SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-8157
THE RESERVE PETROLEUM COMPANY
(Name of small business issuer in its charter)
Delaware 73-0237060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
6801 N. Broadway, Suite 300, Oklahoma City, Oklahoma 73116-9092
(Address or principal executive offices) (Zip Code)
Issuer's telephone number: (405)848-7551
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common
stock $.50 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and will not 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]
Issuer's revenues for the fiscal year ended December 31, 1995 were
$1,808,918. As of March 8, 1996, there were 169,353 common shares
outstanding. The aggregate market value of the voting stock held by
non-affiliates as determined by averaging the highest bid and lowest offer
as of March 8, 1996 was $2,563,506.
DOCUMENTS INCORPORATED BY REFERENCE
Items 9,10,11 and 12 required by Part III, are incorporated herein by
reference to the Company's proxy statement to be mailed to security holders
on or about April 8, 1996, in connection with its annual stockholders'
meeting to be held on May 7, 1996.
Transitional Small Business Disclosure Format (check one) Yes[ ] No[X]
See Exhibit Index on Page 33.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business..............................3
Item 2. Description of Properties............................6
Item 3. Legal Proceedings....................................7
Item 4. Submission of Matters to a Vote of Security Holders..8
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters..............................................9
Item 6. Management's Discussion and Analysis................10
Item 7. Financial Statements................................14
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................35
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons Compliance with Section 16(a)
of the Exchange Act.................................35
Item 10. Executive Compensation..............................35
Item 11. Security Ownership of Certain Beneficial Owners
and Management......................................35
Item 12. Certain Relationships and Related Transactions......35
Item 13. Exhibits and Reports on Form 8-K....................35
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PART I
Item 1. Description of Business
The Reserve Petroleum Company (the "Company") is engaged principally in the
exploration for and the development of oil and natural gas properties. Other
business segments are not significant factors in the Company's operations. The
Company was organized under the laws of the State of Delaware in 1931.
OIL AND NATURAL GAS PROPERTIES
For a summary of certain data relating to the Company's oil and gas properties
including production, undeveloped acreage, producing and dry wells drilled and
recent activity see Item 2, Properties. For a discussion and analysis of
current and prior years' revenue and related costs of oil and gas operations,
and a discussion of liquidity and capital resource requirements, see Item 6,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
MINERAL PROPERTY MANAGEMENT. The Company owns non-producing mineral interests
in approximately 273,611 gross acres equivalent to 94,627 net acres. These
mineral interests are located in nine states with 57,880 net acres in the
states of Oklahoma and Texas, the area of concentration for the Company in
its present development programs.
A substantial amount of the Company's oil and gas revenue has resulted from
its mineral property management. As a result of its mineral ownership, in
1995 the Company had royalty interests in 10 gross ( .205 net) wells which
were drilled and completed as producing gas wells. The most significant of
the royalty interest wells completed in 1995 was the #1 Brounkowski located
in Robertson County, Texas, in which the Company has a .0604 net royalty
interest. First sales from the well were in late November, 1995, and the
well was producing at a rate of approximately 23 million cubic feet per day
at December 31, 1995.
DEVELOPMENT PROGRAM. A development of a drilling program is usually initiated
in one of three ways. The Company may participate as a working interest owner
with a third party operator in the development of non-producing mineral
interests which it owns; along with the joint interest operator, it may
participate in drilling additional wells on its producing leaseholds; or if
its exploration program discussed below results in a successful exploratory
well, it may participate in the development of additional wells on the
exploratory prospect. In 1995, the Company did not participate in the
drilling of any development wells.
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EXPLORATION PROGRAM The Company's exploration program is normally conducted
by purchasing interests in prospects developed by independent third parties,
participating in third party exploration of Company-owned non-producing
minerals or developing its own exploratory prospects.
The Company normally acquires interests in exploratory prospects from someone
in the industry with whom management has conducted business in the past and/or
has confidence in the quality of the geological and geophysical information
presented for evaluation by Company personnel. If evaluation indicates the
prospect is within the Company's risk limits, the Company may negotiate to
acquire an interest in the prospect and participate in a non-operating
capacity.
The Company develops exploratory drilling prospects by identification of an
area of interest, purchase of leaseholds in the area and development of
geological and geophysical information relating to the area. The Company may
then attempt to sell an interest in the prospect to one or more companies in
the petroleum industry with one of the purchasing companies functioning as
operator, or it may jointly develop the prospect with a third party who will
function as operator.
At December 31, 1995, the Company's exploration program involved fractional
interests in seventeen Oklahoma prospects. In 1995, three of the prospects
were tested. The test well on a prospect in which the Company had an 18% net
working interest was successfully completed and two development wells may be
drilled in 1996. A second prospect in which the Company had a 24% net working
interest was condemned after drilling two exploratory wells, one of which is a
salvage well producing from a secondary formation. An exploratory well in
which the Company has a 22.5% net working interest was drilling at year end on
a third prospect. This well was subsequently completed as a producing oil
well in a secondary formation, and the prospect is currently under evaluation.
Current plans include the drilling of up to six test wells on the prospects
in 1996.
CUSTOMERS. In the fourth quarter of 1995, the Company entered into lease
agreements relating to certain of its non-producing minerals in Robertson and
Leon Counties, Texas. Lease bonuses received from these paid up lease
agreements were $690,000, or 38% of operating revenues. The Company does not
anticipate the receipt of comparable amounts from lease bonuses in future
years. Also, in 1995, the Company had one customer whose total purchases were
greater than 10% of revenues from oil and gas sales. This customer purchased
$175,143 or 16.37% of total oil and gas sales.
The Company had a gas purchase contract with a customer which provided for a
price of $4.112 per MMBTU. Gas sold under this contract during 1994 was
73,550 thousand cubic feet (MCF) and amounted to approximately 21% of the
Company's revenues from oil and gas sales. This contract expired November 8,
1994.
The Company sells most of its oil and gas on the spot market or has sales
contracts that are based on the spot market price. A very minor amount of oil
and gas sales are made under fixed price contracts having terms of more than
one year.
COMPETITION. The oil and gas industry is highly competitive in all of its
phases. The availability of a ready market for the Company's oil and gas
production depends on numerous factors beyond its control, including the cost
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and availability of alternative fuels, the level of consumer demand, the
extent of other domestic production of oil and gas, the extent of importation
of foreign oil and gas, the cost of and proximity of pipelines and other
transportation facilities, regulation by state and Federal authorities and the
cost of complying with applicable environmental regulations. The Company is a
very minor factor in the industry and must compete with other persons and
companies having far greater financial and other resources; therefore, the
Company's ability to develop prospects which are viable, given current
economic conditions, and secure the financial participation of other persons
and companies in exploratory drilling on these prospects is limited.
