit Agreement are revolving loans until April 30, 2004, at which time all then outstanding borrowings are due. the Credit Agreement contains various financial covenants and other restrictions. (6) COMMITMENTS AND CONTINGENCIES ----------------------------- Oil and Gas Operator Bonds - South Cuyama Field - ----------------------------------------------- In January 1999, the California legislature passed a bill, which increased our operator's bond from $100,000 to $250,000 to be phased in over a five-year period. In addition, an idle well bill was passed to ensure that funds would be available to properly plug and abandon (P&A) California wells upon their depletion. Over the next ten years, we as the SC Field's operator, are required to place in an interest-bearing escrow account $500 per year for each idle well in the SC Field until such well is plugged and abandoned or until $5,000 has been deposited for each well. Through December 31, 2002 we have made four installments totaling $270,000. We estimate that after 10 annual installments we will have met the current funding obligation considering the interest to be earned. As the SC Field depletes, and more wells move from the producing category to the idle-well category we will have to increase our idle well deposits. Presently, there are 280 wells in the SC Field, 151 of which are classified as "idle". During 1999, we began amortizing, using the units-of-production method, our share of the estimated future costs ($2,200,000) to P&A the SC Field's 280 wells. Included in the DD&A expense for 2002 and 2001 was $310,000 and $154,000, respectively, associated with these estimated future costs. ARCO Indemnity - -------------- The SC Field was purchased from ARCO (Atlantic Richfield which is now part of BP p.l.c.) in May 1990. As part of the Purchase and Sale Agreement, ARCO agreed to indemnify us for certain environmental liabilities connected with their 40-year ownership of the field and gas plant ("ARCO Indemnity"). Part of the gas plant has not been operational during the past twenty-five years. There is evidence of asbestos in the non-operational part of the gas plant. It is our position, and the opinion of our legal counsel, that the ARCO Indemnity covers future abandonment and clean-up costs associated with this gas plant. We have had several discussions with BP regarding this matter and have retained a San Francisco law firm to assert our rights under the ARCO Indemnity. The costs to abandon and clean up the old gas plant area and other oil and gas areas at the field will be significant. There is a chance, depending on the negotiations and legal proceedings with BP, that some or all of the costs could be borne by us. At this time we are unable to estimate what these costs could ultimately be but we expect that such costs could have a material adverse effect on our financial condition, results of operations and cash flows. Partial Self-insurance for Employee Medical and Dental Costs - ------------------------------------------------------------ Due to the rising costs in providing health care coverage for our employees we changed from a standard type of policy to a partially self-insured policy. For each year we are responsible for the first $5,700 of health care and $1,500 dental costs for each employee and their dependents. Our maximum exposure in any given year is about $130,000. Through December 31, 2002 we paid approximately $14,500 in claims and have accrued an additional $5,000. (7) OIL AND GAS RESERVE DATA (UNAUDITED) ------------------------------------ The following reserve estimates for the years ended December 31, 2002 and 2001 were prepared by a sole-proprietor consulting petroleum engineer based on data we supplied. Be cautious that there are many uncertainties inherent in estimating proved reserve quantities and in projecting future production rates. Proved oil and gas reserves are the estimated quantities of crude 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 oil and gas reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods. There were no significant proved undeveloped reserves at December 31, 2002. Proved undeveloped gas reserves at December 31, 2001 were 742 MMCF. During 2002 these reserves were reclassified to proved-developed behind pipe. At December 31, 2002 the oil price in the SC Field was $29.00. Based on this price the field has an estimated economic life of 20 years. At December 31, 2001 the oil price in the SC field was $16.48. Based on that price the field had an estimated economic life of two years. Analysis of Changes in Proved Developed Reserves (in thousands)
Oil Gas (BBLs) (MCF) ------- ------- Balance at December 31, 2000 2,390 1,881 Revisions of previous estimates (1) (1,667) (584) Discoveries 97 1,573 Production (251) (368) ------ ------ Balance at December 31, 2001 569 2,502 Revisions of previous estimates (1) 1,527 484 Discoveries 73 24 Production (291) (360) ------ ------ Balance at December 31, 2002 1,878 2,650 ====== ====== Net of 30% minority interest 1,315 1,855 ====== ======
(1) Due to low oil prices at December 31, 2001, we took a significant downward revision for the SC Field's reserves; such reserves were reinstated at December 31, 2002 due to higher oil prices. The following table (in thousands) sets forth a standardized measure of the discounted future net cash flows attributable to our proved developed oil and gas reserves (hereinafter referred to as "SMOG"). Future cash inflows were computed using December 31, 2002 and 2001 product prices of $29.00 and $16.48 for oil, and $4.02 and $2.29 for gas, 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.
