<PAGE> 1
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, 1996
[ ] 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, 1996 were $2,901,308.
As of March 5, 1997, there were 168,451 common shares outstanding. The
aggregate market value of the voting stock held by non-affiliates as determined
by averaging the highest and lowest bid as of March 5, 1997 was $3,536,466. (No
sales or asked prices have been reported in the last 60 days)
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 7, 1997, in connection with its annual stockholders' meeting to
be held on May 6, 1997. Transitional Small Business Disclosure Format (check
one) Yes No X
--- ---
See Exhibit Index on Page 37.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Forward Looking Statements ................................................... 3
PART I
Item 1. Description of Business ............................................. 4
Item 2. Description of Properties ........................................... 7
Item 3. Legal Proceedings ................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ................. 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ............ 10
Item 6. Management's Discussion and Analysis ................................ 11
Item 7. Financial Statements ................................................ 16
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................ 37
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16(a) of the Exchange Act ................... 37
Item 10. Executive Compensation .............................................. 37
Item 11. Security Ownership of Certain Beneficial Owners and Management ...... 37
Item 12. Certain Relationships and Related Transactions ...................... 37
Item 13. Exhibits and Reports on Form 8-K .................................... 37
</TABLE>
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Forward Looking Statements.
In addition to historical information, from time to time the Company may
publish forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products, research and development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. Although the Company believes that the expectations
reflected in such forward looking statements are based on reasonable
assumptions, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, the following:
The Company's future operating results will depend upon management's
ability to employ and retain quality employees, forecast revenues and
control expenses. Any decline in operating revenues without corresponding
reduction in operating expenses could have a material adverse effect on
the Company's business, results of operations and financial condition.
Estimates of future revenues from oil and gas sales are derived from a
combination of factors which are subject to significant fluctuation over
any given period of time. Reserve estimates by their nature are subject to
revision in the short-term. The evaluating engineers consider all
available production performance data, reservoir data and geological data,
as well as make estimates of production costs, sale prices and the time
period the property can be produced at a profit. A change in any of the
above factors can significantly change the timing and amount of net
revenues from a property.
The Company has no significant long-term sales contacts for either oil or
gas. For the most part, the price the Company receives for its product is
based upon the spot market price which in the past has experienced
significant fluctuations. Management anticipates such price fluctuations
will continue in the future, making any attempt at estimating future
prices subject to significant error.
Exploration and development costs have been the most significant component
of the Company's capital expenditures and are expected to remain so, at
least in the near term. Under the successful efforts method of accounting
for oil and gas properties which the Company uses, these costs are
capitalized if the prospect is successful, or charged to operating costs
and expenses if unsuccessful. Estimating the amount of such future costs
which may relate to successful or unsuccessful prospects is extremely
imprecise, at best.
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The provisions for depreciation, depletion and amortization of oil and gas
properties constitute a particularly sensitive accounting estimate.
Non-producing leaseholds are amortized over the life of the leasehold
using a straight line method; however, when a lease-hold is impaired or
condemned, an appropriate adjustment to the provision is made at that
time. Forward looking estimates of such adjustments are very imprecise.
The provision for impairment of long-lived assets is determined by review
of the estimated future cash flows from the individual properties. A
significant unforeseen downward adjustment in future prices and/or
potential reserves could result in a material change in estimated
long-lived assets impairment. Depletion and depreciation of oil and gas
properties are computed using the units-of-production method. A
significant unanticipated change in volume of production or estimated
reserves would result in a material unforecast change in the estimated
depletion and depreciation provisions.
In prior years, income from available for sale securities and trading
securities have made material contributions to net income. Available for
sale securities and trading securities are used to reserve funds until
needed in the Company's capital investing and financing activities. When
those funds are utilized, net income will be materially reduced.
Management may not have adequate lead time before the funds are required
to include the utilization in any forward looking statements.
The Reserve Petroleum Company undertakes no obligation to publicly revise
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-QSB to be filed
by the Company in 1997 and any Current Reports on Form 8-K filed by the
Company.
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 is a corporation, 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 272,517 gross acres equivalent to 94,180 net acres. These
mineral interests are
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located in nine states with 57,434 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. In 1996 $2,059,079 (73%) of oil and gas sales were
from owned mineral properties as compared to $490,581 (46%) in 1995. For
additional information regarding the increase in royalty interests production,
see Item 6, subheading, "Operating Revenues". As a result of its mineral
ownership, in 1996 the Company had royalty interests in 16 gross ( .56 net)
wells which were drilled and completed as producing wells.
Development Program. The 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 1996, the Company participated in the drilling of development
wells of which 3 gross (.31 net) wells were completed as gas producers and 2
gross (.16 net) wells were non-productive.
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, developing its own exploratory prospects or a combination of the
above.
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, development of geological and geophysical information and
purchase of leaseholds in 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. Three dimensional
seismic technology is employed in the development of most prospects.
The Company had fractional interests in eighteen exploratory prospects in 1996,
seventeen of which are in Oklahoma and one in Texas. Nine of the prospects were
tested in 1996, and the remaining nine are in various stages of development. Of
the nine prospects on which test wells were drilled in 1996:
A prospect in which the Company has a 22.5% working interest was in
process at year end, 1995, and subsequently completed in a secondary zone
as an oil producer. At least one development well is planned for 1997.
