<PAGE>
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 June 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 (IRS 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 August 10, 1998, 167,786.73 shares of the Registrant's $.50 par
value common stock were outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
PART I
FINANCIAL INFORMATION
<PAGE>
THE RESERVE PETROLEUM COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 198,700 $ 313,540
Available for Sale Securities 3,404,596 3,306,740
Trading Securities 453,853 447,266
Receivables 376,370 278,741
Prepaid & Refundable Income Taxes 33,458 75,424
Prepayments 1,875 5,625
------------ ------------
4,468,852 4,427,336
------------ ------------
Investments:
Partnership and Limited
Liability Companies 470,202 490,587
Other 16,230 16,230
------------ ------------
486,432 506,817
------------ ------------
Property, Plant & Equipment:
Oil & Gas Properties, at Cost Based on the
Successful Efforts Method of Accounting
Unproved Properties 627,897 597,284
Proved Properties 4,307,615 4,228,063
------------ ------------
4,935,512 4,825,347
Less - Valuation Allowance and Accumulated
Depreciation, Depletion & Amortization 3,489,210 3,427,157
------------ ------------
1,446,302 1,398,190
Other Property & Equipment, at Cost 324,104 324,104
Less - Accumulated Depreciation & Amortization 174,194 169,195
------------ ------------
149,910 154,909
------------ ------------
1,596,212 1,553,099
------------ ------------
Other Assets 476,338 478,137
------------ ------------
$ 7,027,834 $ 6,965,389
============ ============
</TABLE>
(continued)
See Accompanying Notes
<PAGE>
THE RESERVE PETROLEUM COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
Current Liabilities:
<S> <C> <C>
Accounts Payable $ 33,995 $ 93,044
Other Current Liabilities
Gas Balancing Commitment 45,344 45,344
Other 13,741 13,741
------------ ------------
93,080 152,129
------------ ------------
Dividends Payable 138,647 132,094
------------ ------------
Commitments & Contingencies (Note 2)
Stockholders' Equity:
Common Stock 92,368 92,368
Additional Paid-in Capital 65,000 65,000
Retained Earnings 6,824,234 6,698,773
------------ ------------
6,981,602 6,856,141
Less - Treasury Stock, at Cost 185,495 174,975
------------ ------------
6,796,107 6,681,166
------------ ------------
$ 7,027,834 $ 6,965,389
============ ============
</TABLE>
See Accompanying Notes
<PAGE>
THE RESERVE PETROLEUM COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Operating Revenues:
<S> <C> <C> <C> <C>
Oil & Gas Sales $ 449,793 $ 570,410 $ 950,365 $ 1,522,818
Prospect Sales & Other 335 6,976 1,183 10,270
------------ ------------ ------------ ------------
450,128 577,386 951,548 1,533,088
------------ ------------ ------------ ------------
Operating Costs & Expense:
Production Costs 100,421 86,289 190,408 180,103
Exploration & Development
Costs 4,714 420,213 33,556 471,354
Depreciation, Depletion,
Amortization &
Valuation Provisions 49,138 210,203 118,285 301,426
General, Administrative
& Other Expenses 154,179 195,448 331,387 388,684
------------ ------------ ------------ ------------
308,452 912,153 673,636 1,341,567
------------ ------------ ------------ ------------
Income (Loss) from
Operations 141,676 (334,767) 277,912 191,521
Other Income, Net 74,966 93,433 133,794 124,339
------------ ------------ ------------ ------------
Income (Loss) Before
Income Taxes 216,642 (241,334) 411,706 315,860
Provision For (Benefit From)
Income Taxes 65,414 (103,233) 118,337 38,467
------------ ------------ ------------ ------------
Net Income (Loss) $ 151,228 $ (138,101) $ 293,369 $ 277,393
============ ============ ============ ============
Per Share Data:
Net Income (Loss) $ .90 $ (.82) $ 1.75 $ 1.65
============ ============ ============ ============
Cash Dividends $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============
Weighted Average Shares
Outstanding 167,930 168,442 168,119 168,454
============ ============ ============ ============
</TABLE>
See Accompanying Notes
<PAGE>
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOW
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 277,899 $ 504,925
------------ ------------
Cash Flows from Investing Activities:
Sale and Maturity of Available
for Sale Securities 236,131 621,529
Purchase of Available for Sale Securities (333,987) (702,136)
Property Dispositions 11,867 24,667
Property Additions (196,374) (333,505)
Cash Distributions from Equity Investments 61,500 19,500
------------ ------------
Net Cash Applied to Investing Activities (220,863) (369,945)
------------ ------------
Cash Flows from Financing Activities:
Payments of Dividends (161,356) (158,116)
Purchase of Treasury Stock (10,520) (800)
------------ ------------
Net Cash Applied to Financing Activities (171,876) (158,916)
------------ ------------
Net Change in Cash and Cash Equivalents (114,840) (23,936)
Cash and Cash Equivalents, Beginning of Period 313,540 385,136
------------ ------------
Cash and Cash Equivalents, End of Period $ 198,700 $ 361,200