2002 2001 ------ ------ Future Revenue Oil $53,600 $ 8,300 Gas 9,200 6,200 ------ ------ Future cash inflows 62,800 14,500 Future cash outflows - production costs (35,200) (9,700) Future income taxes (4,000) ------ ------ Future net cash flows 23,600 4,800 10% discount factor (7,100) (900) ------ ------ SMOG $16,500 $ 3,900 ====== ====== Net of 30% minority interest $11,550 $ 2,730 ====== ======
The following table (in thousands) summarizes the principal factors comprising the changes in SMOG:
2002 2001 ------ ------ SMOG, beginning of year $ 3,900 $ 11,600 Sales of oil and gas, net of production costs (2,793) (3,540) Net changes in prices and production costs 15,093 (9,060) Revisions (300) Discoveries 1,400 3,900 Change in income taxes (1,500) 200 Accretion of discount 400 1,100 ------ ------ SMOG, end of year $16,500 $ 3,900 ====== ======
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: Not applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT CORTLANDT S. DIETLER, 81, has been one of our directors since November 1995. From April 1995 to October 1999 he was CEO of TransMontaigne Inc. and is currently Chairman of the Board. He also serves as a director of Carbon Energy Corporation, Forest Oil Corporation and Cimarex Energy Company. DAVID HARDIE, 52 is the Chairman of the Board and has served as a director since July 1989. He is a General Partner of Hallador Venture Partners LLC, the General Partner of Hallador Venture Fund II & III. Mr. Hardie is also a director of Freedom Communications Company based in Irvine, California and serves as a director and partner of other private entities that are owned by members of his family. STEVEN HARDIE, 48 has been a director since 1994. He and David Hardie are brothers. For the last 17 years he has been a self-employed film producer. He also serves as a director and partner of other private entities that are owned by members of his family. BRYAN H. LAWRENCE, 60, has been one of our directors since November 1995. He is a founder and senior manager of Yorktown Partners LLC that manages investment partnerships formerly affiliated with Dillon, Read & Co. Inc., an investment-banking firm (Dillon Read.) He had been employed with Dillon, Read since 1966, serving most recently as a Managing Director until the merger of Dillon Read with SBC Warburg in September 1997. He also serves as a Director of Carbon Energy Corporation, D&K Healthcare Resources, Inc., TransMontaigne, Inc., and Vintage Petroleum, Inc. (each a United States public company), and Cavell Energy Corp. (a Canadian public company) and certain non-public companies in the energy industry in which Yorktown partnership holds equity interests including Inc., PetroSantander Inc., Savoy Energy, L.P., Athanor B.V., Camden Resources, Inc., and Crosstex Energy Holdings, Inc., ESI Energy Services Inc., Ellora Energy Inc., Dernick Resources Inc., Cinco Natural Resources Corp., Approach Resources Inc. and Peak Energy Resources Inc. Mr. Lawrence is a graduate of Hamilton College, and also has a MBA from Columbia University. VICTOR P. STABIO, 55, is our President, CEO, CFO and a director. He joined us in March 1991 as our President and CEO and has been active in the oil and gas business for the past 30 years. ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE Annual Compensation --------------------------------------------- Name and Principal Other Annual Position Year Salary Bonus (1) Compensation (2) - --------------------- ---- --------- ---------- ---------------- Victor P. Stabio, CEO 2002 $132,300 $ 24,000 $ 6,000 2001 120,800 66,800 133,800 (3) 2000 110,500 94,700 5,900
(1) Includes amounts, payments of which are deferred, pursuant to the Key Employee Bonus Plan. (2) Our contribution to the 401(k) Plan. (3) Includes the purchase of 75,000 stock options at a cost of $1.6875 per option or $126,500 during 2001. During 1997, Mr. Stabio was granted an option to purchase 1.75% of Hallador Petroleum, LLP for $294,000 that expires December 31, 2010. No options were exercised during the last three years. On January 19, 2001 we purchased 75,000 options from Mr. Stabio at a cost of $1.6875 per option or $126,500. In October 2002, Mr. Stabio received a distribution in the amount $150,000 from the Key Employee Bonus Plan, as authorized by the Board of Directors. At December 31, 2002 Mr. Stabio had 545,000 exercisable options of which none were in-the-money. Change in Control Arrangements - ------------------------------ As of December 31, 2002, we have accrued $209,000 payable to Mr. Stabio pursuant to the key employee bonus plan. The $209,000 will become payable upon our merger/sale or sale of substantially all of our assets or his voluntary or involuntary termination. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table is as of April 4, 2003.