Two exploratory wells were drilled on a prospect in which the Company had
a 15% working interest. One was non-commercial, the other was completed as
a stripper oil well.
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The prospect is currently being evaluated for drilling of an exploratory
well in an upthrown block.
An exploratory well was completed as an oil producer on a prospect in
which the Company has an 18% working interest. Although the producing
formation will not require additional drilling, other structures will be
drilled in relation to overlapping prospects.
A gas producer was completed upon re-entering and deepening a previously
drilled well. Three development wells were drilled, two of which were gas
producers and the other non-commercial. Another exploratory test is
scheduled for 1997. The Company has a 15% working interest in the
prospect.
Two prospects in which the Company has a 15% working interest, and one
prospect in which it has a 36% working interest, each had one test
drilled, plugged and abandoned. One prospect with a 15% working interest
is currently under evaluation, and up to four additional tests are being
considered. The other two prospects have been condemned.
A Texas prospect in which the Company has a 6% net working interest had a
test well in process at year end. At March 12, 1997, the well was awaiting
participant approval for completion.
Current plans include testing up to six additional prospects in 1997.
Customers. In 1996, the Company had two customers whose total purchases were
greater than 10% of revenues from oil and gas sales. One customer purchased
$970,972 or 34%, and the other $392,246, or 14% of total oil and gas sales.
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
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 develop- ments 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
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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 (unaudited) of $131,439 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, 1996, the
partnership had assets in excess of liabilities of $398,297 and had a net
income of $4,510 for the year then ended (unaudited).
The Company has net equity (unaudited) of $224,748 ($103,650 cost basis) at
December 31, 1996, 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 $2,685,037 at December 31, 1996, and net income of $294,039
(unaudited).
The Company has a net equity (unaudited) of $75,032 ($47,500 cost basis) at
December 31, 1996 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.
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, 1996, the Company had eight employees, including officers. All
the Company's employees devoted a portion of their time to duties with
affiliated companies and received compensation directly from those companies
during 1996.
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Item 2. Description of Properties.
The Company's principal properties are oil and natural gas properties as
described below.
Oil and Natural Gas Operations.
Oil and Gas Reserves. Reference is made to the unaudited supplemental financial
information beginning on Page 32 for working interest reserve quantity
information.
Since January 1, 1996, 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 1995 report on Form 10-KSB and Federal income
tax return for the year ended December 31, 1995. Those reserve 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, 1996, 1995 and 1994. Equivalent
MCF was developed using approximate relative energy content.
<TABLE>
<CAPTION>
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
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
1996 $ 19.76 $ 1.90 $ 20.85 $ 1.99 $ .77
1995 $ 16.35 $ 1.67 $ 17.01 $ 1.42 $ .91
1994 $ 14.15 $ 2.00 $ 15.52 $ 2.42 $ .84
</TABLE>
At December 31, 1996, the Company had working interests in 67 gross (6.6 net)
wells producing primarily gas and/or gas liquids (condensates) and had working
interests in 52 gross (3.5 net) wells producing primarily oil. These interests
were in 17,821 gross (1,601 net) producing acres. These wells include 44 gross
(.32 net) wells associated with secondary recovery projects.
Twenty-three percent, or 9,992 barrels of the Company's oil production during
1996 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:
<TABLE>
<CAPTION>
Acreage
--------------------
Gross Net
------- ------
<S> <C> <C>
Non-producing Mineral Interests 272,517 94,180
Undeveloped Leaseholds 16,898 2,553
</TABLE>
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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, 1994 and there-after, as to net productive and dry exploratory
wells drilled and net productive and dry develop- ment wells drilled.
<TABLE>
<CAPTION>
Number of Net Working Interest Wells Drilled
------------------------------------------------
Exploratory Development
--------------------- ---------------------
Productive Dry Productive Dry
---------- --- ---------- ---
<C> <C> <C> <C> <C>
1996 .88 .83 .31 .16
1995 .45 .24 -0- -0-
1994 .15 .34 .02 -0-
</TABLE>
Recent Activities. At December 31, 1996, the Company had a 6% working interest
in a South Texas exploratory well which was drilling. At March 12, 1997 the
well was awaiting participant approval for completion.
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. Following a jury trial held in August, 1996, a judgment was entered for
the Company. Certain defendants have perfected the right to appeal by posting a
cost bond. Approximately $850,000 of proceeds from oil and gas sales are held
in suspense by the unit operator. These proceeds will be recorded as revenue by
the Company when released by the Unit Operator. The Company does not know when
the appellate proceeding will be completed.
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. Quotations reflect inter-dealer prices, without retail
markup, markdown or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Quarterly Ranges
---------------------
Quarter Ending High Bid Low Bid
-------------- -------- -------
<S> <C> <C>
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
03/31/96 26 24 3/8
06/30/96 27 1/2 26
09/30/96 31 1/4 27 1/2
12/31/96 31 1/2 31 1/4
</TABLE>
There was limited public trading in the Company's common stock in 1996 and
1995. In 1996, there were 13 brokered trades appearing in the Company's
transfer ledger, and in 1995, there were eight.
