SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-8157
THE RESERVE PETROLEUM COMPANY
(Exact name of small business issuer as specified 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 of principal executive offices)
(405)848-7551
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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
As of November 11, 1998, 167,767.73 shares of the Registrant's $.50 par value
common stock were outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE>
18
PART I
FINANCIAL INFORMATION
<PAGE>
THE RESERVE PETROLEUM COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 251,451 $ 313,540
Available for Sale Securities 3,380,107 3,306,740
Trading Securities 443,040 447,266
Receivables 485,628 278,741
Prepaid and Refundable Income Taxes 36,224 75,424
Prepayments and Deferred Income Taxes 11,137 5,625
------------- -------------
4,607,587 4,427,336
------------- -------------
Investments:
Partnership and Limited Liability
Companies 449,162 490,587
Other 16,230 16,230
------------- -------------
465,392 506,817
------------- -------------
Property, Plant & Equipment
Oil & Gas Properties, at Cost Based
on the Successful Efforts Method
of Accounting
Unproved Properties 780,600 597,284
Proved Properties 4,309,412 4,228,063
------------- -------------
5,090,012 4,825,347
Less - Valuation Allowance and
Accumulated Depreciation, Depletion
& Amortization 3,557,064 3,427,157
------------- -------------
1,532,948 1,398,190
------------- -------------
Other Property & Equipment, at Cost 324,104 324,104
Less - Accumulated Depreciation &
Amortization 176,693 169,195
------------- -------------
147,411 154,909
------------- -------------
1,680,359 1,553,099
------------- -------------
Other Assets 527,071 478,137
------------- -------------
$ 7,280,409 $ 6,965,389
============= =============
</TABLE>
(continued)
See Accompanying Notes
<PAGE>
THE RESERVE PETROLEUM COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
Current Liabilities:
<S> <C> <C>
Accounts Payable $ 146,026 $ 93,044
Other Current Liabilities
Gas Balancing Commitment 45,344 45,344
Other 10,000 13,741
------------- -------------
201,370 152,129
------------- -------------
Dividends Payable 138,662 132,094
------------- -------------
Commitments & Contingencies (Note 2)
Stockholders' Equity
Common Stock 92,368 92,368
Additional Paid-in Capital 65,000 65,000
Retained Earnings 6,968,504 6,698,773
------------- -------------
7,125,872 6,856,141
Less - Treasury Stock, at Cost 185,495 174,975
------------- -------------
6,940,377 6,681,166
------------- -------------
$ 7,280,409 $ 6,965,389
============= =============
</TABLE>
See Accompanying Notes
<PAGE>
THE RESERVE PETROLEUM COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Operating Revenues:
<S> <C> <C> <C> <C>
Oil & Gas Sales $ 465,976 $ 511,397 $ 1,416,341 $ 2,034,215
Oil & Gas Prospects
and Other 33,353 2,714 34,537 12,984
------------ ------------ ------------ ------------
499,329 514,111 1,450,878 2,047,199
------------ ------------ ------------ ------------
Operating Costs
& Expenses:
Production 85,998 84,135 276,407 264,238
Exploration and
Development 63,395 110,287 96,951 581,640
Depreciation,
Depletion,
Amortization and
Valuation
Provisions 77,884 114,453 196,169 415,879
General,
Administrative
and Other 159,239 155,696 490,627 544,381
------------ ------------ ------------ ------------
386,516 464,571 1,060,154 1,806,138
------------ ------------ ------------ ------------
Income From
Operations 112,813 49,540 390,724 241,061
Other Income, Net 37,757 141,982 171,552 266,321
------------ ------------ ------------ ------------
Income Before
Income Taxes 150,570 191,522 562,276 507,382
Provision For
Income Taxes 6,300 70,939 124,637 109,406
------------ ------------ ------------ ------------
Net Income $ 144,270 $ 120,583 $ 437,639 $ 397,976
============ ============ ============ ============
Per Share Data:
Net Income $ .86 $ .72 $ 2.60 $ 2.36
Cash Dividends $ ---- $ --- $ 1.00 $ 1.00
============ ============ ============ ============
Weighted Average
Shares
Outstanding 167,787 168,394 168,007 168,434
============ ============ ============ ============
