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, 1999
[ ] 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 (IRS Employer
incorporation or organization) identification number)
6801 N. Broadway, Suite 300,
Oklahoma City, Oklahoma 73116-9092
--------------------------------------------------
(Address of 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 disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Issuer's revenues for the fiscal year ended December 31, 1999 were $1,573,549.
As of March 21, 2000, there were 167,609.73 common shares outstanding. The
aggregate market value of the voting stock held by non-affiliates was $3,975,110
as determined by the last reported sale which was February 11, 2000.
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 4, 2000, in connection with its annual stockholders' meeting to
be held on May 2, 2000. Transitional Small Business Disclosure Format (check
one) Yes No X
--- ---
See Exhibit Index on Page 36.
<PAGE>
TABLE OF CONTENTS
Page
----
Forward Looking Statements................................................. 3
PART I
Item 1. Description of Business....................................... 4
Item 2. Description of Properties..................................... 7
Item 3. Legal Proceedings............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........... 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...... 9
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
Item 7. Financial Statements.......................................... 15
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................... 36
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons Compliance with Section 16(a) of the Exchange Act..... 36
Item 10. Executive Compensation........................................ 36
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................... 36
Item 12. Certain Relationships and Related Transactions................ 36
Item 13. Exhibits and Reports on Form 8-K.............................. 36
<PAGE>
Forward Looking Statements.
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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 management believes that the expectations reflected in such
forward looking statements are based on reasonable assumptions, 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 contracts 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.
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 leasehold 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
3
<PAGE>
in a material change in estimated long-lived assets impairment. Depletion
and depreciation of oil and gas properties are computed using the
unitsof-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 substantial contributions to net income. Available for
sale securities and trading securities are used to invest funds until needed
in the Company's capital investing and financing activities. When those
funds are utilized, net income will be materially reduced.
The Company's trading securities consist primarily of equity securities.
These securities are carried at fair value with unrealized gains and losses
included in earnings. The equity securities are traded on various stock
exchanges and/or the NASDAQ and over the counter markets. Therefore, these
securities are market-risk sensitive instruments. The stock market is
subject to wide price swings in short periods of time. Should the stock
market experience a significant down-turn, the Company could have a material
loss from its equity securities.
The Company has equity investments in organizations over which the Company
has limited or no control. These equity investments make substantial
contributions to the Company's net income. The management of these entities
could at any time make decisions in their own best interests which could
materially affect the Company's net income, or the value of the Company's
investments. See Item 1 "Description of Business - Other Business", for
information regarding these equity investments.
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 2000 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, "Description of 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".
4
<PAGE>
Mineral Property Management. The Company owns non-producing mineral interests in
approximately 270,894 gross acres equivalent to 93,718 net acres. These mineral
interests are located in nine states with 57,028 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 1999 $869,757 (57%) of oil and gas sales were
from royalty interests as compared to $1,017,891 (38%) in 1998. For a discussion
and analysis of the decrease in royalty interests production, see Item 6,
subheading, "Operating Revenues". As a result of its mineral ownership, in 1999
the Company had royalty interests in 10 gross (.176 net) wells which were
drilled and completed as producing wells. See the following paragraphs for a
discussion of mineral interests in which the Company chooses to participate as a
working interest owner.
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 1999, the Company drilled no development wells.
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.
In 1999, the Company had fractional interests in eight prospects which were
tested, including two prospects which were in process at December 31, 1998.
One test well on each of two exploratory prospects in which the Company had 27%
working interests in Woodward County, Oklahoma, were in process at December 31,
1998. Subsequent production testing proved the wells were not economic, and both
wells were sold for salvage.
An exploratory well in which the Company had a 30% working interest was drilled
in Major County, Oklahoma, resulting in a marginal gas producer. The prospect is
under evaluation for possible development drilling.
Four Oklahoma exploratory prospects were tested and condemned by drilling one
well on each prospect. The prospects were located in Pontotoc County (5% working
interest), Dewey County (12% working interest), Logan County (29.25% working
5
<PAGE>
interest), and Lincoln County (30% working interest) A Gray County, Texas,
prospect in which the Company has a 5% working interest was tested resulting in
a dry hole. The prospect is under evaluation for possible additional testing.
Customers. In 1999, the Company had two customers whose total purchases were
greater than 10% of revenues from oil and gas sales. The purchases were $277,667
or 18% of total oil and gas sales by one purchaser, and $177,582 or 12% of total
oil and gas sales by the other.
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 developments and Federal and state laws and regulations. Although
released from Federal price controls, interstate sales of natural gas are
subject to regulation by the Federal Energy Regulatory Commission (FERC). Oil
and gas operations are affected by environmental laws and other laws relating to
the petroleum industry and both are affected by constantly changing
administrative regulations. Rates of production of oil and gas have for many
years been subject to a variety of conservation laws and regulations, and the
petroleum industry is frequently affected by changes in the Federal tax laws.
Generally, the respective state regulatory agencies will supervise various
aspects of oil and gas operations within the state and transportation of oil and
gas sold intrastate.
Environmental Protection. The operation of the various producing properties in
which the Company has an interest is subject to Federal, state and local
provisions regulating discharge of materials into the environment, the storage
of oil and gas products as well as the contamination of subsurface formations.
The Company's lease operations and exploratory activity have been and will
continue to be affected by regulation in future periods. However, the known
effect to date has not been material as to capital expenditures, earnings or
industry competitive position nor are estimated expenditures for environmental
compliance expected to be material in the coming year. Such expenditures produce
no increase in productive capacity or revenue and require more of management's
time and attention, a cost which cannot be estimated with any assurance of
certainty.
Other Business.