REGULATION. The Company's operations are affected in varying degrees by
political developments and Federal and state laws and regulations. Although
released from Federal price controls, interstate sales of natural gas are
subject to regulation by the Federal Energy Regulatory Commission (FERC). Oil
and gas operations are affected by environmental laws and other laws relating
to the petroleum industry and both are affected by constantly changing
administrative regulations. Rates of production of oil and gas have for many
years been subject to a variety of conservation laws and regulations, and the
petroleum industry is frequently affected by changes in the Federal tax laws.
Generally, the respective state regulatory agencies will supervise various
aspects of oil and gas operations within the state and transportation of oil
and gas sold intrastate.
ENVIRONMENTAL PROTECTION. The operation of the various producing properties
in which the Company has an interest is subject to Federal, state and local
provisions regulating discharge of materials into the environment, the storage
of oil and gas products as well as the contamination of subsurface formations.
The Company's lease operations and exploratory activity have been and will
continue to be affected by regulation in future periods. However, the known
effect to date has not been material as to capital expenditures, earnings or
industry competitive position nor are estimated expenditures for environmental
compliance expected to be material in the coming year. Such expenditures
produce no increase in productive capacity or revenue and require more of
management's time and attention, a cost which cannot be estimated with any
assurance of certainty.
OTHER BUSINESS.
The Company has net equity of $144,801 in its 33% limited partner's interest
in an Oklahoma limited partnership which was formed in 1978 principally to
invest in Oklahoma City real estate. The partnership has constructed an office
building in Oklahoma City at a total cost of approximately $2,300,000 for the
land and building. The Company has its office in the building under a lease
with the partnership. At December 31, 1995, the partnership had assets in
excess of liabilities of $438,787 and had a net loss of $8,126 for the year
then ended.
The Company has net equity of $254,535 ($159,900 cost basis) at December 31,
1995, in its 9% interest in an Oklahoma limited liability company (LLC) which
developed and is operating a golf course in the Oklahoma City metropolitan
area. Through an affiliated partnership, the LLC is developing real estate
surrounding the golf course. The LLC had assets in excess of liabilities of
$2,690,998 at December 31, 1995, and net income of $566,912.
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The Company has a net equity of $76,232 ($60,000 cost basis) at December 31,
1995 in its 10% interest in an Oklahoma limited liability company which
was formed in December 1992 to purchase and hold certain Oklahoma City
metropolitan area real estate as an investment. At December 31, 1995, the
limited liability company had assets in excess of liabilities of
$762,315, and net income of $3,526 .
Reference is made to Note 7 of the accompanying financial statements for more
information about the partnership and limited liability companies.
EMPLOYEES
At December 31, 1995, the Company had eight employees, including officers.
All of the Company's employees devoted a portion of their time to duties with
affiliated companies and received compensation directly from those companies
during 1995.
Item 2. Description of Properties
The Company's principal properties are oil and natural gas properties as
described below.
OIL AND NATURAL GAS OPERATION
OIL AND GAS RESERVES. Reference is made to the unaudited supplemental
financial information beginning on Page 30 for working interest reserve
quantity information.
Since January 1, 1995, the Company has filed no reports with any Federal
authority or agency which included estimates of total proved net oil or gas
reserves, except for its annual 1994 report on Form 10-K and Federal income
tax return for the year ended December 31, 1994. Those reserves estimates
were identical.
PRODUCTION. The average sales price of oil and gas produced and, for the
Company's working interests, the average production cost (lifting cost) per
equivalent thousand cubic feet (MCF) of gas production is presented in the
table below for the years ended December 31, 1995, 1994 and 1993. Equivalent
MCF was developed using approximate relative energy content.
ROYALTIES WORKING INTERESTS
SALES PRICE SALES PRICE Average Production
Oil Gas Oil Gas Cost per
PER BBL PER MCF PER BBL PER MCF EQUIVALENT MCF
1995 $16.35 $ 1.67 $17.01 $1.42 $ .91
1994 $14.15 $ 2.00 $15.52 $2.42 $ .84
1993 $15.48 $ 2.15 $17.21 $2.39 $ .88
At December 31, 1995, the Company had working interests in 69 gross (6.8 net)
wells producing primarily gas and/or gas liquids (condensates) and had working
interests in 59 gross (3.9 net) wells producing primarily oil. These
interests were in 19,263 gross (1,852 net) producing acres. These wells
include 52 gross (.37 net) wells associated with secondary recovery projects.
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Thirty-six percent, or 10,431 barrels of the Company's oil production during
1995 was derived from royalty interests in mature West Texas water-floods.
UNDEVELOPED ACREAGE. The Company's undeveloped acreage consists of non-
producing mineral interests and undeveloped leaseholds. The following table
summarizes the Company's gross and net acres in each:
ACREAGE
GROSS NET
Non-producing Mineral Interests 273,611 94,627
Undeveloped Leaseholds 18,054 3,839
NET PRODUCTIVE AND DRY WELLS DRILLED. The following table summarizes the net
wells drilled in which the Company had a working interest for the years ended
December 31, 1993 and there-after, as to net productive and dry exploratory
wells drilled and net productive and dry development wells drilled.
NUMBER OF NET WORKING INTEREST WELLS DRILLED
EXPLORATORY DEVELOPMENT
PRODUCTIVE DRY PRODUCTIVE DRY
1995 .45 .24 -0- -0-
1994 .15 .34 .02 -0-
1993 .19 .52 .16 0-
RECENT ACTIVITIES. At December 31, 1995, the Company had working interests
in two exploratory wells in progress, both in the state of Oklahoma. One
well, in which the Company had a 24% working interest was unsuccessful and
plugged and abandoned in January, 1996, resulting in the abandonment of the
prospect and the related costs incurred through December 31, 1995, were
expensed in 1995. The other well, in which the Company had a 22.5% working
interest was completed as an oil producer in a secondary formation in
February, 1996. The prospect is under evaluation to determine if additional
drilling will be done. On March 6, 1996, a development well in which the
Company has a 16.6% net working interest was spudded and was in process at
March 15, 1996.
Item 3. Legal Proceedings
In August 1993, the Company filed an action in the District Court of Leon
County, Texas to quiet title to its 13/32nd interest in approximately 203
mineral acres associated with two producing oil and gas wells completed in
1988. The Company claims title through deeds recorded in 1932; the defendants
claim title under a deed dated nine years prior to the Company's deeds, but
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not recorded until seven years after the Company's deeds were recorded. The
principal defendants are McRae Exploration and Production Inc., and Torch
Energy Advisors. Approximately $850,000 of proceeds from oil and gas sales
were held in suspense by the unit operator at March 1996, and have not been
recorded as revenue by the Company. The Company has expended $428,000 in
drilling, completion and operating costs for these wells of which $233,750 was
included in the Company's net investment in oil and gas properties at December
31, 1995. If the Company is successful in quieting title to its mineral
interests in this litigation and recovers the suspended oil and gas proceeds,
management believes the outcome will have a favorable effect on the Company
and its financial condition. If the Company is unsuccessful in this
litigation, management believes that such outcome will not have a material
adverse effect on the Company's financial condition. The case is set for
trial April 1, 1996.