At March 5, 1997, the Company had approximately 1,431 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 1996 and 1995. 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 1997.
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Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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.
As indicated in the Balance Sheets, net working capital increased $549,270
(17%) to $3,783,214 in 1996 from $3,233,944 in 1995. The working capital ratio
was 15 to 1 in 1996 as compared to 20 to 1 in 1995. For the most part, the
increase in net working capital was the result of positive net cash flows from
operations, less cash applied to oil and gas exploration and development costs
and payment of cash dividends on common stock, plus a net increase in year end
accruals.
Operating Activities. As indicated in the statements of cash flows, net cash
flows provided by operating activities, exclusive of cash paid for oil and gas
exploration costs charged to operations, were $1,557,058, a $598,176 (62%)
increase from 1995. The most significant factor contributing to the increase
was additional cash flows from oil and gas sales of $1,565,359 as offset by a
decrease in lease bonuses and rentals of $688,081. For further discussion of
oil and gas sales and lease bonuses and rentals, see "Results of
Operations-Operating Revenues", below.
Investing Activities. Net cash applied to investing activities was $762,858, a
$211,402 (38%) increase from 1995. Net cash applied to available for sale
securities of $252,458 and property additions of $589,200 was offset $78,800 by
net cash received from equity investments.
Available for sale securities are primarily US Treasury Bills or Notes 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. Substantially all of the $252,458 net
increase in available for sale securities in 1996 was cash flows from
operations not applied to property additions or financing 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 1996 included $781,067 classified as investing activities and $403,558
classified as operating activities for a total of $1,184,625. This compares to
a total of $523,310 in 1995.
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. Such applied cash flows amounted to $180,520 in 1996, a $7,567 (4%)
increase from 1995.
Forward-looking Summary. The Company's current estimates indicate cash flow
from operations, exclusive of exploration and development costs charged to
operations will approximate $1,480,000 or about $77,000 (5%) less than
comparable actual cash flows from 1996. Also, current estimates indicate cash
required for capital expenditures, inclusive of exploration and development
costs charged to operations will approximate $1,340,000, and cash to be applied
to financing activities should approximate actual 1996 cash applied of
$180,500. Therefore, operating cash flows, along with existing available for
sale securities should supply the funds necessary to meet 1997 cash
requirements.
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It should be noted, the Company's exploration drilling activity is conducted
for the purpose of locating oil and gas reserves which can be developed to
produce additional revenues. Should there be a significant discovery, capital
requirements could be far more than the Company has available. Also, management
is constantly alert for investment opportunities both within and outside the
petroleum industry which meet its risk criteria and will improve return on
stockholders' equity. Should such circumstances occur, the Company may require
external sources of financing.
Results of Operations.
In 1996, the Company's net income increased $198,341 (33 %) to $791,378 ($4.68
per share). A $1,092,390 (60%) growth in operating revenue was partially offset
by a $780,403 (53%) increase in operating cost and expenses resulting in a
$311,987 (94%) increase in operating income to $643,808. Other income, net was
up $68,441 (32%) and the provision for income tax increased $182,087. Material
changes in the Statements of Operations line items will be discussed below.
Operating Revenues. Oil and gas sales accounted for 98% of operating revenues
in 1996 as compared to 59% in 1995. Historically, oil and gas sales have
accounted for in excess of 90% of annual operating revenues. This trend was
interrupted in 1995 by the one time receipt of lease bonuses of $690,000 from
non-producing East Texas minerals.
Oil and gas sales in 1996 were $2,838,091, an amount which was $1,768,043
(165%) greater than in 1995. The following table presents a price and volume
analysis of oil and gas sales for the years ended December 31, 1996 and 1995.
The table does not include an analysis of revenues from miscellaneous oil and
gas products which totaled $18,008 in 1996 and $19,411 in 1995.
<TABLE>
<CAPTION>
Variance
---------------
Production 1996 Price Volume 1995
- ---------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Oil -
Bbls (000 omitted) 44 15 29
$(000 omitted) $ 885 150 247 488
Unit Price $20.08 3.40 16.68
Gas -
MCF (000 omitted) 1,005 635 370
$(000 omitted) $1,935 402 971 562
Unit Price $ 1.92 .40 1.52
</TABLE>
Revenues from oil sales increased $396,208 (81%) to $884,849 in 1996. The
volume of oil sales advanced 14,775 barrels (Bbls) to 44,075 Bbls, an increase
of 50%. The additional volumes contributed $246,352 to oil revenues. The
positive volume variance was the result of an increase in royalty interests
production of 16,287 Bbls to 31,227 Bbls, as offset by a decline in working
interest production of 1,512 Bbls to 12,848 Bbls. Royalty production increased
17,023 Bbls as the result of new production which first came on line in 1996 as
offset by the normal decline of older production. Approximately 16,500 Bbls
($315,000) of new royalty interests production was from the Austin Chalk area
of Texas, which is noted for its rapidly declining production.
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The drop in working interests production was the result of a normal decline in
older producing properties of 4,536 Bbls as offset by 3,024 Bbls of new
production which came on line in 1996.