- --------------
The Company has net equity of $175,577 (unaudited) 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
6
<PAGE>
(unaudited) for the land and building. The Company has its office in the
building under a lease with the partnership. At December 31, 1999, the
partnership had assets in excess of liabilities of $532,047 (unaudited) and had
net income of $79,066 (unaudited) for the year then ended.
The Company has net equity of $166,177 (unaudited) at December 31, 1999, in its
9% interest in an Oklahoma limited liability company (LLC) which owns and is
operating two golf courses in the Oklahoma City metropolitan area. The LLC is
participating in the development of real estate surrounding both golf courses.
The LLC had assets in excess of liabilities of $1,709,264 (unaudited) at
December 31, 1999, and net income of $23,700 (unaudited) for the year then
ended.
The Company has a net equity of $ 73,007 (unaudited) at December 31, 1999 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. The limited liability company had assets in excess of
liabilities of $730,070 (unaudited) at December 31, 1999, and net income of
$405,740 (unaudited) for the year then ended.
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, 1999, 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 1999.
Item 2. Description of Properties.
The Company's principal properties are oil and natural gas properties as
described below.
Oil and Natural Gas Operations.
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Oil and Gas Reserves. Reference is made to the unaudited supplemental financial
information beginning on Page 31 for working interest reserve quantity
information.
Since January 1, 1999, 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 1998 report on Form 10-KSB and Federal income
tax return for the year ended December 31, 1998. 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, 1999, 1998 and 1997. 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>
1999 $16.43 $ 1.94 $17.12 $2.12 $ .86
1998 $12.07 $ 1.86 $17.52 $1.91 $ .49
1997 $19.33 $ 2.32 $20.41 $2.59 $ .76
</TABLE>
7
<PAGE>
The sales price and average production cost per equivalent MCF as shown in the
above schedule are skewed as the result of the 1998 receipt of suspended runs
upon the final judgment in favor of the Company in a Texas quiet title action as
discussed in Note 11, to the accompanying financial statements. Also, see Item
6, under the subheading "Results of Operations - Operating Revenues", for
further analysis.
At December 31, 1999, the Company had working interests in 65 gross (7.2 net)
wells producing primarily gas and/or gas liquids (condensates) and had working
interests in 62 gross (3.4 net) wells producing primarily oil. These interests
were in 19,626 gross (2,137 net) producing acres. These wells include 44 gross
(.32 net) wells associated with secondary recovery projects.
Thirty-two percent, or 8,472 barrels of the Company's oil production during 1999
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 270,894 93,718
Undeveloped Leaseholds 35,735 9,503
</TABLE>
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, 1997 and thereafter, as to net productive and dry exploratory wells
drilled and net productive and dry development wells drilled.
<TABLE>
<CAPTION>
Number of Net Working Interest Wells Drilled
----------------------------------------------
Exploratory Development
------------------- ------------------
Productive Dry Productive Dry
---------- ---- ---------- ---
<S> <C> <C> <C> <C>
1999 .30 1.37 --- ---
1998 --- .62 .18 ---
1997 .66 .74 .24 .17
</TABLE>
Recent Activities. In January, 2000, a McClain County, Oklahoma, exploratory
well in which the Company has an 18% working interest was spudded. At March 15,
2000, the well was awaiting final testing. A Cimarron County, Oklahoma, well in
which the Company has a 28% interest was spudded in February, 2000, and at March
15, 2000, was awaiting a completion attempt.
Item 3. Legal Proceedings.
There are no material pending legal proceedings affecting the Company or any
of its properties.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
8
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PART II
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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 quoted on the OTC Bulletin Board and
the National Quotation Bureau's pink sheets. Prices do not include retail
markup, markdown or commission.
<TABLE>
<CAPTION>
Quarterly Ranges
------------------------
Quarter Ending High Bid Low Bid
-------------- -------- --------
<S> <C> <C>
03/31/98 36 35.50
06/30/98 36.25 36
09/30/98 36.25 36.25
12/31/98 36.25 31
03/31/99 32 30.0625
06/30/99 32 30.0625
09/30/99 36 32
12/31/99 36 36
</TABLE>
There was limited public trading in the Company's common stock in 1999 and 1998.
In 1999, there were twenty brokered trades appearing in the Company's transfer
ledger, and in 1998, there were twenty-five.
At March 15, 2000, the Company had approximately 1478 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 1999 and 1998. Management intends to
recommend to the board of directors that the annual dividend remain at $1.00 per
share in 2000.
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.
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At December 31, 1999, the Company had cash, cash equivalents and available for
sale securities totaling $4,740,536, a $137,251 (2.8%) decline from 1998. The
decrease happened because net cash provided from operations and other sources,
(property dispositions and distributions from equity investments) was not
adequate to fund property additions and financing activities.
Operating Activities. Net cash provided by operating activities was $218,451 in
1999 as compared to $1,780,522 in 1998. Cash flows for 1998 were increased
$1,088,853 by a favorable final judgment in a Texas quiet title action as
discussed below under "Results of Operations" and in Note 11 to the accompanying
financial statements. Most of the remaining approximately $473,000 decline in
cash flows from 1998 was the result of decreased oil and gas sales of $384,000
from properties other than those involved in the above noted quiet title
judgment, and increased income taxes paid of $78,000.
9
<PAGE>
Investing Activities. Net cash applied to investing activities in 1999 was
$21,491. This net application resulted because net cash provided by available
for sale securities of $166,200, property dispositions of $42,564 and cash
distributions from equity investments of $90,345 was less than the $320,600 cash
applied to property additions.
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, cash flows
with which these securities are purchased are generated by operating activities.
When current cash requirements are greater than the balance of cash and cash
equivalents, the additional required cash is drawn from available for sale
securities. As discussed at the beginning of this Item 6, additional cash was
drawn from available for sale securities because cash flows from operations did
not meet 1999 requirements.