Item 4. Submission of matters to a vote of Security Holders.
Not Applicable.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's stock is traded over the counter in the United States. The
following high and low bid information is based on quotes obtained from the
National Association of Security Dealers through the NASD OTC Bulletin Board,
its automated system for reporting non-NASDAQ quotes and the National
Quotation Bureau's pink sheets. Prices do not include retail markup, markdown
or commission.
QUARTERLY RANGES
QUARTER ENDING HIGH BID LOW BID
03/31/94 21 3/4 21
06/30/94 21 3/4 21
09/30/94 21 3/4 21
12/31/94 22 1/2 21 5/8
03/31/95 23 22
06/30/95 23 1/8 22
09/30/95 24 1/8 19 1/2
12/31/95 24 3/8 19 1/2
There was limited public trading in the Company's common stock in 1994 and
1995. In 1994, there were thirteen brokered trades appearing in the
Company's transfer ledger and in 1995 there were eight.
At March 11, 1996, the Company had approximately 1445 record holders of its
common stock. The Company paid dividends on its common stock in the amount of
$1.00 per share in the second quarter of 1995 and 1994. Unless there is an
unforeseen change in market conditions or the Company's financial condition,
management intends to recommend to the board of directors that the annual
dividend remain at $1.00 per share in 1996.
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Item 6.Management's Discussion and Analysis.
Please refer to the financial statements and related notes in Item 7 of this
Form 10-KSB to supplement this discussion and analysis.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. As summarized in the Statements of Cash Flows, cash
flows from operating activities, exclusive of oil and gas exploration costs
charged to operations, were $958,882 in 1995, a $154,358 (19%) increase from
1994. In the first quarter of 1995, such cash flows were projected to
approximate $500,000 for the year, a decrease of $305,000 (38%) from 1994. The
actual decrease in oil and gas sales of $359,057 was more than offset by an
unanticipated increase in lease bonus revenue of $659,108 as discussed under
"Results of Operations," below.
INVESTING ACTIVITIES. Net cash applied to investing activities was $551,456
in 1995, a $19,937 (4%) increase from 1994. To a great extent, cash applied
was either for the purchase of available for sale securities or investment in
oil and gas property additions.
Available for sale securities are US Treasury Bills or Notes, bank
certificates of deposit and money market accounts which are used to store cash
flows which are not needed immediately. For the most part, these cash flows
are from operating activities. When current cash requirements are greater
than operating cash flows, the additional required cash will be drawn from
available for sale securities. In 1995, available for sale securities
increased a net of $232,981. For the most part, the increase was a result of
decreased cash applied to oil and gas property additions as discussed in the
following paragraph, as well as increased net cash flows from operating
activities.
Property additions are directly related to the Company's oil and gas
exploration and development drilling activity. Expenditures for unsuccessful
exploratory and development drilling as well as geological and geophysical
costs are included in operating activities. Cash applied to property
additions in 1995 included $351,287 classified as investing activities and
$172,023 classified as operating activities for a total of $523,310. This
compares to a total of $851,692 in 1994. Expenditures for property additions
in 1995 were originally projected to be $760,000; however, prospect
development is requiring more time than originally estimated and resulted in
some expenditures projected for 1995 to be deferred until 1996.
FINANCING ACTIVITIES. Net cash flows applied to financing activities consist
of cash dividends on common stock and cash used for the purchase of treasury
stock. Management currently has no plans that would significantly change cash
requirements for financing activities other than the possible need for
external sources of funds for capital expenditures as discussed below.
FORWARD-LOOKING SUMMARY. In 1996, exclusive of any unexpected increase in
cash flows from exploratory and development drilling or significant price
variances, the Company anticipates cash flows from operating activities,
before any expensing of exploration and development costs, of about
$1,000,000. Cash flows from oil and gas sales are expected to increase
$700,000 as a result of new production which came on line around year end,
1995, as offset by the normal production decline of older wells.
The most significant of the new wells is Marathon Oil Company's #1
Brounkowski, in Robertson County, Texas, which was producing at a rate of
approximately 23 million cubic feet per day at December 31, 1995. If that
rate of production is maintained through 1996, assuming the December 1995
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average price, net revenues from the #1 Brounkowski would approximate $700,000
in 1996. Although the #1 Brounkowski is expected to make a significant
contribution to the Company's oil and gas revenues for the next two or more
years, as a royalty interest owner the Company has not had access to the well
data sufficient to compute a reasonable estimate of total reserves, and the #1
Brounkowski's production history is too short to project a meaningful decline
curve.
Lease bonus income is projected to return to its normal immaterial amount.
Cash flows which may result from the successful resolution of the quiet title
litigation discussed in Item 3, Legal Proceedings, have not been included.
Management's current estimates indicate cash requirements for investing
activities other than available for sale securities will approximate $800,000,
most of which will be applied to oil and gas exploration and development
activities. Cash applied to financing activities should remain at about
$170,000 for a total of $970,000. As noted above, $1,000,000 in net cash
flows from operating activities before expensing of any exploration or
development costs are projected for 1996 and should cover investing activity
cash requirements.
The Company's planned drilling program may change during the year depending
upon the amount of successful drilling, the amount and stability of product
prices and the availability of quality drilling prospects. Also, management
continues to be alert for the purchase of producing oil and gas properties.
Therefore, the possible need for additional capital exists, and management
could seek funds from external sources.
RESULTS OF OPERATIONS.
For the year ended December 31, 1995, the Company had net income of $593,037
($3.50 per share) as compared to net income of $110,769 ($.65 per share) in
1994. The most significant factor contributing to the additional net income
was an increase in revenue from lease bonuses. A discussion of the increase
in lease bonus revenues as well as other material year-to-year line item
changes follows.
OPERATING REVENUES. Oil and gas sales fell $323,600 (23%) to $1,070,048 in
1995 from $1,393,648 in 1994. The following table presents certain information
concerning price and volume components of oil and gas sales for the years
ended December 31, 1995 and 1994. The table does not include an analysis of
revenues from plant products and other miscellaneous oil and gas sales which
totaled $19,411 in 1995 and $33,776 in 1994.
VARIANCE
PRODUCTION 1995 PRICE VOLUME 1994
Oil -
Bbls (000 omitted) 29 ---- (2) 31
$(000 omitted) $ 488 47 (27) 468
Unit Price $16.68 1.59 ---- 15.09
Gas -
MCF (000 omitted) 370 ---- (22) 392
$(000 omitted) $ 562 (279) (50) 891
Unit Price $ 1.52 ( .76) ---- 2.28
In 1995, revenues from oil sales increased $19,954 (4%) to $448,641. An
increase in revenues of $46,588 resulting from a $1.59 average price increase
per barrel was partially off-set by a $26,665 decline in revenues resulting
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from a 1,767 barrel fall in volume produced. Production of 2,674 barrels from
wells which first produced in 1995 was off-set by the normal decline in
production from older wells of 4,441 barrels. The average price increase of
$1.59 per barrel resulted from an overall market increase in the price of oil.