The average price received for oil production advanced to $20.08 per Bbl in
1996, an increase of $3.40 per Bbl from 1995 and resulted in a $149,856
positive price variance. The price increase was the result of favorable market
conditions over which the Company has no control.
Revenues from natural gas sales increased $1,373,239 (244%) to $1,935,234 in
1996. Natural gas volume increased 635,872 thousand cubic feet (MCF) to
1,005,411 MCF resulting in a positive volume variance of $971,075. Of the
635,872 MCF volume increase, the #1 Brounkowski, a Robertson County, Texas,
royalty interest which came on line in the fourth quarter of 1995, produced
531,558 MCF, and added $953,888 to revenues. This production was 34% of the
Company's total oil and gas sales in 1996. Natural gas production from older
producing properties declined 17,896 MCF as the result of normal decline and
because of the sale or abandonment of properties which had reached their
economic limit.
The average price received for natural gas production increased $.40 per MCF to
$1.92 resulting in a positive price variance of $402,164. The Company sells
most of its gas on the spot market or has contracts which are based on the spot
market. Sales made under fixed price contracts with terms longer than one year
are insignificant.
Operating Costs and Expenses. Each line item in this category had
significant increases from 1995. In summary, the increases resulted for the
most part from additional costs of oil and gas sales, more exploration
activity, an impairment loss resulting from a change in an accounting principle
and legal fees related to a quiet title action.
Production Costs. The $88,128 (29%) increase was, for the most part, the
result of an increase in gross production tax of $70,183 (110%) and
transportation expense of $67,882 (1300%) as offset by a decrease in lease
operating expenses of $44,896 (19%). The gross production tax is based on a
percentage of gross revenues and varies as the related oil and gas revenues
increase or decrease; however, a significant amount of the additional 1996
Texas royalty production qualified for state incentives that reduced or
eliminated the tax resulting in a smaller overall increase. The additional
transportation expense was almost totally related to the #1 Brounkowski
discussed above under the sub-heading "Operating Revenues". The decline in
lease operating expense resulted to a significant degree from the sale or
retirement of several high cost producing properties in late 1995 and early
1996.
Exploration and Development Expense 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. The costs of successful exploratory and development drilling are
capitalized. Total costs of exploration and development, inclusive of
geological and geophysical costs, were $836,390 in 1996 and $354,049 in 1995.
Cost charged to operations were $387,137 in 1996 and $183,409 in 1995,
inclusive of geological and geophysical expense of $157,146 in 1996 and
$112,075 in 1995.
Depreciation, Depletion, Amortization and Valuation Provisions. Major
components are the provision for impairment of non-producing leaseholds,
provision for impairment of long-lived assets, 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
13
<PAGE> 14
the provision is made at the time of impairment. The provision for impairment
was $113,858 in 1996 and $94,747 in 1995.
As discussed in Note 11, to the accompanying financial statements, a change in
an accounting principle first effective for the Company in 1996, requires the
recognition of an impairment loss 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. An
initial review was performed in the first quarter of 1996, and a second review
was done as of year end 1996, resulting in the recognition of an impairment
loss totaling $382,862 for 1996.
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 provisions for depletion and depreciation totaled $221,788 in
1996, a $43,130 (16%) decrease from 1995. The 1996 amount was net of a $63,365
reduction because of the reduced basis of long-lived assets on which an
impairment loss was recognized, as discussed above.
General, Administrative and Other Expenses (G&A). G&A increased $135,370
(22%) to $759,725 in 1996. Numerous variances between the periods occurred in
the detail of expenses included in G&A; however, the most significant overall
increase was in legal fees which increased $114,697 to $187,188. Most of the
legal fee increase was in connection with the quiet title litigation discussed
in Item 3, "Legal Proceedings". Legal fees relating to the quiet title action
were $172,021 in 1996 and $69,880 in 1995.
Other Income, Net. This line item consists of interest and other investment
income as offset by investment losses and various other non-operating income
and expense. Other income, net had an overall increase of $68,441 (32%) to
$281,404 in 1996. A net gain on sale of assets of $73,951, an increase of
$54,696 from 1995, was the most significant increase. For the most part the
gain was from the sale of marginal producing properties. Also of significance
was a $19,869 (14%) increase in interest income and $15,905 (61%) increase in
gain from securities trading and related dividend income. A 49% decrease in
income from equity investments reduced the above by $24,334.
Provisions for (Benefit from) Income Taxes. In 1996, the Company had a
calculated provision for income taxes of $133,824 for an effective tax rate of
14.47%. A deferred tax benefit of $125,627 exceeded current tax expense of
$259,461 by $133,824. In 1995, the calculated benefit from income taxes
resulted because the net decrease in deferred tax liabilities of $67,000
exceeded the current tax expense of $18,747 by $48,253. See Note 6, to the
accompanying financial statements for an analysis of the various components of
income taxes for both 1996 and 1995.
Forward-looking Summary. Management's current estimates for 1997 indicate net
income of approximately $583,000, a $208,000 (26%) decrease from 1996.
Oil and gas sales are estimated at $2,400,000 a $438,000 (15%) decline from
1996 actual.