Property and equipment additions are directly related to the Company's oil and
gas exploration and development drilling activity. Expenditures for unsuccessful
exploratory drilling as well as geological and geophysical costs are included in
operating activities. Cash applied to property additions in 1999 included
$320,600 classified as investing activities and $323,080 classified as operating
activities for a total of $643,680 as compared to a total of $659,770 in 1998.
Total net cash applied to investing activities noted above of $21,491 in 1999
decreased $1,481,252 from the net application in 1998. The most significant
contribution to the difference was the 1998 purchase of available for sale
securities with the $1,088,853 proceeds from the quiet title judgment noted
above under "Operating Activities".
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.
In 1999, cash dividends paid on common stock amounted to $165,932 as compared to
$169,793 in 1998. Cash applied to the purchase of treasury stock was $2,080 in
1999 as compared to $11,660 in 1998.
Forward-looking Summary. Refer to page 3 for a summary of the risks and
uncertainties that may affect this forward-looking summary. The Company's latest
forecast for 2000 projects cash flow from operations of $363,000. Cash to be
applied to investing activities for property additions is estimated at $340,000
and cash to be applied to financing activities is estimated to be $170,000.
Therefore, given the projected level of activity, operating cash flows will have
to be supplemented by funds from other sources, probably available for sale
securities, to provide the necessary funds to meet 2000 cash requirements.
Because of the recent price increase for crude oil and to a much lessor degree
for natural gas, Company personnel are re-evaluating prospects which were
deferred because of depressed prices in much of 1998 and 1999. Some of the
deferred prospects are scheduled for testing in 2000 and others may be added
later in the year if risk analysis is positive. Also, should exploratory
drilling result in a significant discovery that requires substantial development
drilling, or should other investment opportunities become available, capital
requirements could be far more than the Company has available. If such
circumstances occur, the Company may require external sources of financing.
10
<PAGE>
Results of Operations.
- ---------------------
Net income, both basic and diluted, was $1.94 per share for the year ended
December 31, 1999, as compared to net income of $5.11 per share for 1998, a
decline of $3.17 per share. The most significant reason for the decline in net
income was the 1998 receipt of proceeds of prior years oil and gas sales plus
interest thereon related to a favorable final judgment in a Texas quiet title
action ("AFNU" Judgment). As a result, the Company's 1998 after tax net income
was increased by approximately $655,000, or $3.90 per share. See Note 11 to the
accompanying financial statements for additional information. The above noted
receipt will be discussed further in the following paragraphs along with other
material line item changes in the statements of operations.
Operating Revenues. Operating revenues decreased $1,140,545 (42%) to $1,573,549
in 1999 from $2,714,094 in 1998. The decrease was the result of a $1,147,152
(43%) decline in oil and gas sales to $1,532,279, as offset by an increase in
lease bonuses and other miscellaneous revenues of $6,607 (19%) to $41,270. The
following table reflects volume and price variances from 1998 to 1999:
<TABLE>
<CAPTION>
1998
----------------------
Variance Excluding
-------------------
Production 1999 Price Volume Actual AFNU AFNU
---------- ------ ------ ------- ------ ---- ----
Oil -
<S> <C> <C> <C> <C> <C> <C>
Bbls (000 omitted) 27 (43) 70 34 36
$(000 omitted) $ 446 21 (695) 1,120 431 689
Unit Price $16.65 .79 15.86 12.71 18.75
Gas -
MCF (000 omitted) 530 (291) 821 683 138
$(000 omitted) $1,070 70 (549) 1,549 1,323 226
Unit Price $ 2.02 .13 1.89 1.94 1.64
</TABLE>
Revenues from oil sales fell $673,599 (60%) to $446,096 from $1,119,695. The
volume of oil sales decreased 43,828 barrels (Bbls) to 26,790 Bbls from 70,618
Bbls in 1998, resulting in a negative volume variance of $695,113. Of the 43,828
Bbls decrease in volume, 36,737 Bbls was a result of the 1998 receipt of prior
years oil sales related to the AFNU Judgment discussed above. Exclusive of these
prior years receipts, 1998 sales volumes would have been 33,881 Bbls at an
average price of $12.71 for total sales of $430,719, and the decrease in sales
volume to 1999 would have been 7,091 Bbls for a negative volume variance of
$112,463. The 7,091 Bbls decrease was the result of normal decline of more
mature producing properties.
The unit price of oil sales increased $.79 per Bbl to $16.65 per Bbl resulting
in a positive price variance of $21,164. Exclusive of receipts related to the
AFNU Judgment which averaged $18.75 per Bbl, the average price per Bbl would
have increased $3.94 to $16.65 per Bbl for a positive price variance of
$105,504. The price received for oil sales is based upon the spot market price
over which the Company has no control.
Revenues from natural gas sales decreased $478,150 (31%) to $1,070,506 in 1999
from $1,548,656 in 1998. The volume of gas sold declined 291,092 thousand cubic
feet (MCF) to 530,137 MCF in 1999 from 821,229 MCF in 1998, resulting in a
negative volume variance of $548,914. Exclusive of the 1998 AFNU Judgment, the
volume of gas sales would have decreased 152,683 MCF from 1998 production of
682,820 MCF with a negative volume variance of $296,205 based on an average unit
price of $1.94 per MCF for 1998. Of the 152,683 volume decline, 108,447 MCF
(71%) resulted from the normal decline in production from the #1 Brounkowski, a
11
<PAGE>
Robertson County, Texas, royalty interest which came on line in 1995. The
average price of gas sales increased $.13 per MCF to $2.02 in 1999 resulting in
a positive price variance of $70,764. Exclusive of 1998 sales attributable to
the AFNU Judgment which had an average unit price of $1.64 per MCF, the price
increase to 1999 would have been $.08 per MCF and the positive price variance
would have been $43,607. 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 are insignificant.