Revenues from natural gas sales fell $329,190 (37%) in 1995 to $561,995. The
decline attributable to a decrease in average price per thousand cubic feet
(MCF) of $.76 was $278,812. An additional decline in sales of $50,378
resulted from a decrease in volume produced of 22,096 MCF. The decrease in
average price was the result of an overall decline in the spot market price of
gas as well as the November 1994, expiration of a gas contract with a sales
price in excess of $4.00 per MCF. The volume decline resulted as an increase
in production of 30,900 MCF from wells which first produced in 1995 was off-
set by a 52,996 MCF decrease due to the natural decline of older producing
properties as well as a decrease in production from properties which were shut
in for pipeline construction to accommodate a new gas purchaser.
Lease bonuses and other increased $701,106 from $37,764 in 1994 to $738,870 in
1995. The most significant item contributing to the increase was the receipt
of bonuses of $690,000 from the leasing of East Texas non-producing minerals
which the Company owns.
OPERATING COSTS AND EXPENSES. The Company experienced an overall decline in
operating costs and expenses of $64,153 (4%) as an increase in exploration and
development costs charged to expense of $68,897 was more than offset by
declines in each of the other line items.
PRODUCTION COSTS. The prior years upward trend in production costs was
reversed in 1995 with an overall decrease of $20,055 (6%) from 1994 to
$299,622. A $26,811 decrease in gross production taxes was partially offset
by a $4,776 increase in lease operating expense. The gross production tax is
based on a percentage of gross revenues and therefore varies as the related
oil and gas revenues increase or decrease.
EXPLORATION AND DEVELOPMENT EXPENSE. Exploration and development costs may
be either capitalized or charged to operations under the successful efforts
method of accounting used by the Company. Geological and geophysical costs
are expensed as incurred, as are the costs of unsuccessful exploratory and
development drilling. Total costs of exploration and development were
$354,049 in 1995 and $367,089 in 1994. Costs charged to operations were
$183,409 in 1995 and $114,512 in 1994, inclusive of geological and geophysical
costs of $112,075 in 1995 and $23,142 in 1994.
DEPRECIATION, DEPLETION, AMORTIZATION AND VALUATION PROVISIONS. Major
components are the provision for impairment of non-producing leaseholds,
depletion of producing leaseholds and depreciation of tangible and intangible
lease and well costs. Non-producing leaseholds are amortized over the life of
the leasehold using a straight line method except when the leasehold is
impaired or condemned by drilling and/or geological interpretation of seismic
data; if so, an adjustment to the provision is made at the time of impairment.
The provision for impairment was $94,747 in 1995 and $51,829 in 1994.
The depletion and depreciation of oil and gas properties are computed by the
units-of-production method. The amount expensed in any year will fluctuate
with the change in estimated reserves of oil and gas or a change in the rate
of production. The provision for depletion and depreciation totaled $264,918
in 1995, a $126,621 (32%) decrease from 1994. The decrease in depletion and
depreciation resulted because of the rapid amortization of wells with initial
flush production in 1994, marginal wells which were mostly or fully reserved
in 1994 and properties sold in 1995 all of which totaled approximately
$201,000. The decrease was partially offset by amortization of new properties
placed in service in 1995 of about $74,000.
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GENERAL, ADMINISTRATIVE AND OTHER EXPENSES (G&A). G&A declined $27,210
(4%) to $624,355 in 1995. Although numerous variances between the periods
occurred in the detail of expenses included in G&A, the most significant
overall change was caused by an increase in the percentage of shared costs
allocated to affiliated entities. This change resulted in a reduction of G&A
by approximately $22,000.
OTHER INCOME, NET. This category consists of interest and other investment
income as offset by investment losses and various other non-operating income
and expense items. Although there was little change in the amount of this
line item between the periods, there were some significant changes within the
category. In 1994, the Company received $120,272 related to settlement of
litigation. There was no such receipt in 1995; however, the decline was
offset by receipt of additional interest income on available for sale
securities of $39,206, increased income from equity investments of $39,787,
additional realized and unrealized gain from trading securities of $36,062
plus changes in miscellaneous other non operating income and expense items.
BENEFIT FROM INCOME TAXES. In 1995, the Company had a calculated benefit
from income taxes as the net decrease in deferred tax liabilities of $67,000
exceeded current tax expense of $18,747 by $48,253. Significant factors
contributing to the overall benefit was the utilization of statutory depletion
deductions and a decrease in the valuation allowance for deferred tax assets.
Also, the utilization of statutory depletion deductions contributed to the
benefit from income taxes in 1994. See Note 6 to the financial statements for
an analysis of the components of income taxes.
FORWARD-LOOKING SUMMARY. Management's current projections indicate operating
revenues for 1996 of $1,800,000, about the same as 1995. Given a stable
overall average price which approximates 1995, oil and gas revenues should
increase to around $1,770,000. New production which came on line around year
end 1995 should increase revenues in 1996 by approximately $800,000 as the
normal decline of older properties reduces revenues by about $100,000.
The most significant of the new wells is Marathon Oil Company's #1
Brounkowski, in Robertson County, Texas, which was producing at a rate of
approximately 23 million cubic feet per day at December 31, 1995. If that
rate of production is maintained through 1996, assuming the December 1995
average price, net revenues from the #1 Brounkowski would approximate $700,000
in 1996. Although the #1 Brounkowski is expected to make a significant
contribution to the Company's oil and gas revenues for the next two or more
years, as a royalty interest owner, the Company has not had access to the well
data sufficient to compute a reasonable estimate of total reserves, and the #1
Brounkowski's production history is too short to project a meaningful decline
curve.
Lease bonuses should be an immaterial amount as management does not expect
the receipt of significant lease bonuses to reoccur in 1996.
Operating costs and expenses are projected to increase $110,000, or 7%, from
1995 actual costs of $1,477,097. Production costs are estimated to increase
$50,000 as the increased production will result in more gross production taxes
and additional costs of lease operations. Exploration and development costs
charged to expense are projected to remain at the same level as 1995 because,
as discussed above, a significant part of such cost charged to expense is
dependent upon the success or failure of the prospect. Depreciation,
depletion, amortization and valuation provisions are projected to increase a
total of $30,000, mostly as a result of new production. General,
administrative and other expense is also projected to increase $30,000 because
of additional payroll costs and inflationary increases in other administrative
expense.
Other income, net, should approximate the 1995 amount of $213,000.