Working interest production volumes are projected at the volumes estimated
in the January 1, 1997 engineer's reserve report. Average price is assumed
to approximate 1996 actual average price for total working interests sales
of $900,000.
Royalty interests sales are estimated at 1996 actual sales of $2,060,000
reduced by $560,000 to allow for expected production declines in the #1
Brounkowski and the Austin Chalk area of Texas. As a royalty
14
<PAGE> 15
interest owner in the #1 Brounkowski, the Company has limited access to
information required for its engineers to calculate the wells estimated
potential reserves and flow rate. Based upon preliminary raw pressure data
received from the operator, return to the Company's royalty interest over
the remaining life of the well should approximate 975,000 MCF or
$1,950,000 assuming an average price of $2 per MCF. Revenues though 1996
were $954,000. Flow rates have varied over the first year of production
and management does not know the operator's projected rate of production.
Also, the #1 Brounkowski's rate of production is regulated by the state
authorities, as is all production. The Austin Chalk area of Texas is noted
for its rapidly declining production. The information required to compute
meaningful royalty interests reserve estimates is not available to the
Company; however, management's experience in the area has been that about
40% of total reserves are recovered through the first year, another 20% is
recovered in the second year and economic limit is reached in about 5
years. No estimate has been made of the new production which may come on
line in 1997 as a result of the Company's Mineral Property Management,
exploration and development activities.
Lease bonuses and other revenues are estimated at $25,000 for 1997.
Operating costs and expenses are projected at $1,937,000, a $320,000 (14%)
decrease from 1996 actual costs.
Production costs are estimated at $383,000, approximately 1996 actual
costs, because an expected decline in production taxes should be offset by
an increase in lease operating expense as a result of new working interest
production which came on line in the last quarter of 1996.
Exploration and development costs are estimated at $367,000; however,
currently planned exploration and development activity is estimated to
cost $1,068,000. It is possible that almost none or all of the $1,068,000
could be charged to operations depending upon the results of drilling and
management's evaluation of the prospects.
Depreciation, depletion and amortization are projected at $500,000, a
$223,000 decline from 1996, because it is estimated that any additional
provision for impairment of long-lived assets will be significantly less
than the $383,000 initially recorded in 1996.
General, administrative and other expense are estimated at $690,000, a
$70,000 (9%) decrease from 1996, because an expected increase in salaries
and allocated expenses should be less than the decline in legal fees
related to the quiet title action discussed above.
Other income, net, is projected at $250,000, a $31,000 decline from 1996
actual, because a limited amount of asset sales are currently planned for 1997.
The provision for income taxes should approximate $130,000, assuming no change
in deferred income taxes and full utilization of permanent differences between
financial and taxable income.
15
<PAGE> 16
Item 7. Financial Statements.
Index to Financial Statements.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants - Grant Thornton LLP 17
Balance Sheets - December 31, 1996 and 1995 18
Statements of Operations - Years Ended December 31, 1996 and 1995 20
Statement of Stockholders' Equity - December 31, 1996 and 1995 21
Statements of Cash Flow - Years Ended December 31, 1996 and 1995 22
Notes to Financial Statements 24
Unaudited Supplemental Financial Information 32
</TABLE>
16
<PAGE> 17
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, 1996 and 1995, 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, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 11 to the financial statements, the Company changed its
method of accounting for impairment of long-lived assets.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 15, 1997
17
<PAGE> 18
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents (Note 2) $ 385,136 $ 175,014
Available for Sale Securities (Notes 2 & 5) 2,942,004 2,689,546
Trading Securities (Notes 2 & 5) 414,751 372,705
Receivables 309,147 154,012
Prepayments & Deferred Income Taxes 5,625 8,577
---------- ----------
4,056,663 3,399,854
---------- ----------
Investments:
Partnership and Limited
Liability Companies (Note 2) 448,908 495,379
Other 16,230 11,430
---------- ----------
465,138 506,809
---------- ----------
Property, Plant & Equipment (Notes 2 & 11):
Oil & Gas Properties, at Cost Based on the
Successful Efforts Method of Accounting
Unproved Properties 543,454 488,859
Proved Properties 4,704,113 4,660,881
---------- ----------
5,247,567 5,149,740
Less - Valuation Allowance and Accumulated
Depreciation, Depletion & Amortization 3,399,478 3,270,087
---------- ----------
1,848,089 1,879,653
---------- ----------
Other Property & Equipment, at Cost 322,398 323,136
Less - Accumulated Depreciation & Amortization 173,190 176,460
---------- ----------
149,208 146,676
---------- ----------
1,997,297 2,026,329
---------- ----------
Other Assets 344,518 267,089
---------- ----------
$6,863,616 $6,200,081
========== ==========
</TABLE>
(continued)
See Accompanying Notes
18
<PAGE> 19