Operating Costs and Expenses. Operating costs and expenses decreased $420,513
(21%) to $1,603,356 in 1999, from $2,023,869 in 1998, as declines in production
cost of $111,241, depreciation, depletion, amortization and valuation provision
of $420,336 and general, administrative and other expense of $53,907 were
partially offset by an increase in exploration costs charged to expense of
$164,971. Material components of the above noted line item changes will be
discussed below.
Production costs. A significant amount of the $111,241 (27%) decrease was
the result of a $60,677 (47%) decline in gross production taxes. Generally,
these state taxes are calculated as a percentage of gross proceeds from the sale
of products from each producing property. Therefore, they tend to fluctuate with
the change in the dollar amount of revenues from oil and gas sales. Also, lease
operating expenses fell $24,872 (12%) because of a reduction of down hole
maintenance and repair, and prior and current year sale or retirement of some
older high maintenance properties. Hauling, compression and other expenses
declined $25,692 (32%) generally, because of reduced product sales.
Exploration 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 drilling. The costs of successful
exploratory drilling are capitalized. Total costs of exploration, inclusive of
geological and geophysical costs, were $542,447 in 1999 and $549,528 in 1998.
Cost charged to operations were $333,226 in 1999 and $168,255 in 1998, inclusive
of geological and geophysical expense of $84,650 in 1999 and $94,070 in 1998.
Depreciation, Depletion, Amortization and Valuation Provisions (DD&A).
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 the provision
is made at the time of impairment. The provision for impairment was $198,047 in
1999 and $122,204 in 1998.
As discussed in Note 10, to the accompanying financial statements, accounting
principles require 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. Reviews were performed in both 1999 and 1998,
resulting in the recognition of an impairment loss of $184,835 in 1998. No
impairment loss was required in 1999.
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 $110,749 in
1999 and $418,420 in 1998. The $307,671 (74%) decrease resulted because prior
years long-lived asset impairments reduced the asset basis and because of the
current year reduced volumes sold.
12
<PAGE>
General, Administrative and Other Expenses (G&A). The $53,907 (8%)
decrease in G&A was mostly caused by a $47,429 drop in legal fees as a final
judgment in the Company's favor was rendered in a Texas quiet title action in
1998.
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 decreased $82,994 (20%) in 1999. To a great extent,
the decrease was the net result of a $204,460 decline in interest income less a
$113,423 increase in trading securities gain. As discussed in Note 11 to the
accompanying financial statements, in 1998, the Company received interest of
$234,811 as part of the AFNU Judgment. That interest income was recorded in this
line item. In 1999, trading securities gain included additional realized gain of
$41,823 and additional unrealized gain of $71,600.
Provisions for Income Taxes. In 1999, the Company had a calculated provision for
income tax of $34,386 as the current tax expense of $72,622 exceeded a deferred
tax benefit of $38,236. In 1998, a calculated provision for income tax of
$320,937 resulted because the current tax expense of $244,811 was increased by a
deferred tax provision of $76,126. See Note 6 to the accompanying financial
statements for an analysis of the various components of income taxes for both
1999 and 1998.
Forward-looking Summary. Refer to page 3 for a summary of the risks and
uncertainties that may affect this forward-looking statements. Management's
latest projection of the results of operations for 2000 as compared to 1999
actual results follows:
<TABLE>
<CAPTION>
(000 Omitted)
--------------------------------
Net Income
Estimate Actual Increase
2000 1999 (Decrease)
-------- ------ ----------
<S> <C> <C> <C>
Operating Revenues $ 1,509 $ 1,574 (65)
------- ------- ---------
Operating Costs & Expenses:
Production 300 299 (1)
Exploration 526 333 (193)
DD&A 350 315 (35)
G&A 660 656 (4)
------- ------- ---------
1,836 1,603 (233)
------- ------- ---------
Operating Income (Loss) (327) (29) (298)
Equity Earnings in Investees 30 57 (27)
Other Income, Net 310 331 (21)
------- ------- ---------
Income Before Taxes 13 359 (346)
Provision for Income Tax 4 34 30
------- ------- ---------
Net Income $ 9 $ 325 $ (316)
======= ======= =========
</TABLE>
13
<PAGE>
Operating Revenues. Revenues from oil and gas sales are estimated at
$1,509,000 for 2000, or a $65,000 (4%) decrease from 1999. The following price
and volume analysis of 2000 forecast sales as compared with 1999 actual oil and
gas sales provides a breakout of the various components and projected variances
from 1999.
<TABLE>
<CAPTION>
Forecast Variance Actual
---------------------
Production 2000 Price Volume 1999
---------- -------- --------- --------- --------
Oil -
<S> <C> <C> <C> <C>
Bbls (000 omitted) 22 --- (5) 27
$(000 omitted) $ 541 178 (83) $ 446
Unit Price $24.75 8.10 --- $16.65
Gas -
MCF (000 omitted) 450 --- (80) 530
$(000 omitted) $ 928 19 (161) $1,070
Unit Price $ 2.06 .04 --- $ 2.02
</TABLE>
The projected decline in oil and gas volumes assumes a normal decline for
properties which produced in 1999 and no new production coming on line in 2000.
The average price used for the 2000 projections of revenues from oil and gas
sales is management's most recent estimate of the average price to be received
for the year 2000. It should be noted that March 14, 2000 spot market prices for
oil were $31.98 per Bbl and lower, and spot market prices for gas were $2.80 per
MCF and lower.
Operating Costs and Expenses. Operating cost and expenses are projected at
$1,836,000 for 2000, a $233,000 (15%) increase from 1999. Production costs are
estimated to remain at around the 1999 amount as reduction in hauling,
compression and other expense is offset by additional lease operation expense.