</TABLE>
See Accompanying Notes
<PAGE>
THE RESERVE PETROLEUM COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
Net Cash Provided by
<S> <C> <C>
Operating Activities $ 375,650 $ 658,148
------------ ------------
Cash Flows from Investing Activities:
Available for Sale Securities -
Sales 439,765 355,291
Purchases (513,131) (708,908)
Cash Distributions from Equity Investments 84,000 99,000
Cash Payments for Equity Investments ---- (6,000)
Property Dispositions 13,931 27,187
Property Additions (290,442) (481,684)
------------ ------------
Net Cash Applied to Investing Activities (265,877) (715,114)
------------ ------------
Cash Flows from Financing Activities:
Payment of Dividends (161,342) (161,243)
Purchase of Treasury Stock (10,520) (3,000)
------------ ------------
Net Cash Applied to Financing Activities (171,862) (164,243)
------------ ------------
Net Change in Cash and
Cash Equivalents (62,089) (221,209)
Cash and Cash Equivalents,
Beginning of Period 313,540 385,136
------------ ------------
Cash and Cash Equivalents,
End of Period $ 251,451 $ 163,927
============ ============
Supplemental Disclosures of
Cash Flow Information:
Cash Paid during the Periods For:
Interest $ 11,250 $ 3,750
Income Taxes $ 120,056 $ 370,000
</TABLE>
See Accompanying Notes
<PAGE>
RESERVE PETROLEUM COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
Note 1 - ADJUSTMENTS
In the opinion of Management, the accompanying financial statements reflect all
adjustments which are necessary for a fair statement of the results for the
interim periods presented.
Note 2 - MATERIAL CONTINGENCIES.
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 in favor of the
Company on all its claims. The same defendants appealed the judgement to the
Texas Court of Appeals. On February 11, 1998, the appellate court affirmed the
judgement in all respects as to the issues affecting the Company's mineral
interests, but denied recovery of attorney's fees awarded by the trial court. On
April 1, 1998, the same defendants filed a petition for review in the Supreme
Court of the State of Texas. On October 29, 1998, the Supreme Court of Texas
denied the petition for review. The defendants have until mid-November, 1998, to
file a motion for rehearing. Approximately $854,000 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 $451,000 drilling, completion and operating costs for
these wells of which $184,311 was included in the Company's net investment in
oil and gas properties at September 30, 1998.
An action was filed in the District Court of Robertson County, Texas, seeking a
declaration that the Plaintiff owns an additional interest in the Brounkowski
Gas Unit. The Company was added as a Defendant in this action in December, 1997,
because it owns minerals included in the Brounkowski Unit. On September 3, 1998,
a Motion of Non-Suit filed by the Plaintiff was heard in the District Court of
Robertson County, Texas. The presiding judge executed an order of Non-Suit, and
on October 23,1998, the operator of the Brounkowski Unit released all the funds
held in escrow for the Company.
<PAGE>
THE RESERVE PETROLEUM COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1998
(Unaudited)
The discussion and analysis of financial condition and results of operations
should be read with reference to a similar discussion in the Company's December
31, 1997, Form 10-KSB filed with the Securities and Exchange Commission, as well
as the condensed financial statements included in this Form 10-QSB.
1. LIQUIDITY AND CAPITAL RESOURCES.
The Company's net working capital at September 30, 1998, was $4,406,217, a
$131,010 increase from December 31, 1997. For the nine months ended September
30, 1998, cash flow from operations, exclusive of exploration and development
costs charged to operations, was $430,960, a decrease of $807,119 from the
comparable period in 1997. For the most part, the decline was the result of
reduced cash receipts from oil and gas sales, including the suspension of
payment for production from the #1 Brounkowski Gas Unit until the end of
October, 1998, as discussed in Note 2 to the accompanying condensed financial
statements.