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
(concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts Payable $ 25,342 $ 86,229
Income Taxes Payable 187,272 16,280
Other Current Liabilities
Gas Balancing Commitment 49,333 53,401
Other 11,502 10,000
---------- ----------
273,449 165,910
---------- ----------
Dividends Payable (Note 3) 128,474 119,277
---------- ----------
Deferred Income Taxes (Notes 2 & 6) -- 54,864
---------- ----------
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 6,475,980 5,854,105
---------- ----------
6,633,348 6,011,473
Less - Treasury Stock at Cost 171,655 151,443
---------- ----------
6,461,693 5,860,030
---------- ----------
$6,863,616 $6,200,081
========== ==========
</TABLE>
See Accompanying Notes
19
<PAGE> 20
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Operating Revenues:
Oil & Gas Sales $ 2,838,091 $ 1,070,048
Lease Bonuses & Other 63,217 738,870
----------- -----------
2,901,308 1,808,918
----------- -----------
Operating Costs and Expenses:
Production 387,750 299,622
Exploration and Development 387,137 183,409
Depreciation, Depletion, Amortization
& Valuation Provisions 722,888 369,711
General, Administrative and Other 759,725 624,355
----------- -----------
2,257,500 1,477,097
----------- -----------
Income from Operations 643,808 331,821
Other Income, Net 281,404 212,963
----------- -----------
Income before Income Taxes 925,212 544,784
Provisions for (Benefit from)
Income Taxes (Notes 2 & 6) 133,834 (48,253)
----------- -----------
Net Income $ 791,378 $ 593,037
=========== ===========
Per Share Data (Note 2):
Net Income $ 4.68 $ 3.50
=========== ===========
Cash Dividends $ 1.00 $ 1.00
=========== ===========
Weighted Average Shares Outstanding 169,216 169,679
=========== ===========
</TABLE>
See Accompanying Notes
20
<PAGE> 21
THE RESERVE PETROLEUM COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 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)
----------- ----------- ----------- -----------
Balance at December 31, 1995 92,368 65,000 5,854,105 (151,443)
Net Income -- -- 791,378 --
Cash Dividends on Common Stock -- -- (169,503) --
Purchase of Treasury Stock -- -- -- (20,212)
----------- ----------- ----------- -----------
Balance at December 31, 1996 $ 92,368 $ 65,000 $ 6,475,980 $ (171,655)
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes
21
<PAGE> 22
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Cash Received-
Oil and Gas Sales $ 2,646,288 $ 1,080,929
Lease Bonuses and Rentals 7,627 695,708
Agricultural Rentals 7,643 5,100
Cash Paid-
Production Costs (388,050) (312,404)
Exploration and Development Expenses (403,558) (172,023)
General Suppliers, Employees and Taxes,
Other than Income (790,886) (617,251)
Interest Received 174,089 119,197
Interest Paid (11,250) (11,392)
Dividends Received on Trading
Securities 6,057 9,254
Purchase of Trading Securities (1,868,703) (1,159,613)
Sale of Trading Securities 1,862,712 1,150,372
Income Taxes Paid (88,469) (13,018)
Receipts of Refundable Income Taxes -- 12,000
----------- -----------
Net Cash Provided by Operating
Activities 1,153,500 786,859
----------- -----------
Cash Flows from Investing Activities:
Sale and Maturity of Available for
Sale Securities 1,665,332 442,099
Purchase of Available for Sale Securities (1,917,790) (675,080)
Property Dispositions 191,867 31,171
Property Additions (781,067) (351,287)
Cash Distributions from Equity Investments 83,600 22,500
Cash Payments for Equity Investments (4,800) (20,859)
----------- -----------
Net Cash Applied to Investing Activities $ (762,858) $ (551,456)
----------- -----------
</TABLE>
(Continued)
See Accompanying Notes
22
<PAGE> 23
(Concluded)
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows Applied to Financing Activities:
Dividends Paid to Shareholders $ (160,306) $ (165,568)
Purchase of Treasury Stock (20,214) (7,385)
----------- -----------
Total Cash Applied to Financing Activities (180,520) (172,953)
----------- -----------
Net Change in Cash and Cash Equivalents 210,122 62,450
Cash and Cash Equivalents at Beginning of Year 175,014 112,564
----------- -----------
Cash and Cash Equivalents at End of Year $ 385,136 $ 175,014
=========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net Income $ 791,378 $ 593,037
Net Income Increased (Decreased) by -
Net Change in -
Unrealized Holding (Gains) Losses
on Trading Securities (13,616) (25,808)
Accounts Receivable (172,618) 14,215
Interest and Dividends Receivable 11,543 (22,579)
Income Taxes Refundable/Payable 170,992 17,729
Accounts Payable (31,093) 7,077
Trading Securities (27,224) (82)
Gain from Equity Investments (25,108) (49,822)
Gain on Disposition of Property
& Equipment (128,425) (33,380)
Depreciation, Depletion, Amortization
and Valuation Provisions 722,888 369,711
Change in Cash Value of Officers'
Life Insurance (15,522) (11,782)
Change in Deferred Taxes (125,627) (67,000)
Gas Balancing Liabilities (4,068) (4,457)
----------- -----------
Net Cash Provided by Operating Activities $ 1,153,500 $ 786,859
=========== ===========
</TABLE>
See Accompanying Notes
23
<PAGE> 24
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
Impairment losses are 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. See Note 11 for discussion of change in accounting
principle
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, when material, reported in a separate
component of stockholders' equity, net of tax effects.
24
<PAGE> 25
Cash & 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.