Management's current estimate of total exploration costs for 2000 is $766,000,
of which $526,000 is estimated to be charges against operations and $240,000
capitalized as proven properties. Of the $766,000 total estimated costs,
$126,000 is geological and geophysical expense. All of the remaining $640,000
could be capitalized or expensed depending upon the results of drilling. Also,
if the Company's exploration is successful, significant additional costs could
be incurred for development drilling and lease acquisition.
DD&A is projected to increase $35,000 (11%) as testing of exploratory oil
prospects deferred in prior years may result in additional impairment of
undeveloped leaseholds.
G&A is estimated to remain at about the 1999 level exclusive of a small increase
in employee compensation.
Equity Earnings in Investees. This item is expected to decrease as real
estate sales decline and start up costs related to a second golf course further
reduce profit.
Other Income, Net. Other income, net is estimated to decrease $21,000
(6%) from a decline in interest income and miscellaneous income.
14
<PAGE>
Item 7. Financial Statements.
Index to Financial Statements.
Page
----
Report of Independent Certified Public
Accountants - Grant Thornton LLP 16
Balance Sheets - December 31, 1999 and 1998 17
Statements of Operations - Years Ended December 31,
1999 and 1998 19
Statement of Stockholders' Equity - December 31,
1999 and 1998 20
Statements of Cash Flows - Years Ended December 31,
1999 and 1998 21
Notes to Financial Statements 23
Unaudited Supplemental Financial Information 31
15
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
The Reserve Petroleum Company
We have audited the accompanying balance sheets of The Reserve Petroleum Company
(a Delaware corporation) as of December 31, 1999 and 1998, 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
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 16, 2000
16
<PAGE>
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
---------- ----------
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents (Note 2) $ 367,963 $ 339,015
Available for Sale Securities (Notes 2 & 5) 4,372,573 4,538,772
Trading Securities (Notes 2 & 5) 562,176 450,768
Receivables 256,647 152,460
Refundable Income Taxes 75,964 ----
Prepayments & Deferred Income Taxes 58,735 13,127
---------- ----------
5,694,058 5,494,142
---------- ----------
Investments:
Partnership and Limited
Liability Companies (Notes 2 & 7) 430,302 462,951
Other 19,048 19,048
---------- ----------
449,350 481,999
---------- ----------
Property, Plant & Equipment (Notes 2 & 10):
Oil & Gas Properties, at Cost Based on the
Successful Efforts Method of Accounting
Unproved Properties 662,765 668,332
Proved Properties 4,157,016 4,189,787
---------- ----------
4,819,781 4,858,119
Less - Valuation Allowance and Accumulated
Depreciation, Depletion & Amortization 3,896,557 3,751,113
---------- ----------
923,224 1,107,006
---------- ----------
Other Property & Equipment, at Cost 337,474 324,104
Less - Accumulated Depreciation & Amortization 165,996 179,192
---------- ----------
171,478 144,912
---------- ----------
1,094,702 1,251,918
---------- ----------
Other Assets 490,738 407,569
---------- ----------
$7,728,848 $7,635,628
========== ==========
</TABLE>
(continued)
See Accompanying Notes
17
<PAGE>
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
(concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
----------- ----------
Current Liabilities:
<S> <C> <C>
Accounts Payable $ 28,504 $ 45,656
Income Taxes Payable ---- 49,331
Other Current Liabilities
Gas Balancing Commitment 38,839 41,410
Other 20,439 15,000
---------- ----------
87,782 151,397
---------- ----------
Dividends Payable (Note 3) 127,008 125,210
---------- ----------
Commitments & Contingencies (Note 7)
Stockholders' Equity (Notes 3 & 4)
Common Stock 92,368 92,368
Additional Paid-in Capital 65,000 65,000
Retained Earnings 7,545,405 7,388,288
---------- ----------
7,702,773 7,545,656
Less - Treasury Stock, at Cost 188,715 186,635
---------- ----------
7,514,058 7,359,021
---------- ----------
$7,728,848 $7,635,628
</TABLE>
========== ==========
See Accompanying Notes
18
<PAGE>
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998
------------- ------------
Operating Revenues:
<S> <C> <C>
Oil & Gas Sales (Note 11) $ 1,532,279 $ 2,679,431
Lease Bonuses & Other 41,270 34,663
------------- ------------
1,573,549 2,714,094
------------- ------------
Operating Costs and Expenses:
Production 299,100 410,341
Exploration 333,226 168,255
Depreciation, Depletion, Amortization
& Valuation Provisions 315,120 735,456
General, Administrative and Other 655,910 709,817
------------- -------------
1,603,356 2,023,869
------------- -------------
Income (Loss) from Operations (29,807) 690,225
Equity Earnings in Investees 57,695 73,796
Other Income, Net (Note 11) 331,345 414,339
------------ -------------
Income before Income Taxes 359,233 1,178,360
Provisions for Income Taxes (Notes 2 & 6) 34,386 320,937
------------ -------------
Net Income $ 324,847 $ 857,423
============ =============
Per Share Data (Notes 2 & 11):
Net Income, Basic and Diluted $ 1.94 $ 5.11
============ =============
Cash Dividends $ 1.00 $ 1.00
============ =============
Weighted Average Shares Outstanding,
Basic and Diluted 167,693 167,947
============ =============
</TABLE>
See Accompanying Notes
19
<PAGE>
THE RESERVE PETROLEUM COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $92,368 $65,000 $6,698,773 $(174,975)
Net Income ---- ---- 857,423 ----
Cash Dividends on Common Stock ---- ---- (167,908) ----
Purchase of Treasury Stock ---- ---- ---- (11,660)
------- -------- ---------- ---------
Balance at December 31, 1998 92,368 65,000 7,388,288 (186,635)
Net Income ---- ---- 324,847 ----