============ ============
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Periods For:
Interest $ 3,750 $ 3,750
Income Taxes $ 60,000 $ 310,000
</TABLE>
See Accompanying Notes
<PAGE>
THE RESERVE PETROLEUM COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 1 - ADJUSTMENTS
In the opinion of Management, the accompanying condensed financial
statements reflect all adjustments which are necessary for a fair
statement of the results of 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 entered in favor of the Company on all its claims. The same
defendants appealed the judgment to the Texas Court of Appeals. On
February 11, 1998, the appellate court affirmed the judgment 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. The petition is currently under
consideration. 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 $449,500 in drilling, completion
and operating costs for these wells of which $192,606 was included in the
Company's net investment in oil and gas properties at June 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. Plaintiff does not assert claims directly against the
Company and the information available to the Company at this time appears
to indicate that if the Plaintiff were successful in this action, the
minerals he claims are currently in the name of parties other than the
Company. In February, 1998, the operator suspended payment of proceeds
from gas sales after filing of Plaintiff's amended petition. The
Company's management is taking steps to obtain current payments from the
operator and believe the long-term suspension, if any, will not exceed
10% of the Company's interest in production, or approximately $3,500 per
month. The Company has recorded an estimated 90% of the suspended
proceeds as oil and gas sales for the six months ended June 30, 1998. As
a result, oil and gas sales were increased by $203,288 and net income was
increased by $120,495 ($.72 per share).
<PAGE>
THE RESERVE PETROLEUM COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1998
This discussion and analysis of financial condition and results of
operations should be read with reference to 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
-------------------------------
At June 30, 1998, the Company's net working capital was $4,375,772, a
$100,565 (2%) increase from December 31, 1997. For the six months ended
June 30, 1998, cash flow from operations, exclusive of exploration and
development costs charged to operations, was $311,445, a decrease of
$664,834 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 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 June 30, cash applied
to such activities was $230,167. Current estimates indicate such
expenditures for the remaining six months of the year should
approximate $300,000.
2. Material Changes in Results of Operations Six Months Ended June 30,
-----------------------------------------------------------------------
1998, Compared with Six Months Ended June 30, 1997.
---------------------------------------------------
OPERATING REVENUES. Revenues from oil and gas sales declined $572,453
(38%) to $950,365 as a result of a decrease in oil sales of $173,610
(40%) to $263,220 and a decrease in gas sales of $398,843 (37%) to
$679,886. The decrease in oil sales happened because of a negative
volume variance of $48,023 and a negative price variance of $125,587.
The volume of oil sales fell 2,289 barrels (Bbls) to 18,528 Bbls as the
net result of a decline in production from older properties of 6,502
Bbls as offset by 4,213 Bbls produced from properties which first came
on line after June 30, 1997. Of the 6,502 Bbl decline, 4,582 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 $6.77 per Bbl to $14.21.
Revenues from gas sales fell as a combined result of a negative volume
variance of $213,867 and a negative price variance of $184,976. The
volume of gas sales decreased 85,206 thousand cubic feet (MCF), or 20%,
to 342,613 MCF. An increase of 18,389 MCF from new production was
offset 103,595 MCF by a decrease in production of older wells. Of the
103,595 MCF decrease, 66,488 MCF resulted from a drop in production
from the #1 Brounkowski Gas Unit. See Note 2 to the accompanying
condensed financial statements which provides information regarding the
operator's suspension of payment of gas runs from the #1 Brounkowski.
The negative price variance resulted because the average price per MCF
fell $.53 to $1.98 per MCF.
<PAGE>
FORWARD-LOOKING STATEMENT. Management expects little or no relief from
depressed oil and gas prices until the fourth quarter when the start of
the heating season should increase demand. Therefore, revenues from oil
and gas sales for the last half of 1998 are likely to be no greater,
and probably less, than said revenues for the first six months. The
above statement does not include amounts that may be recovered from the
Leon County, Texas, quiet title action as discussed in Note 2, to the
accompanying condensed financial statements.