Name No. Shares (1) % of Class (1) - ------------------------------------ --------------- ------------- David Hardie and Steven Hardie as 3,346,069 47 Nominee for Hardie Family Members (2) Victor P. Stabio (3) 609,937 8 Cortlandt S. Dietler (4) 100,000 1 Bryan H. Lawrence (5) 2,328,500 33 SBC Warburg Dillion Read Inc. (6) 421,500 6 All directors and executive officer as a group (3) 6,384,506 89
(1) Based on total outstanding shares of 7,093,150 if no options are held by the named directors, or based on a pro forma calculation of the total outstanding shares including shares issued upon exercise of options held by the named director or by members of the named group. Beneficial ownership of certain shares have been, or is being, specifically disclaimed by certain directors in ownership reports filed with the SEC. (2) The Hardie family business address is 740 University Avenue, Suite 110, Sacramento, California 95825. (3) Includes 545,000 shares issuable upon the exercise of options by Mr. Stabio. (4) Mr. Dietler's address is P. O. Box 5660, Denver, Colorado 80217. All shares are held by Pinnacle Engine Company LLC, wholly owned by Mr. Dietler. (5) Mr. Lawrence's address is 410 Park Avenue, 19th Floor, New York, NY 10022. Mr. Lawrence owns 50,000 shares directly, and the remainder is held by Yorktown Energy Partners II, L.P., an affiliate. (6) SBC Warburg Dillon Read Inc.'s address is 680 Washington Boulevard, 7th Floor, Stamford, CT 06901 EQUITY COMPENSATION PLAN INFORMATION
Number of securities Number of Securities Weighted-average remaining available to be issued upon exercise price of for future issuance exercise of outstanding options under equity Plan Category outstanding options warrants and rights compliance plans - ------------- --------------------- ------------------- ------------------- Equity compensation Plans approved by Security holders 749,723 $1.06 277 Equity compensation Plans not approved By security holders 0 0 0
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Restated Articles of Incorporation of Kimbark Oil and Gas Company, effective September 24, 1987 (1) 3.2 Articles of Amendment to Restated Articles of Incorporation of Kimbark Oil & Gas Company, effective December 14, 1989, to effect change of name to Hallador Petroleum Company and to change the par value and number of authorized shares of common stock (1) 3.3 Amendment to Articles of Incorporation dated December 31, 1990 to effect the one-for-ten reverse stock split (2) 3.4 By-laws of Hallador Petroleum Company, effective November 9, 1993 (4) 10.1 Composite Agreement and Plan of Merger dated as of July 17, 1989, as amended as of August 24, 1989, among Kimbark Oil & Gas Company, KOG Acquisition, Inc., Hallador Exploration Company and Harco Investors, with Exhibits A, B, C and D (1) 10.2 Hallador Petroleum Company 1993 Stock Option Plan *(3) 10.3 Hallador Petroleum Company Key Employee Bonus Compensation Plan *(3) 10.4 First Amendment to the 1993 Stock Option Plan *(6) 10.5 First Amendment to Key Employee Bonus Compensation Plan *(6) 10.6 Stock Purchase Agreement with Yorktown dated November 15, 1995 (6) 10.7 Second Amendment to Key Employee Bonus Compensation Plan *(7) 10.8 Hallador Petroleum, LLP Agreement (9) 10.9 Hallador Petroleum, LLP Stock Option Agreement *(9) 10.10 ARCO Indemnity - excerpt from the Purchase and Sale Agreement dated January 29, 1990 by and between Atlantic Richfield Corporation and Stream Energy, Inc. (10) 21.1 List of Subsidiaries (2) 99.1 SOX 906 Certification (11) ------------------- (1) Incorporated by reference (IBR) to the 1989 Form 10-K. (2) IBR to the 1990 Form 10-K. (3) IBR to the 1992 Form 10-KSB. (4) IBR to the 1993 Form 10-KSB. (5) Not used. (6) IBR to the 1995 Form 10-KSB. (7) IBR to the September 30, 1996 Form 10-QSB. (8) IBR to the September 30, 1997 Form 10-QSB. (9) IBR to the December 31, 1997 Form 10-KSB. (10) IBR to the December 31, 2001 Form 10-KSB. (11) Filed herewith. * Management contracts or compensatory plans. (b) No reports on Form 8-K were filed during the 2002 fourth quarter ITEM 14. CONTROLS AND PROCEDURES We maintain a system of disclosure controls and procedures that are designed for the purposes of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our CEO as appropriate to allow timely decisions regarding required disclosure. Within the 90-day period prior to the filing of this report, we carried out an evaluation, under the supervision and with the participation of our CEO of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our CEO, who is also our CFO, concluded that our disclosure controls and procedures are effective for the purposes discussed above. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HALLADOR PETROLEUM COMPANY BY:/S/VICTOR P. STABIO VICTOR P. STABIO, CEO Dated: April 14, 2003 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ DAVID HARDIE Chairman April 14, 2003 DAVID HARDIE /S/ VICTOR P. STABIO CEO, Principal Financial April 14, 2003 VICTOR P. STABIO and Accounting Officer and Director /S/ BRYAN LAWRENCE Director April 14, 2003 BRYAN LAWRENCE CERTIFICATION I, Victor P. Stabio, certify that: 1. I have reviewed this annual report on Form 10-KSB of Hallador Petroleum Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I 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 me by others within those entities, particularly during the period in which this annual 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 annual report (the "Evaluation Date"); and c) presented in this annual report my conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 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 weakness 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 6. I have indicated in this annual report whether 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. Date: April 14, 2003 /S/VICTOR P. STABIO Victor P. Stabio Chief Executive Officer and Chief Financial Officer EX-99 3 exh9910ksb.txt CERTIFICATION SECTION 906 SARBANES-OXLEY Exhibit 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Hallador Petroleum Company (the "Company"), on Form 10-KSB for the period ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: April 14, 2003 By: /S/VICTOR P. STABIO Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----