Cash Dividends on Common Stock ---- ---- (167,730) ----
Purchase of Treasury Stock ---- ---- ---- (2,080)
------- ------- ---------- ---------
Balance at December 31, 1999 $92,368 $65,000 $7,545,405 $(188,715)
======= ======= ========== =========
</TABLE>
See Accompanying Notes
20
<PAGE>
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998
------------ ------------
Cash Flows from Operating Activities:
Cash Received-
<S> <C> <C>
Oil and Gas Sales $ 1,487,438 $ 2,785,843
Lease Bonuses and Rentals 41,270 34,663
Agricultural Rentals & Other 24,407 11,188
Cash Paid-
Production Costs (297,946) (415,556)
Exploration Costs (323,080) (200,850)
General Suppliers, Employees and Taxes,
Other than Income (679,742) (737,918)
Interest Received 174,901 437,753
Interest Paid (11,293) (11,250)
Dividends Received on Trading
Securities 7,926 9,735
Purchase of Trading Securities (2,133,596) (2,856,372)
Sale of Trading Securities 2,126,083 2,843,342
Income Taxes Paid (197,917) (120,056)
----------- -----------
Net Cash Provided by Operating
Activities 218,451 1,780,522
----------- -----------
Cash Flows from Investing Activities:
Sale and Maturity of Available for
Sale Securities 6,271,431 1,353,669
Purchase of Available for Sale Securities (6,105,231) (2,585,701)
Property Dispositions 42,564 15,358
Property Additions (320,600) (458,920)
Cash Distributions from Equity Investments 90,345 102,000
----------- -----------
Net Cash Applied to Investing Activities $ (21,491) $(1,573,594)
----------- -----------
</TABLE>
(Continued)
See Accompanying Notes
21
<PAGE>
(Concluded)
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998
---------- -----------
Cash Flows Applied to Financing Activities:
<S> <C> <C>
Dividends Paid to Shareholders $(165,932) $ (169,793)
Purchase of Treasury Stock (2,080) (11,660)
--------- ----------
Total Cash Applied to Financing Activities (168,012) (181,453)
--------- ----------
Net Change in Cash and Cash Equivalents 28,948 25,475
Cash and Cash Equivalents at Beginning of Year 339,015 313,540
--------- ----------
Cash and Cash Equivalents at End of Year $ 367,963 $ 339,015
========= ==========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net Income $ 324,847 $ 857,423
Net Income Increased (Decreased) by -
Net Change in -
Unrealized Holding (Gains) Losses
on Trading Securities (39,148) 32,451
Accounts Receivable (45,279) 107,351
Interest and Dividends Receivable (47,745) 18,505
Income Taxes Refundable/Payable (125,295) 124,755
Accounts Payable 4,751 (27,616)
Trading Securities (72,260) (35,953)
Equity Earnings in Investees (57,696) (73,796)
Disposition of Property & Equipment 72,125 (13,445)
Depreciation, Depletion, Amortization
and Valuation Provisions 315,120 735,456
Change in Cash Value of Officers'
Life Insurance (17,052) (16,801)
Change in Prepayments (53,110) ----
Change in Deferred Taxes (38,236) 76,126
Gas Balancing Liabilities (2,571) (3,934)
--------- ----------
Net Cash Provided by Operating Activities $ 218,451 $1,780,522
========= ==========
</TABLE>
See Accompanying Notes
22
<PAGE>
THE RESERVE PETROLEUM COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1 - NATURE OF OPERATIONS
--------------------
The Company is principally engaged in oil and natural gas exploration and
development with an area of concentration in Texas and Oklahoma.
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
proved 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 10 for discussion of impairment losses.
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, which consist primarily of equity securities, are
carried at fair value with unrealized gains and losses included in
earnings.
Available for sale securities, which consist primarily of US Government
securities, are carried at fair value with unrealized gains and losses
reported as a component of other comprehensive income, when material.
23
<PAGE>
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.
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. The Company had two
purchasers in both 1999 and 1998 whose purchases were in excess of 10% of
total oil and gas sales. In 1999, the purchases were $277,667 or 18% of
total oil and gas sales by one purchaser, and $177,582 or 12% of total oil
and gas sales by the other. In 1998, the purchases were $455,208, or 17%,
by one purchaser, and $914,552, or 34% by the other.
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.
24
<PAGE>
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
---------- ---------- -----------
January 1, 1998, $.50
par value stock, 400,000
<S> <C> <C> <C>
shares authorized 184,735.28 16,422.55 168,312.73
Purchase of stock ---- 583.00 (583.00)
---------- --------- ----------
December 31, 1998, $.50
par value stock, 400,000
shares authorized 184,735.28 17,005.55 167,729.73
Purchase of stock ---- 104.00 (104.00)
---------- --------- ----------
December 31, 1999, $.50
Par value stock, 400,000
shares authorized 184,735.28 17,109.55 167,625.73
========== ========= ==========
</TABLE>
Note 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
-----------------------------------------
At December 31, 1999 and 1998, the difference between the aggregate fair
value and amortized cost basis of available for sale securities was
immaterial; therefore, reporting of comprehensive income is not required.
The available for sale securities by contractual maturity are as follows:
Due within one year or less $ 3,973,198
Due after one year through five years 399,375
--------------
$ 4,372,573
==============
In 1999 there was no sale of securities prior to maturity. In 1998 proceeds
from sales of securities prior to maturity totaled $255,383 with no
significant realized gains or losses.
As to the trading securities, unrealized holding gains (losses) included in
earnings were $39,148 in 1999 and ($32,451) for 1998.