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 1996 the Company
had two purchasers whose purchases were in excess of 10% of total oil and
gas sales. One purchased $970,972, or 34%, and the other $392,246, or 14%
of total oil and gas sales. In 1995, a different purchaser made purchases
of $175,143, or 16.37% 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 had no
receipts of comparable amounts from lease bonuses in 1996.
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.
Note 3 - DIVIDENDS PAYABLE
Dividends payable include amounts that are due to stockholders whom the
Company has been unable to locate and uncashed dividend checks of other
stockholders.
25
<PAGE> 26
Note 4 - COMMON STOCK
The following table summarizes the changes in common stock issued and
outstanding:
<TABLE>
<CAPTION>
Shares of
Shares Treasury Shares
Issued Stock Outstanding
---------- ---------- ----------
<S> <C> <C> <C>
January 1, 1995, $.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
Purchase of stock -- 1,097.00 (1,097.00)
---------- ---------- ----------
December 31, 1996, $.50
par value stock, 400,000
shares authorized 184,735.28 16,256.55 168,478.73
========== ========== ==========
</TABLE>
Note 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
At December 31, 1996 and 1995, 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. At December
31, 1996, all available for sale securities mature prior to October 1,
1997. There were no sales of securities prior to maturity in 1996 and
1995.
As to the trading securities, the change in unrealized holding gains
included in earnings was $13,616 for 1996 and $25,808 for 1995.
26
<PAGE> 27
Note 6 - INCOME TAXES
Components of deferred taxes follow:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Assets
Leasehold Costs $ 334,276 $ 210,995
Gas Balancing Receivable 52,379 52,379
Marketable Securities -- 2,952
Lease and Well Equipment 512 854
Charitable Contributions -- 2,725
Long-Lived Asset Impairment 103,513 --
Capital Loss Carryforward -- 5,821
---------- ----------
490,680 275,726
Valuation Allowance -- --
---------- ----------
490,680 275,726
---------- ----------
Liabilities
Marketable Securities 1,502 --
Intangible Development Costs 415,463 327,638
---------- ----------
416,965 327,638
---------- ----------
Net Deferred Tax Asset (Liability) $ 73,715 $ (51,912)
========== ==========
Valuation Allowance Decrease for the Year $ -- $ 66,133
========== ==========
</TABLE>
The following table summarizes the current and deferred portions of income
tax expense.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Current Tax Expense:
Federal $ 259,461 $ 18,747
State -- --
---------- ----------
259,461 18,747
Deferred Benefit (125,627) (67,000)
---------- ----------
Total Provision (Benefit) $ 133,834 $ (48,253)
========== ==========
</TABLE>
27
<PAGE> 28
The total provision for (benefit from) income tax expressed as a
percentage of income before income tax was 14.47% in 1996 and (8.86%) in
1995. These amounts differ from the amounts computed by applying the
statutory US Federal income tax rate of 35% for 1996 and 1995 to income
before income tax as summarized in the following reconciliation:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Computed Federal Tax
Provision $ 323,824 $ 190,674
Increase (Decrease) in Tax From:
Allowable Depletion in Excess of
Depletion for Financial Statements (176,212) (140,852)
Change in Valuation Allowance -- (66,133)
Non-conventional Fuel Credit (12,684) (11,668)
Corporate Graduated Tax Rate
Structure (3,621) (7,282)
Dividend Received Deduction (1,779) (2,342)
Change in Prior Year Estimates -- (15,445)
Other 4,306 4,795
---------- ----------
Provision for (Benefit from) Income Tax $ 133,834 $ (48,253)
========== ==========
Effective Tax Rate 14.47% (8.86)%
========== ==========
</TABLE>
28
<PAGE> 29
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 $398,297 and $438,787, at December 31, 1996 and
1995, respectively, and its net income (loss) for the periods then ended
were $ 4,510 and ($8,126).
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
$875,454 at December 31, 1996. 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 $26,006 and $26,015, for the
years ended December 31, 1996 and 1995, 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, 1996, the Company's net equity
in the LLC totaled $224,748, ($254,535 at December 31, 1995).
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, 1996, the Company's net
equity in the limited liability company was $75,032, compared to $76,232
at December 31, 1995.
29
<PAGE> 30
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:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Acquisition of Properties
Unproved $306,454 $253,031
Proved -- --
Exploration Costs $706,429 $324,238
Development Costs $129,961 $ 29,811
</TABLE>
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. Following a jury trial held in August, 1996, a judgment was entered
for the Company. Some defendants have perfected the right to appeal by
posting a cost bond. The Company does not know when the appellate
proceedings will be completed.
Approximately $850,000 of proceeds from oil and gas sales are held in
suspense by the unit operator. These proceeds will be recorded as revenue
by the Company when released by the unit operator. The Company has
expended approximately $438,000 in drilling, completion and operating
costs for these wells of which $230,942 was included in the Company's net
investment in oil and gas properties at December 31, 1996.
Note 10 - FINANCIAL INSTRUMENTS
The following table includes various estimated fair value information as
of December 31, 1996 and 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.