13
<PAGE>
The above projections are expected to result in net income before taxes for
1996 of approximately $426,000. Tax expense after utilization of available tax
credits and statutory depletion deductions should approximate $45,000. The
above projection does not include additional revenue which may result from the
successful resolution of the quiet title litigation discussed in Item 3, Legal
Proceedings.
Item 7. Financial Statements
Index to Financial Statements
PAGE
Report of Independent Certified Public Accountants-Grant Thornton LLP 15
Balance Sheets - December 31, 1995 and 1994 16
Statements of Operations - Years Ended December 31, 1995 and 1994 18
Statements of Stockholders' Equity - December 31, 1995 and 1994 19
Statements of Cash Flow - Years Ended December 31, 1995 and 1994 20
Notes to Financial Statements 22
Unaudited Supplemental Financial Information 30
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The Reserve Petroleum Company
We have audited the accompanying balance sheets of The Reserve
Petroleum Company (a Delaware corporation) as of December 31, 1995 and
1994, and the related statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 The Reserve Petroleum
Company at December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 11, 1996
15
<PAGE>
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
ASSETS
DECEMBER 31,
1995 1994
Current Assets:
Cash and Cash Equivalents (Note 2) $ 175,014 $ 112,564
Available for Sale Securities (Note 5) 2,689,546 2,715,502
Trading Securities (Note 5) 372,705 87,574
Receivables 154,012 163,729
Refundable Income Taxes ---- 1,449
Prepayments & Deferred Income Taxes 8,577 6,042
--------- ---------
3,399,854 3,086,860
--------- ---------
Investments:
Partnership and Limited
Liability Companies (Note 2) 495,379 459,251
Other 11,430 11,430
--------- ---------
506,809 470,681
--------- ---------
Property, Plant & Equipment (Note 2):
Oil & Gas Properties, at Cost Based on the
Successful Efforts Method of Accounting
Unproved Properties 488,859 444,831
Proved Properties 4,660,881 4,977,386
--------- ---------
5,149,740 5,422,217
Less - Valuation Allowance and Accumulated
Depreciation, Depletion & Amortization 3,270,087 3,580,350
--------- ---------
1,879,653 1,841,867
--------- ---------
Other Property & Equipment, at Cost 323,136 329,431
Less - Accumulated Depreciation,
Depletion, & Amortization 176,460 172,634
--------- ---------
146,676 156,797
--------- ---------
2,026,329 1,998,664
--------- ---------
Other Assets 267,089 241,881
--------- ---------
$6,200,081 $5,798,086
========== ==========
(continued)
See Accompanying Notes
16
<PAGE>
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
(concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
1995 1994
Current Liabilities:
Accounts Payable $ 86,229 $ 51,676
Income Taxes Payable 16,280 ----
Other Current Liabilities
Gas Balancing Commitment 53,401 57,858
Dividends Payable, Current Portion 10,000 10,000
---------- ----------
165,910 119,534
---------- ----------
Dividends Payable (Note 3) 119,277 115,066
---------- ----------
Deferred Income Taxes (Notes 2 & 6) 54,864 119,329
---------- ----------
Commitments & Contingencies (Notes 7 & 9)
Stockholders' Equity (Notes 3 & 4):
Common Stock 92,368 92,368
Additional Paid-in Capital 65,000 65,000
Retained Earnings 5,854,105 5,430,847
---------- ----------
6,011,473 5,588,215
Less - Treasury Stock at Cost (Note 4) 151,443 144,058
---------- ----------
5,860,030 5,444,157
---------- ----------
$6,200,081 $5,798,086
========== ==========
See Accompanying Notes
17
<PAGE>
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1995 1994
Operating Revenues:
Oil & Gas Sales $1,070,048 $1,393,648
Lease Bonuses & Other 738,870 37,764
---------- ----------
1,808,918 1,431,412
---------- ----------
Operating Costs and Expenses:
Production 299,622 319,677
Exploration and Development 183,409 114,512
Depreciation, Depletion, Amortization
& Valuation Provisions 369,711 455,496
General, Administrative and Other 624,355 651,565
---------- ----------
1,477,097 1,541,250
---------- ----------
Income (Loss) from Operations 331,821 (109,838)
Other Income, Net 212,963 212,016
---------- ----------
Income before Income Taxes 544,784 102,178
(Benefit from) Income Taxes (48,253) (8,591)
---------- ----------
Net Income $ 593,037 $ 110,769
========== ==========
Per Share Data (Note 2):
Net Income $ 3.50 $ .65
========== ==========
Cash Dividends $ 1.00 $ 1.00
========== ==========
Weighted Average Shares Outstanding 169,679 170,149
========== ==========
See Accompanying Notes
18
<PAGE>
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1995
Additional
Common Paid-in Retained Treasury
STOCK CAPITAL EARNINGS STOCK
Balance at January 1, 1994 $ 92,368 $ 65,000 $5,490,295 $(138,703)
Net Income ---- ---- 110,769 ----
Cash Dividends on Common Stock ---- ---- (170,217) ----
Purchase of Treasury Stock ---- ---- ---- (5,355)
-------- -------- ---------- ---------
Balance at December 31, 1994 92,368 65,000 5,430,847 (144,058)
Net Income ---- ---- 593,037 ----
Cash Dividends on Common Stock ---- ---- (169,779) ----
Purchase of Treasury Stock ---- ---- ---- (7,385)
-------- -------- ---------- ---------
Blance at December 31, 1995 $ 92,368 $ 65,000 $5,854,105 $(151,443)
======== ======== ========== =========
See Accompanying Notes
19
<PAGE>
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
YEAR ENDED DECEMBER 31,
1995 1994
Cash Flows from Operating Activities:
Cash Received-
Oil and Gas Sales $1,080,929 $1,439,986
Lease Bonuses and Rentals 695,708 36,600
Agricultural Rentals 5,100 5,104
Cash Paid-
Production Costs (312,404) (296,090)
Exploration and Development Expenses (172,023) (93,639)
General Suppliers, Employees and Taxes,
Other than Income (617,251) (673,746)
Interest Received 119,197 96,560
Interest Paid (11,392) (7,528)
Dividends Received on Trading
Securities 9,254 5,364
Purchase of Trading Securities (1,159,613) (90,088)
Sale of Trading Securities 1,150,372 146,321
Income Taxes Paid (13,018) (12,111)
Receipts of Refundable Income Taxes 12,000 33,881
Receipts from Take or Pay Settlement ---- 120,271
---------- ----------
Net Cash Provided by Operating
Activities 786,859 710,885
---------- ----------
Cash Flows from Investing Activities:
Sale and maturity of Available
for Sale Securities 442,099 830,919
Purchase of Available for Sale Securities (675,080) (657,896)
Property Dispositions 31,171 78,011
Property Additions (351,287) (758,053)
Cash Distributions from Equity Investments 22,500 15,300
Cash Payments for Equity Investments (20,859) (39,800)
--------- ---------
Net Cash Applied to Investing Activities $(551,456) $(531,519)
--------- ---------
(Continued)
See Accompanying Notes
20
<PAGE>
(Concluded)
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
YEAR ENDED DECEMBER 31,
1995 1994
Cash Flows Applied to Financing Activities:
Dividends Paid to Shareholders $(165,568) $(160,000)
Purchase of Treasury Stock (7,385) (5,355)
--------- ---------