25
<PAGE>
Note 6 - INCOME TAXES
------------
Components of deferred taxes follow:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
---------- ----------
Assets
<S> <C> <C>
Leasehold Costs $ 197,533 $ 174,479
Gas Balancing Receivable 52,379 52,379
Lease and Well Equipment ---- 85
Long-Lived Asset Impairment 94,870 131,173
Marketable Securities ---- 7,501
---------- ----------
344,782 365,617
Valuation Allowance ---- ----
---------- ----------
344,782 365,617
---------- ----------
Liabilities
Equity Investments ---- 6,212
Marketable Securities 5,440 ----
Intangible Development Costs 199,545 257,846
---------- ----------
204,985 264,058
---------- ----------
Net Deferred Tax Asset $ 139,797 $ 101,559
========== ==========
Change in Valuation Allowance
for the Year $ ---- $ ----
========== ==========
</TABLE>
The following table summarizes the current and deferred portions of income
tax expense.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998
---------- ----------
Current Tax Expense:
<S> <C> <C>
Federal $ 72,622 $ 244,811
State ---- ----
---------- ----------
72,622 244,811
Deferred Provision (Benefit) (38,236) 76,126
---------- ----------
Total Provision $ 34,386 $ 320,937
========== ==========
</TABLE>
26
<PAGE>
The total provision for income tax expressed as a percentage of income
before income tax was 10% in 1999 and 27% in 1998. These amounts differ from
the amounts computed by applying the statutory US Federal income tax rate of
35% for 1999 and 1998 to income before income tax as summarized in the
following reconciliation:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998
--------- ----------
Computed Federal Tax
<S> <C> <C>
Provision $ 125,732 $ 412,426
Increase (Decrease) in Tax From:
Allowable Depletion in Excess of
Depletion for Financial Statements (78,477) (77,223)
Non-conventional Fuel Credit (6,453) (7,849)
Corporate Graduated Tax Rate
Structure (7,384) (7,840)
Dividend Received Deduction (1,207) (2,385)
Other 2,175 3,808
--------- ----------
Provision for Income Tax $ 34,386 $ 320,937
========= ==========
Effective Tax Rate 10% 27%
</TABLE>
27
<PAGE>
Note 7 - INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------
The Company has a 33% interest in Broadway Sixty-Eight, Ltd., an Oklahoma
limited partnership (the Partnership). The Partnership had assets in
excess of liabilities of $532,047 and $474,480, at December 31, 1999 and
1998, respectively, and its net income for the periods then ended were
$79,066 and $53,520.
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
$549,546 at December 31, 1999. The loan matures in 2002 with interest at
New York prime rate which was capped at 8 1/2% until December 1999. 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 $26,353 for each of the
years ended December 31, 1999 and 1998.
The Company had a 9% interest in the Coffee Creek Limited Liability
Company (Coffee Creek), an Oklahoma limited liability company. Coffee
Creek owns and operates Coffee Creek Golf Course, and through an
investment in a partnership, participates in the development of real
property surrounding the golf course. In April, 1999, the owners of
Coffee Creek formed Millennium Golf Properties, L.L.C. , another Oklahoma
limited liability company (Millennium) and assigned their ownership in
Coffee Creek to Millennium. Also, Millennium purchased a second Oklahoma
City area golf course, River Oaks, along with a related real estate
development. Millennium is now engaged in the ownership and operation of
Coffee Creek, River Oaks and their related real estate developments. The
River Oaks purchase, renovations and real estate development is financed
by loans collateralized by the land and buildings of both Coffee Creek
and River Oaks. The loan balance at December 31, 1999, was $2,800,000. At
December 31, 1999, the Company's net equity in Millennium was $166,177,
as compared to $192,778 for Coffee Creek at December 31, 1998.
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, 1999, the Company's net
equity in the limited liability company was $73,007, compared to $95,904
at December 31, 1998.
28
<PAGE>
Note 8 - COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
---------------------------------------------------
EXPLORATION, AND DEVELOPMENT ACTIVITIES
---------------------------------------
All of the Company's oil and gas operations are within the continental
United States. In connection with its oil and gas operations, the
following costs were incurred:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998
--------- ---------
Acquisition of Properties
<S> <C> <C>
Unproved $ 197,993 $ 380,592
Proved $ ---- $ -----
Exploration Costs $ 344,454 $ 168,936
Development Costs $ 25,065 $ 58,382
</TABLE>
Note 9 - FINANCIAL INSTRUMENTS
---------------------
The following table includes various estimated fair value information as
of December 31, 1999 and 1998 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.
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
-----------------
Due to the uncertainty regarding when such amounts will be paid, it is not
practicable to estimate fair value.
29
<PAGE>
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Financial Assets
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 367,963 $ 367,963 $ 339,015 $ 339,015
Available for Sale
Securities 4,372,573 4,372,573 4,538,772 4,538,772
Trading Securities 562,176 562,176 450,768 450,768
Financial Liabilities
Dividends Payable for which
it is not practicable to
estimate fair value (142,008) N/A (140,210) N/A
</TABLE>
Note 10 - LONG-LIVED ASSETS IMPAIRMENT LOSS
----------------------------------
Certain oil and gas producing properties have been 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.
Impairment losses totaling $184,835 for the year ended December 31, 1998,
are included in the Statements of Operations in the line item, Depreciation,
Depletion, Amortization and Valuation Provisions. No impairment losses were
required for 1999, based on December 31, 1999 reserve studies.
Note 11 - LEGAL PROCEEDINGS
-----------------
In December 1998, the Company received proceeds from oil and gas sales as
the result of a favorable final judgment in a Texas quiet title action.
Because the Company had no assurance the judgment would be rendered in its
favor, oil and gas revenues of $914,552 less $60,511 operating costs related
thereto plus interest income thereon of $234,811 were not recorded in the
Statement of Operations until the proceeds were released from suspense by
the unit operator. As a result, for the year ending December 31, 1998, the
Company's net income after the related provision for income taxes increased
by approximately $655,000, or $3.90 per common share outstanding.