As noted below, the price received for oil and gas sales has fallen
significantly. As a result, management has deferred planned exploration and
development activities. Through September 30 1998, cash applied to such
activities was $345,950. Current estimates indicate such expenditures for the
remaining three months of the year should approximate $200,000.
2. MATERIAL CHANGES IN RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30,
1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997.
OPERATING REVENUES. Revenues from oil and gas sales declined $617,874 (30%) to
$1,416,341 as a result of the decrease in oil sales of $234,168 (41%) to
$336,371 and a decrease in gas sales of $383,706 (26%) to $1,070,611. The
decrease in oil sales happened because of a negative volume variance of $54,708
and a negative price variance of $179,460. The volume of oil sales fell 2,711
barrels (Bbls) to 25,681 Bbls as the net result of a decline in production from
older properties of 7,590 Bbls as offset by 4,879 Bbls produced from properties
which first came on line after September 30, 1997. Of the 7,590 Bbl decline,
5,964 Bbls were from properties in the Austin Chalk area of Texas, which are
noted for their rapidly declining production. The negative price variance
resulted because the average unit price fell $7.08 per Bbl to $13.10.
Revenues from gas sales fell as a combined result of a negative volume variance
of $197,983 and a negative price variance of $185,723. The volume of gas sales
decreased 83,891 thousand cubic feet (MCF), or 14% to 533,347 MCF. An increase
of 27,505 MCF from new production was offset 111,396 MCF by a decrease in
production of older wells. Of the 111,396 MCF decrease, 60,989 MCF resulted from
a drop in production from the #1 Brounkowski Gas Unit. The negative price
variance resulted because the average price per MCF fell $.35 to $2.01 per MCF.
<PAGE>
OPERATING COSTS AND EXPENSES. Exploration and development costs incurred in 1998
were $422,440 of which $96,951 was charged to expense, and the remaining
$325,489 recorded as an asset. The foregoing compares to $1,137,718 incurred in
1997 of which $581,640 was charged to expense, and $556,078 was recorded as an
asset. The decline in total exploration an development costs was $715,278, or
63% of 1997 total costs. For the most part, the decrease occurred because
projects were deferred as a result of depressed product prices.
Depreciation, Depletion, Amortization and Valuation Provisions (DD&A) was
$196,169 in 1998, a $219,710 (53%) decline from 1997. To a great extent, the
decline resulted because writedowns and accelerated amortization in 1997 caused
some assets to have smaller depletable basis. Also of significance, less volume
of oil and gas production resulted in a decline in depreciation and depletion
under the units-of-production method the Company uses.
General, administrative and other expenses decreased $53,754 (10%) to $490,627.
To a significant degree, the decrease resulted because of reduced legal fees in
connection with the Leon County, Texas quiet title action discussed in Note 2,
to the condensed financial statements, as well as a reduction in property and
franchise taxes paid to the State of Texas.
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 decrease of $94,769 (36%) to $171,552.
Items of significance include a decrease in estimated income of equity
investments of $57,238 and a decrease in realized and unrealized gains from
trading securities of $40,557.
PROVISIONS FOR INCOME TAXES. The provision for income taxes increased $15,231 to
$124,637 from $109,406 in 1997. In 1998, the Company had a calculated deferred
tax benefit of $34,619 that partially offset a calculated current tax expense of
$159,256. In 1997, the Company had a calculated deferred tax benefit of $6,960
as offset by a calculated current tax expense of $116,366.
3. MATERIAL CHANGES IN RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 1998,
COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1997.
OPERATING REVENUES. Oil and gas sales fell $45,421 (9%) to $465,976 as a $63,001
(46%) decline in oil sales was partially offset by a $17,201 increase in gas
sales. For the most part, the decline in oil sales was caused by a decrease in
average price per barrel received to $11.02 in 1998 from $17.97 in 1997. The
increase in gas sales was, to a great extent, the result of an increase in the
average price per MCF from $2.00 in 1997 to $2.07 in 1998.