Total Cash Applied to Financing Activities (172,953) (165,355)
--------- ---------
Net Change in Cash and Cash Equivalents 62,450 14,011
Cash and Cash Equivalents at Beginning of Year 112,564 98,553
--------- ---------
Cash and Cash Equivalents at End of Year $ 175,014 $ 112,564
========= =========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net Income $ 593,037 $ 110,769
--------- ---------
Net Income Increased (Decreased) by -
Net Change in -
Unrealized Holding (Gains) Losses
on Trading Securities $ (25,808) $ 10,769
Accounts Receivable 14,215 17,968
Interest and Dividends Receivable (22,579) (7,432)
Income Taxes Refundable/Payable 17,729 21,770
Prepayments ---- 50,022
Accounts Payable 7,077 10,940
Trading Securities (82) 63,878
Gain from Equity Investments (49,822) (9,655)
Gain on Disposition of Property
& Equipment (33,380) (10,480)
Depreciation, Depletion, Amortization
and Valuation Provisions 369,711 455,496
Change in Cash Value of Officers'
Life Insurance (11,782) (28,157)
Change in Deferred Taxes (67,000) (8,591)
Gas Balancing Liabilities (4,457) 33,588
--------- ---------
Total Adjustments 193,822 600,116
Net Cash Provided by Operating Activities $ 786,859 $ 710,885
========= =========
See Accompanying Notes
21
<PAGE>
THE RESERVE PETROLEUM COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 - NATURE OF OPERATIONS
The Company is principally engaged in oil and natural gas exploration and
development with an area of concentration in Texas and Oklahoma. Other
business segments are not a significant factor in the Company's
operations.
Note 2 - SUMMARY OF ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Oil and gas properties are accounted for on the successful efforts
method. The acquisition, exploration and development costs of producing
properties are capitalized. All costs relating to unsuccessful
exploration, geological and geophysical costs, delay rentals and abandoned
properties are expensed. Lease costs related to unproved properties are
amortized over the life of the lease and are assessed periodically. Any
impairment of value is charged to expense.
Depreciation, depletion and amortization of producing properties is
computed on the units-of-production method on a property-by-property
basis. The units-of-production method is based primarily on estimates of
reserve quantities. Due to uncertainties inherent in this estimation
process, it is at least reasonably possible that reserve quantities will
be revised in the near term.
Other property and equipment is depreciated on the straight-line,
declining-balance or other accelerated methods.
The following estimated useful lives are used for the different types of
property:
Buildings and improvements 10 to 20 years
Office furniture & fixtures 5 to 10 years
Automotive equipment 5 to 8 years
INVESTMENTS
The Company accounts for its investments in a partnership and limited
liability companies on the equity basis and adjusts the investment balance
to agree with its equity in the underlying assets of the entities. See
Note 7 for additional information.
Trading Securities are carried at fair value with unrealized gains and
losses included in earnings.
Available for sale securities, which consist primarily of U.S. Government
securities, are carried at fair value with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity, net of tax effects.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts which at times may exceed
federally insured limits. The Company believes it is not exposed to any
significant credit risk on such accounts.
22
<PAGE>
INCOME TAXES
Deferred income taxes are provided for significant carryforwards and
temporary differences using the liability method.
NET INCOME PER SHARE
Net Income per share is calculated based on the weighted average of the
number of shares outstanding during the year. There are no outstanding
stock options or common stock equivalents..
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's receivables relate primarily to sales of oil and natural
gas to purchasers with operations in Texas and Oklahoma. In 1995 the
Company had one purchaser whose purchases were $175,143 or 16.37% of total
oil and gas sales. In 1994, a different purchaser made purchases of
$202,968, or 14.56% of total oil and gas sales.
In the fourth quarter of 1995, the Company entered into oil and gas lease
agreements relating to certain of its non-producing minerals in Robertson
and Leon Counties, Texas. Lease bonuses received from these paid up lease
agreements were $690,000, or 38% of operating revenues. The Company does
not anticipate the receipt of comparable amounts from lease bonuses in
future years.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1996; however,
the effect of adoption has not been determined.
Note 3 - DIVIDENDS PAYABLE
Dividends payable include amounts that belong to stockholders whom the
Company has been unable to locate and uncashed dividend checks of other
stockholders.
23
<PAGE>
Note 4 - COMMON STOCK
The following table summarizes the changes in common stock issued and
outstanding:
Shares of
Shares Treasury Shares
ISSUED STOCK OUTSTANDING
January 1, 1994, $.50
par value stock, 400,000
shares authorized 184,735.28 14,431.55 170,303.73
Purchase of stock --- 306.00 (306.00)
---------- --------- ----------
December 31, 1994, $.50
par value stock, 400,000
shares authorized 184,735.28 14,737.55 169,997.73
Purchase of stock ---- 422.00 (422.00)
---------- --------- ----------
December 31, 1995, $.50
par value stock, 400,000
shares authorized 184,735.28 15,159.55 169,575.73
========== ========= ==========
Note 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
At December 31, 1995 and 1994, the difference between the aggregate fair
value and amortized cost basis of available for sale securities was
immaterial and required no adjustment to stockholders' equity. All
available for sale securities mature prior to November 1, 1996. Proceeds
from sale of securities prior to maturity totaled $596,841 in 1994,
resulting in a gross loss of $3,159 on a specific identification basis.
As to the trading securities, the change in unrealized holding gains
(losses) included in earnings was $25,808 for 1995 and $(10,768) for 1994.
24
<PAGE>
Note 6 - INCOME TAXES
Components of deferred taxes follow:
DECEMBER 31,
1995 1994
Assets
Leasehold Costs $ 210,995 $ 104,572
Gas Balancing Receivable 52,379 52,379
Marketable Securities 2,952 417
Lease and Well Equipment 854 1,265
Charitable Contributions 2,725 10,415
Alternative Minimum Tax
Credits Carry Forward ---- 66,133
Capital Loss Carry Forward 5,821 ---
--------- ---------
275,726 235,181
Valuation Allowance ---- (66,133)
--------- ---------
275,726 169,048
Liabilities
Intangible Development Costs 327,638 287,960
--------- ---------
Net Deferred Tax Liability $ 51,912 $ 118,912
========= =========
Valuation Allowance Decrease
for the Year $ 66,133 $ 171,782
========= =========
The following table summarizes the current and deferred portions of income
tax expense.