30
<PAGE>
UNAUDITED SUPPLEMENTAL FINANCIAL INFORMATION
31
<PAGE>
SUPPLEMENTAL SCHEDULE 1
THE RESERVE PETROLEUM COMPANY
WORKING INTERESTS RESERVE QUANTITY INFORMATION
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998
---------- ----------
Oil & Natural Gas Liquids (Bbls)
Proved Developed and
Undeveloped Reserves
<S> <C> <C>
Beginning of Year 37,803 53,590
Revisions of Previous Estimates (221) 25,908
Extensions and Discoveries ---- 7,387
Production (8,561) (49,082)
Sale of Reserves in Place ---- ----
-------- ---------
End of Year 29,021 37,803
======== =========
Proved Developed Reserves
Beginning of Year 37,803 53,590
End of Year 29,021 37,803
Gas (MCF)
Proved Developed and Undeveloped
Reserves Beginning of Year 1,567,726 1,921,324
Revisions of Previous Estimates 38,719 49,799
Extensions and Discoveries 34,348 10,727
Production (236,335) (414,124)
Sale of Reserves in Place ---- ----
--------- ---------
End of Year 1,404,458 1,567,726
========= =========
Proved Developed Reserves
Beginning of Year 1,567,726 1,921,324
End of Year 1,404,458 1,567,726
</TABLE>
(continued)
See notes on next page
32
<PAGE>
SUPPLEMENTAL SCHEDULE 1
THE RESERVE PETROLEUM COMPANY
WORKING INTERESTS RESERVE QUANTITY INFORMATION
(Unaudited)
(Concluded)
Notes 1. Estimates of royalty interests reserves have not been included
because the information required for the estimation of said
reserves is not available. The Company's share of production from
its net royalty interests was 18,229 Bbls of oil and 293,739 MCF of
gas for the year ended December 31, 1999, and 21,537 Bbls of oil
and 407,106 MCF of gas for the year ended December 31, 1998.
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, 1999 and 1998. 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.
4. In December 1998, the Company received proceeds from oil and gas
sales upon the final judgment in its favor of a Texas quiet title
action. Because the Company had no assurance the judgment would be
rendered in its favor, the oil and gas reserves related thereto
were not included in proved developed reserves until the proceeds
were released from suspense by the unit operator. As a result,
both the Revisions of Previous Estimates and Production line items
for 1998 include 36,737 barrels of oil and 138,409 MCF of gas which
were produced in prior years, but received in 1998.
33
<PAGE>
SUPPLEMENTAL SCHEDULE 2
THE RESERVE PETROLEUM COMPANY
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED WORKING INTERESTS
OIL AND GAS RESERVES
(Unaudited)
<TABLE>
<CAPTION>
At December 31,
---------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Future Cash Inflows $ 3,615,463 $ 3,517,878
Future Production and
Development Costs (1,231,489) (1,172,954)
Future Income Tax Expense (661,948) (683,975)
-------------- -------------
Future Net Cash Flows 1,722,026 1,660,949
10% Annual Discount for
Estimated Timing of Cash Flows (487,526) (474,621)
-------------- -------------
Standardized Measure of Discounted
Future Net Cash Flows $ 1,234,500 $ 1,186,328
============== =============
</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.
34
<PAGE>
SUPPLEMENTAL SCHEDULE 3
THE RESERVE PETROLEUM COMPANY
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOW FROM PROVED WORKING INTERESTS RESERVE QUANTITIES
(Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998
-------------- -------------
Standardized Measure,
<S> <C> <C>
Beginning of Year $ 1,186,328 $ 1,975,421
Sales and Transfers, Net of
Production Costs (399,792) (1,301,791)
Net Change in Sales and Transfer
Prices, Net of Production Costs 257,559 (436,455)
Extensions, Discoveries and Improved
Recoveries, Net of Future Production
and Development Costs 22,983 38,687
Revisions of Quantity Estimates 40,400 207,508
Accretion of Discount 167,537 275,430
Net Change in Income Taxes 14,425 289,835
Changes in Production Rates
(Timing) and Other (54,940) 137,693
-------------- -------------
Standardized Measure,
End of Year $ 1,234,500 $ 1,186,328
============== =============
</TABLE>
35
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable
PART III
--------
Items 9, 10, 11, and 12 are incorporated by reference to the Company's proxy
statement to be mailed to security holders on or about April 4, 2000 in
connection with its annual stockholders' meeting to be held on May 2, 2000.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following documents are exhibits to this Form 10-KSB. Each document
marked by an asterisk is hereby incorporated herein by reference to the same
document previously filed with the Securities and Exchange Commission.
Exhibit S.E.C. Exhibit
Reference Description Report(Date) Number Page
- --------- ----------- ------------ ------- ----
3.1 *Restated Certificate of
Incorporation dated
November 1, 1988 10-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 (12/99) 27 38
(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.
36
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE RESERVE PETROLEUM COMPANY
(Registrant)
/s/ Mason W. McLain
--------------------------------------------
By: Mason W. McLain, President
(Principal Executive Officer)
/s/ Jerry L. Crow
--------------------------------------------
By: Jerry L. Crow, 2nd Vice President
(Principal Financial and Accounting Officer)
Date: March 23, 2000
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:
/s/ Mason W. McLai n /s/Jerry L. Crow
- ---------------------------- -----------------------------
Mason W. McLain (Director) Jerry L. Crow (Director)
March 23, 2000 March 23, 2000
/s/ Robert L. Savage /s/ R.T. McLain
- ---------------------------- -----------------------------
Robert L. Savage (Director) R.T. McLain (Director)
March 23, 2000 March 23, 2000
37