OPERATING EXPENSES. Exploration and development costs incurred in 1998
were $195,877 of which $33,556 was charged to expense, and the
remaining $162,321 recorded as an asset. The foregoing compares to
$625,657 incurred in 1997 of which $471,354 were charged to expense,
and $154,303 were recorded as an asset. The decline in total
exploration and development costs was $429,780, or 69% of 1997 total
costs of $625,657. 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 $118,285 in 1998, a $183,141 (61%) decline from 1997. To a great
extent, the decline resulted because writedowns and accelerated
amortization in 1997 caused some assets to have a 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 $57,297 (15%) to
$331,387. 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.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$79,870 to $118,337 from $38,467 in 1997. In 1998, the Company had a
calculated deferred tax expense of $16,371 in addition to a calculated
current tax expense of $101,966. In 1997, the Company had a calculated
deferred tax benefit of $71,533 as offset by a calculated current tax
expense of $110,000.
3. Material Changes in Results of Operations Three Months Ended June 30,
-----------------------------------------------------------------------
1998, Compared with Three Months Ended June 30, 1997.
-----------------------------------------------------
OPERATING REVENUES. Oil and gas sales decreased $120,617 (21%) to
$449,793. Oil sales fell $95,904 (42%) to $131,121 from $227,025 as a
result of both lower volume and price. Oil volume declined 1,702 Bbls
to 9,776 Bbls resulting in a negative volume variance of $33,666. The
average price received for oil sales dropped $6.37 per Bbl to $13.41
creating a negative price variance of $62,238.
Sales of gas declined $24,577 (7%) to $315,669. The volume of sales
decreased 39,696 MCF to 158,056 MCF for a negative volume variance of
$68,277. The negative volume variance was partially offset by a
positive price variance as the average price received for gas sales
increased $.28 per MCF to $2. The increase resulted in a $43,700
increase in sales.
OPERATING COSTS AND EXPENSE. Production costs increased $14,421 (16%)
to $100,421. For the most part, it was the result of an increase in
lease operating expense of $22,497 (52%). Although a portion of the
lease operating expense increase was related to new producing
properties, most of the increase resulted from downhole maintenance and
repair of existing wells.
PROVISION FOR INCOME TAXES. In 1998, the Company had a calculated
provision for income taxes of $65,414 because of net deferred tax
expense of $13,702 plus current tax expense of $51,712. In 1997, the
Company had a calculated benefit from income tax of $103,233 as the
result of a deferred tax benefit of $93,233 plus a current tax benefit
of $10,000.
There were no other material changes between quarters which were not
discussed in item 2, above for the six months.
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. The annual
meeting of stockholders' was held on Tuesday, May 5, 1998. A brief
description of each matter voted on at the meeting is given in the
paragraphs below.
The registrant's board of directors was re-elected in its entirety.
A summary of voting by individual directors follows:
<TABLE>
<CAPTION>
RESULTS OF VOTE
---------------
BY PROXY IN PERSON
---------- -----------
WITHHELD WITHHELD
FOR AUTHORITY FOR AUTHORITY
------- ----------- ------- ----------
<S> <C> <C> <C> <C>
MASON McLAIN 58110 567 50,719 ---
R.T. McLAIN 57998 679 50,719 ---
LOYD TERRY 58129 548 50,719 ---
ROBERT SAVAGE 58145 532 50,719 ---
MARVIN E. HARRIS 58101 576 50,719 ---
JERRY L. CROW 58149 528 50,719 ---
WILLIAM (BILL) SMITH 58147 530 50,719 ---
</TABLE>
The stockholders approved all actions of the directors since the
stockholders' annual meeting on Tuesday May 6, 1997. The stockholders cast
109,396 votes for the proposal. There were no abstentions, broker
non-votes or votes cast against the proposal.
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)
/s/ Mason McLain
------------------------------
Date: August 12, 1998 Mason McLain, President
------------------------
/s/ Jerry L. Crow
------------------------------
Date: August 12, 1998 Jerry L. Crow,
------------------------- Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS FORM
10-QSB FOR THE SIX MONTHS ENDING JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCING TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 198,700
<SECURITIES> 3,858,449
<RECEIVABLES> 376,370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,468,852
<PP&E> 5,259,616
<DEPRECIATION> 3,663,404
<TOTAL-ASSETS> 7,027,834
<CURRENT-LIABILITIES> 93,080
<BONDS> 0
0
0
<COMMON> 92,368
<OTHER-SE> 6,703,739
<TOTAL-LIABILITY-AND-EQUITY> 7,027,834
<SALES> 950,365
<TOTAL-REVENUES> 951,548
<CGS> 0
<TOTAL-COSTS> 190,408
<OTHER-EXPENSES> 151,841
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 411,706
<INCOME-TAX> 118,337
<INCOME-CONTINUING> 293,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293,369
<EPS-PRIMARY> 1.750
<EPS-DILUTED> 1.750
</TABLE>