YEAR ENDED DECEMBER 31,
1995 1994
Current Tax Expense:
Federal $ 18,747 $ ----
State ---- ----
--------- ---------
18,747 ----
Deferred (Benefit) (67,000) (8,591)
--------- ---------
Total (Benefit) $ (48,253) $ (8,591)
========= =========
25
<PAGE>
The total (benefit from) income tax expressed as a percentage of income
before income tax was (8.86%) in 1995 and (8.41%) in 1994. These amounts
differ from the amounts computed by applying the statutory US Federal
income tax rate of 35% for 1995 and 1994 to income before income tax as
summarized in the following reconciliation:
YEAR ENDED DECEMBER 31,
1995 1994
Computed Federal Tax
Provision $ 190,674 $ 35,762
Increase (Decrease) in Tax From:
Allowable Depletion in Excess of
Depletion for Financial Statements (140,852) (31,067)
Change in Valuation Allowance (66,133) ----
Non-conventional Fuel Credit (11,668) (7,195)
Corporate Graduated Tax Rate
Structure (7,282) (6,759)
Loss from Marketable
Equity Securities ----- 3,769
Dividend Received Deduction (2,342) (1,662)
Change in Prior Year Estimates (15,445) ----
Other 4,795 (1,439)
--------- ---------
(Benefit from) Income Tax $ (48,253) $ (8,591)
========= =========
Effective Tax Rate (8.86)% (8.41)%
========= =========
26
<PAGE>
Note 7 - INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES
The Company has a 33% interest in Broadway Sixty-Eight, Ltd., an
Oklahoma limited partnership (the Partnership). The Partnership had
assets in excess of liabilities of $438,787 and $446,913 at
December 31, 1995 and 1994, respectively, and its net losses for the
periods then ended were $8,126 and $31,510.
The Partnership was organized for the purpose of owning and operating an
office building which was constructed in Oklahoma City, Oklahoma, at a
total cost for the land and building of approximately $2,300,000.
Although the Company invested as a limited partner, along with the other
limited partners, it has signed an indemnity agreement to reimburse the
general partner for any losses suffered from operating the Partnership.
The office building is financed by a mortgage loan with a balance of
$938,542 at December 31, 1995. The loan matures in 2002 with interest at
New York prime rate capped at 8 1/2% until December 1998. The loan is
collateralized by a first mortgage on the land and building, and the
assignment of leases and rents.
The Company leases its corporate office from the Partnership. The
operating lease under which the space was rented expired December 31,
1994, and the space is currently rented on a year-to-year basis under the
terms of the expired lease. Rent expense was $ 26,015 and $27,319, for
the years ended December 31, 1995 and 1994, respectively.
The Company has a 9% interest in the Coffee Creek Golf Course Limited
Liability Company (LLC), an Oklahoma limited liability company. The LLC
has developed and is operating a golf course on real property it acquired
in Oklahoma. The LLC is also developing adjacent real property for
residential construction. At December 31, 1995, the Company's net equity
in the LLC totaled $254,535, ($235,890 at December 31, 1994).
In December, 1992 the Company invested $90,000 for a 10% interest in OKC
Industrial Properties, L.C., an Oklahoma limited liability company, which
was formed to purchase and hold certain Oklahoma City metropolitan area
real estate as an investment. At December 31, 1995, the Company's net
equity in the limited liability company was $76,232, compared to $75,878
at December 31, 1994.
27
<PAGE>
Note 8 -COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
EXPLORATION, AND DEVELOPMENT ACTIVITIES
All of the Company's oil and gas operations are within the Continental
United States. In connection with its oil and gas operations, the
following costs were incurred:
YEAR ENDED DECEMBER 31,
1995 1994
Acquisition of Properties
Unproved $ 253,031 $ 97,970
Proved ----- 149,601
Exploration Costs 324,238 299,668
Development Costs 29,811 67,421
Note 9 -LEGAL PROCEEDINGS
In August 1993, the Company filed an action in the District Court of Leon
County, Texas to quiet title to its 13/32nd interest in approximately 203
mineral acres associated with two producing oil and gas wells completed in
1988. The Company claims title through deeds recorded in 1932; the
defendants claim title under a deed dated nine years prior to the
Company's deeds but not recorded until seven years after the Company's
deeds were recorded. Approximately $850,000 of proceeds from oil and gas
sales were held in suspense by the unit operator at March 1996, and have
not been recorded as revenue by the Company. The Company has expended
$428,000 in drilling, completion and operating costs for these wells of
which $233,750 was included in the Company's net investment in oil and gas
properties at December 31, 1995. If the Company is successful in quieting
title to its mineral interests in this litigation and recovers the
suspended oil and gas proceeds, management believes the outcome will have
a material favorable effect on the Company and its financial condition.
If the Company is unsuccessful in this litigation, management believes
that such outcome will not have a material adverse effect on the Company's
financial condition. The case is set for trial April 1, 1996.
Note 10 - FINANCIAL INSTRUMENTS
The following table includes various estimated fair value information as
of December 31, 1995 as required by Statement of Financial Accounting
Standards No.107, "Disclosures about Fair Value of Financial Instruments"
(SFAS 107). Such information, which pertains to the Company's financial
instruments, is based on the requirements set forth in SFAS 107 and does
not purport to represent the aggregate net fair value of the Company. The
carrying amounts in the table below are the amounts at which the financial
instruments are reported in the financial statements
All of the Company's financial instruments are held for purposes other
than trading, except for trading securities.
28
<PAGE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
1.CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
and highly liquid nature of those instruments.
2.AVAILABLE FOR SALE SECURITIES
The estimated fair values are based upon quoted market prices.
3.TRADING SECURITIES
The estimated fair values are based upon quoted market prices.