30
<PAGE> 31
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:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets
Cash and Cash Equivalents $ 385,136 $ 385,136 $ 175,014 $ 175,014
Available for Sale Securities 2,942,004 2,942,004 2,689,546 2,689,546
Trading Securities 414,751 414,751 372,705 372,705
Financial Liabilities
Dividends Payable (138,474) (138,474) (129,277) (129,277)
</TABLE>
Note 11 - CHANGE IN ACCOUNTING PRINCIPLE
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Standards 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 statement is
effective for fiscal years beginning after December 15, 1995, and the
Company adopted the Statement in the first quarter of 1996.
As a result of this change in accounting principle, certain oil and gas
producing properties are deemed to be impaired because the assets,
evaluated on a property-by-property basis, are not expected to recover
their entire carrying value through future cash flows. An impairment loss
totaling $382,862 is included in the Statement of Operations for the year
ended December 31, 1996, in the line item, Depreciation, Depletion,
Amortization and Valuation Provisions. The estimated discounted future net
cash flows from the impaired properties were considered to be the fair
value of the properties.
31
<PAGE> 32
UNAUDITED SUPPLEMENTAL FINANCIAL INFORMATION
32
<PAGE> 33
SUPPLEMENTAL SCHEDULE 1
THE RESERVE PETROLEUM COMPANY
WORKING INTERESTS RESERVE QUANTITY INFORMATION
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Oil & Natural Gas Liquids (Bbls)
Proved Developed and
Undeveloped Reserves
Beginning of Year 78,714 76,819
Revisions of Previous Estimates (16,580) (12,911)
Extensions and Discoveries 29,456 29,166
Production (12,848) (14,360)
Sale of Reserves in Place (6,094) --
---------- ----------
End of Year 72,648 78,714
========== ==========
Proved Developed Reserves
Beginning of Year 78,714 76,819
End of Year 72,648 78,714
Gas (MCF)
Proved Developed and Undeveloped
Reserves Beginning of Year 1,371,984 1,537,949
Revisions of Previous Estimates 195,170 3,602
Extensions and Discoveries 860,631 52,256
Production (248,132) (221,823)
Sale of Reserves in Place (81,767) --
---------- ----------
End of Year 2,097,886 1,371,984
========== ==========
Proved Developed Reserves
Beginning of Year 1,371,984 1,537,949
End of Year 2,097,886 1,371,984
</TABLE>
(continued)
See notes on next page
33
<PAGE> 34
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 31,227 Bbls of oil and
757,279 MCF of gas for the year ended December 31, 1996, and
14,940 Bbls of oil and 147,716 MCF of gas for the year ended
December 31, 1995.
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, 1996 and 1995. 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.
34
<PAGE> 35
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)
<TABLE>
<CAPTION>
At December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Future Cash Inflows $ 8,277,768 $ 3,640,464
Future Production and
Development Costs (1,735,509) (1,447,683)
Future Income Tax Expense (1,888,329) (553,158)
------------ ------------
Future Net Cash Flows 4,653,930 1,639,623
10% Annual Discount for
Estimated Timing of Cash Flows (1,360,964) (442,519)
------------ ------------
Standardized Measure of Discounted
Future Net Cash Flows $ 3,292,966 $ 1,197,104
============ ============
</TABLE>
Estimates of future net cash flows from the Company's proved working
interests 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.
35
<PAGE> 36
SUPPLEMENTAL SCHEDULE 3
THE RESERVE PETROLEUM COMPANY
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOW FROM PROVED WORKING INTERESTS RESERVE QUANTITIES
(Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Standardized Measure,
Beginning of Year $ 1,197,104 $ 1,217,541
Sales and Transfers, Net of
Production Costs (509,992) (279,677)
Net Change in Sales and Transfer
Prices, Net of Production Costs 1,320,837 (188,640)
Extensions, Discoveries and Improved
Recoveries, Net of Future Production
and Development Costs 2,150,070 296,452
Sale of Reserves in Place (175,740) --
Revisions of Quantity Estimates 311,891 (30,277)
Accretion of Discount 160,091 177,702
Net Change in Income Taxes (936,909) 19,126
Changes in Production Rates
(Timing) and Other (224,386) (15,123)
------------ ------------
Standardized Measure,
End of Year $ 3,292,966 $ 1,197,104
============ ============
</TABLE>
36
<PAGE> 37
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 7, 1997 in
connection with its annual stockholders' meeting to be held on May 6, 1997.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following documents are exhibits to this Form 10-KSB.
<TABLE>
<CAPTION>
Exhibit S.E.C. Exhibit
Reference Description Report (Date) Number Page
- --------- ----------- ------------- ------ ----
<S> <C> <C> <C> <C>
3.1 Restated Certificate of
Incorporation dated
November 1, 1988 10-KSB (12/96) 3.1 39
3.2 By-Laws
dated November 1, 1988 10-KSB (12/96) 3.2 48
27 Financial Data Schedule 10-KSB (12/96) 27 58
</TABLE>
(b). Reports on Form 8-K.
No 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.
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE RESERVE PETROLEUM COMPANY
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 24, 1997
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 24, 1997 March 24, 1997
ROBERT L. SAVAGE MYRA D. RALSTON
- ---------------------------------- -------------------------------
Robert L. Savage (Director) Myra D. Ralston (Director)
March 24, 1997 March 24, 1997
38