OTHER INCOME, NET. A significant amount of the $104,225 decrease in this line
item was caused by a decrease in income from equity investments of $64,083 as
well as a decline of $35,880 in realized and unrealized gains from trading
securities. The decrease in equity investment income resulted because of gains
from real estate sales in the third quarter of 1997 which were not duplicated in
the third quarter of 1998. The decline in gains from trading securities was, for
the most part, the result of recognition of unrealized losses in the third
quarter of 1998.
<PAGE>
PROVISIONS FOR INCOME TAXES. The calculated provision declined $64,639 to
$6,300. The decline was the result of an increase in estimated deferred tax
benefits of $115,563 as offset by an increase in estimated current income taxes
expense of $50,924.
There were no additional material changes between the quarters which were not
discussed in Item 2, above, for the nine months.
4. YEAR 2000 ISSUES.
With respect to its internal system, the Company has reviewed all its
information technology and the review has disclosed no material year 2000
problem. Because of the nature of the Company's business, its non-information
technology systems problems should not be of significance, and reviews to date
have disclosed none. Company personnel will continue to review its internal
system for the purpose of uncovering any problems which have not yet been
detected.
FORWARDLOOKING STATEMENTS. The Company is attempting to determine whether third
parties with which it has significant business relationships have addressed the
potential problems that they may encounter. Response to date gives very limited
or no assurance regarding the year 2000 issue.
All software used by the Company in processing its financial, accounting and
property management information was developed in house by personnel still on
staff. The costs to date and any future costs expected to be incurred to make
the Company's software and internal systems compliant are not expected to have a
material effect on its financial position or results of operations.
Management's review of the Company's year 2000 issues indicate its most likely
reasonable worst case year 2000 scenario as follows:
INTERNAL SYSTEMS. The most likely reasonable worst case scenario would
be the failure of one or, at most, two software modules. The worst case
scenario would be the total failure of the Company's information
technology. In either case, the Company would convert to a manual
system. Review of current activity indicates the Company could convert
to a manual system either totally or partially with little or no
additional costs and minimal loss of efficiency.
THIRD PARTY SYSTEMS. The most likely reasonable worst case scenario
would be a delay in receipt of revenue from oil and gas sales from
several major payors for a period of three to six months. Management
believes its healthy working capital position will allow it to survive
a temporary substantial reduction in cash flow.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27. Financial Data Schedule
(b) No reports on Form 8-K were required to be filed by the Registrant
for the three months ended September 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE RESERVE PETROLEUM COMPANY
-----------------------------
(Registrant)
Date: November 11, 1998 /s/ Mason McLain
-------------------------- ----------------------
Mason McLain
President
Date: November 11, 1998 /s/ Jerry L. Crow
-------------------------- ----------------------
Jerry L. Crow
Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA INFORMATION EXTRACTED FROM THIS
FORM 10-QSB FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 251,451
<SECURITIES> 3,823,147
<RECEIVABLES> 485,628
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,607,587
<PP&E> 5,414,116
<DEPRECIATION> 3,733,757
<TOTAL-ASSETS> 7,280,409
<CURRENT-LIABILITIES> 201,370
<BONDS> 0
0
0
<COMMON> 92,368
<OTHER-SE> 6,848,009
<TOTAL-LIABILITY-AND-EQUITY> 7,280,409
<SALES> 1,416,341
<TOTAL-REVENUES> 1,450,878
<CGS> 0
<TOTAL-COSTS> 276,407
<OTHER-EXPENSES> 293,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 562,276
<INCOME-TAX> 124,637
<INCOME-CONTINUING> 437,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 437,639
<EPS-PRIMARY> 2.600
<EPS-DILUTED> 2.600
</TABLE>