4.DIVIDENDS PAYABLE
The carrying amount approximates fair value due to the demand nature of
these obligations.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
Carrying Estimated
AMOUNT FAIR VALUE
Financial Assets
Cash and Cash Equivalents $ 175,014 $ 175,014
Available for Sale Securities 2,689,546 2,689,546
Trading Securities 372,705 372,705
Financial Liabilities
Dividends Payable (129,277) (129,277)
29
<PAGE>
UNAUDITED SUPPLEMENTAL FINANCIAL INFORMATION
30
<PAGE>
SUPPLEMENTAL SCHEDULE 1
THE RESERVE PETROLEUM COMPANY
WORKING INTERESTS RESERVE QUANTITY INFORMATION
(Unaudited)
YEARS ENDED DECEMBER 31,
1995 1994
Oil & Natural Gas
Liquids (Bbls)
Proved Developed and
Undeveloped Reserves
Beginning of Year 76,819 78,920
Revisions of Previous Estimates (12,911) (9,157)
Extensions and Discoveries 29,166 7,177
Purchase of Minerals in Place ---- 15,429
Production (14,360) (15,550)
---------- ----------
End of Year 78,714 76,819
========== ==========
Proved Developed Reserves
Beginning of Year 76,819 78,920
End of Year 78,714 76,819
Gas (MCF)
Proved Developed and Undeveloped
Reserves Beginning of Year 1,537,949 1,618,464
Revisions of Previous Estimates 3,602 55,947
Extensions and Discoveries 52,256 119,269
Production (221,823) (255,731)
---------- ---------
End of Year 1,371,984 1,537,949
========= =========
Proved Developed Reserves
Beginning of Year 1,537,949 1,618,464
End of Year 1,371,984 1,537,949
(continued)
See notes on next page
31
<PAGE>
SUPPLEMENTAL SCHEDULE 1
THE RESERVE PETROLEUM COMPANY
WORKING INTERESTS RESERVE QUANTITY INFORMATION
(Unaudited)
(Concluded)
Notes 1. Estimates of royalty interests reserves have not been included
because the information required for the estimation of said
reserves is not available. The Company's share of production
from its net royalty interests was 14,940 Bbls of oil and 147,716
MCF of gas for the year ended December 31, 1995, and 15,517
Bbls of oil and 135,903 MCF of gas for the year ended
December 31, 1994.
2. The preceding table sets forth estimates of the Company's
proved developed oil and gas reserves, together with the changes
in those reserves as prepared by the Company's engineer for the
years ended December 31, 1995 and 1994. All reserves are located
within the United States.
3. The Company emphasizes that the reserve volumes shown are
estimates which by their nature are subject to revision in the
near term. The estimates have been made by utilizing all
available geological and reservoir data, as well as actual
production performance data. These estimates are reviewed
annually and are revised upward or downward, as warranted by
additional performance data.
32
<PAGE>
SUPPLEMENTAL SCHEDULE 2
THE RESERVE PETROLEUM COMPANY
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED WORKING INTERESTS
OIL AND GAS RESERVES
(Unaudited)
AT DECEMBER 31,
1995 1994
Future Cash Inflows $3,640,464 $4,010,900
Future Production and
Development Costs (1,447,683) (1,597,992)
Future Income Tax Expense (553,158) (621,958)
---------- ----------
Future Net Cash Flows 1,639,623 1,790,950
10% Annual Discount for
Estimated Timing of Cash Flows (442,519) (573,409)
---------- ----------
Standardized Measure of Discounted
Future Net Cash Flows $1,197,104 $1,217,541
========== ==========
Estimates of future net cash flows from the Company's proved working
interest oil and gas reserves are shown in the table above. These
estimates, which by their nature are subject to revision in the near
term, are based on prices in effect at year end, with no escalation,
except for fixed and determinable amounts attributable to gas under
provisions of the Natural Gas Policy Act (NGPA). The development and
production costs are based on year-end cost levels, assuming the
continuation of existing economic conditions. Cash flows are further
reduced by estimated future income tax expense calculated by applying
the current statutory income tax rates to the pretax net cash flows
less depreciation of the tax basis of the properties and depletion
applicable to oil and gas production.
33
<PAGE>
SUPPLEMENTAL SCHEDULE 3
THE RESERVE PETROLEUM COMPANY
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOW FROM PROVED WORKING INTERESTS RESERVE QUANTITIES
(Unaudited)
YEAR ENDED DECEMBER 31,
1995 1994
Standardized Measure,
Beginning of Year $1,217,541 $1,441,907
Sales and Transfers, Net of
Production Costs (279,677) (587,828)
Net Change in Sales and Transfer
Prices, Net of Production Costs (188,640) (156,167)
Extensions, Discoveries and Improved
Recoveries, Net of Future Production
and Development Costs 296,452 102,811
Purchase of Reserves in Place ---- 112,783
Sale of Reserves in Place ---- (27,902)
Revisions of Quantity Estimates (30,277) 95,246
Accretion of Discount 177,702 197,521
Net Change in Income Taxes 19,126 110,372
Changes in Production Rates
(Timing) and Other (15,123) (71,202)
---------- ----------
Standardized Measure,
End of Year $1,197,104 $1,217,541
========== ==========
34
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable
PART III
Items 9, 10, 11, and 12 are incorporated by reference to the Company's
proxy statement to be mailed to security holders on or about April 8,
1996 in connection with its annual stockholders' meeting to be held on
May 7, 1996.
Item 13.Exhibits and Reports on Form 8-K.
(a) Exhibits
The following documents are exhibits to this Form 10-K. Each document
marked by an asterisk is hereby incorporated herein by reference to the
same document previously filed with the Securities and Exchange Commission.
Exhibit S.E.C. Exhibit
REFERENCE DESCRIPTION REPORT (DATE) NUMBER PAGE
3.1 *Restated Certificate of
Incorporation dated
November 1, 1988 10-K (12/88) 3.1 39
3.2 *By-Laws
dated November 1, 1988 10-K(12/88) 3.2 50
27 Financial Data Schedule 10KSB(12/95)
(b). Reports on Form 8-K.
Reports on Form 8-K have been filed with the Securities and Exchange
Commission during the last quarter of the period covered by this report
as follows.
Item Report Financial
REPORTED DATE STATEMENT FILED
5. Other Events October 28, 1995 No
5. Other Events December 29, 1995 No
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE RESERVE PETROLEUM COMPANY
(Registrant)
MASON W. MCLAIN
By: Mason W. McLain, President
(Principal Executive Officer)
JERRY L. CROW
By: Jerry L. Crow, 2nd Vice President
(Principal Financial and Accounting Officer)
Date: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
MASON W. MCLAIN JERRY L. CROW
Mason W. McLain (Director) Jerry L. Crow (Director)
March 25, 1996 March 25, 1996
ROBERT L. SAVAGE MYRA D. RALSTON
Robert L. Savage (Director) Myra D. Ralston (Director)
March 25, 1996 March 25, 1996
36
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-KSB FOR THE YEAR ENDING DECEMBER 31, 1995, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 175,014
<SECURITIES> 3,062,251
<RECEIVABLES> 154,012
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,399,854
<PP&E> 5,472,876
<DEPRECIATION> 3,446,547
<TOTAL-ASSETS> 6,200,081
<CURRENT-LIABILITIES> 165,910
<BONDS> 0
0
0
<COMMON> 92,368
<OTHER-SE> 5,767,662
<TOTAL-LIABILITY-AND-EQUITY> 6,200,081
<SALES> 1,070,048
<TOTAL-REVENUES> 1,808,918
<CGS> 0
<TOTAL-COSTS> 299,622
<OTHER-EXPENSES> 553,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 544,784
<INCOME-TAX> (48,253)
<INCOME-CONTINUING> 593,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 593,037
<EPS-PRIMARY> 3.50
<EPS-DILUTED> 3.50
</TABLE>
