UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
| | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number 0-8157
THE RESERVE PETROLEUM COMPANY
(Name of small business issue in its charter)
DELAWARE 73-0237060
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6801 N. BROADWAY, SUITE 300 73116-9092
OKLAHOMA CITY, OKLAHOMA
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (405) 848-7551
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK ($0.50 PAR VALUE)
(Title of Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. | |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | |
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained 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|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes | | No |X|
The issuer's revenues for the fiscal year ended December 31, 2005 were $8,523,346.
The aggregate market value of the voting stock held by non-affiliates was $18,548,820 as computed by reference to the last reported sale which was on March 7, 2006.
As of March 17, 2006, there were 163,633.64 common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the registrant's Annual Meeting of Shareholders to be held on May 23, 2004 (the "Proxy Statement") are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes | | No |X|
TABLE OF CONTENTS
PAGE
----
Forward Looking Statements..................................................3
PART I
Item 1. Description of Business...........................................3
Item 2. Description of Property...........................................5
Item 3. Legal Proceedings.................................................7
Item 4. Submission of Matters to a Vote of Security
Holders...........................................................7
PART II
Item 5. Market for Common Equity, Related Stockholder
Matters and Small Business Issuer Purchase of
Equity Securities.................................................7
Item 6. Management's Discussion and Analysis or Plan of
Operation.........................................................8
Item 7. Financial Statements.............................................20
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................43
Item 8A. Controls and Procedures..........................................43
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of
the Exchange Act.................................................44
Item 10. Executive Compensation...........................................44
Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters...................44
Item 12. Certain Relationships and Related Transactions...................44
Item 13. Exhibits.........................................................44
Item 14. Principal Accountant Fees and Services...........................45
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Actual events and/or future results of operations may differ materially from those contemplated by such forward-looking statements. See Item 6, "Management's Discussion and Analysis or Plan of Operation" for a summation of some of the risks and uncertainties inherent in forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
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 Property". 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 or Plan of Operation".
MINERAL PROPERTY MANAGEMENT
The Company owns non-producing mineral interests in approximately 268,393 gross acres equivalent to 92,540 net acres. These mineral interests are located in nine states with 56,215 net acres in the states of Oklahoma and Texas, the area of concentration for the Company in its present exploration and development programs.
Management continually reviews various industry reports and other sources for activity (leasing, drilling, significant discoveries, etc.) in areas where the Company has mineral ownership. Based on its analysis of any activity and assessment of the potential risk relative to the particular area, management may negotiate a lease or farmout agreement and accept a royalty interest, or it may choose to participate as a working interest owner and pay its proportionate share of costs for any exploration or development drilling.
A substantial amount of the Company's oil and gas revenue has resulted from its mineral property management. In 2005, $4,635,747 (57%) of oil and gas sales was from royalty interests as compared to $2,024,362 (52%) in 2004. As a result of its mineral ownership, in 2005 the Company had royalty interests in 23 gross (.48 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 a 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 2005, the Company participated in the drilling of twenty-three development wells with nineteen wells (2.17 net) completed as producers, two as dry holes and two in the process of completion.
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 if management 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.
For a summation of exploratory wells drilled in 2005 or planned for in 2006, see Item 6, "Management's Discussion and Analysis of Financial Condition or Plan of Operation," subheading, "Update of Oil and Gas Exploration Activity from December 31, 2004."
CUSTOMERS
In 2005, the Company had two customers whose total purchases were greater than 10% of revenues from oil and gas sales. XTO Energy purchases were $910,108 or 11.3% of total oil and gas sales. Burlington Resources purchases were $833,363, or 10.3% of total oil and gas sales. The Company sells most of its oil and gas under short-term sales contracts that are based on the spot market price. A 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. There are numerous circumstances within the industry and related market place that are out of the Company's control such as cost and availability of alternative fuels, the level of consumer demand, the extent of other domestic production of oil and gas, the price and extent of importation of foreign oil and gas, the cost of and proximity of pipelines and other transportation facilities, the cost and availability of drilling rigs, 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. The Company's ability to participate in and/or develop viable prospects, and secure the financial participation of other persons or 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 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, and 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
See Item 6, "Management's Discussion and Analysis of Plan of Operation", subheading, "Equity Investments" and Item 7, "Notes to Financial Statements," Notes 2 and 7 for a discussion of other business including guarantees.
EMPLOYEES
At December 31, 2005, the Company had eight employees, including officers. See the Proxy Statement for additional information. During 2005, all the Company's employees devoted a portion of their time to duties with affiliated companies and the Company was reimbursed for the affiliates' share of compensation directly from those companies. See Item 6, "Management's Discussion and Analysis or Plan of Operation, subheading "Certain Relationships and Related Transactions" and Item 7, "Notes to Financial Statements," Note 12, for additional information.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal properties are oil and natural gas properties as described below.
OIL AND NATURAL GAS OPERATIONS
OIL AND GAS RESERVES
Reference is made to the unaudited supplemental financial information beginning on Page 38 for working interest reserve quantity information.
Since January 1, 2005, the Company has not filed any reports with any Federal authority or agency which included estimates of total proved net oil or gas reserves, except for its 2004 annual report on Form 10-KSB and Federal income tax return for the year ended December 31, 2004. 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, 2005, 2004 and 2003. Equivalent MCF was developed using approximate relative energy content.
Royalties Working Interests
---------------------- -----------------------------------------------
Sales Price Sales Price Average Production
---------------------- ---------------------
Oil Gas Oil Gas Cost per
Per Bbl Per MCF Per Bbl Per MCF Equivalent MCF
------- ------- ------- ------- ------------------
2005 $ 54.93 $ 7.55 $ 54.56 $ 7.55 $ 1.73
2004 $ 38.79 $ 5.42 $ 40.47 $ 5.65 $ 1.61
2003 $ 28.72 $ 4.82 $ 28.54 $ 4.81 $ 1.56
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At December 31, 2005, the Company had working interests in 123 gross (14.76 net) wells producing primarily gas and/or gas liquids (condensates) and had working interests in 76 gross (4.77 net) wells producing primarily oil. These interests were in 41,533 gross (4,368 net) producing acres. These wells include 44 gross (.26 net) wells associated with secondary recovery projects.
Twenty percent, or 7,212 barrels of the Company's oil production during 2005 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 at December 31, 2005.
Acreage
----------------------
Gross Net
------- ------
Non-producing Mineral Interests 268,393 92,540
Undeveloped Leaseholds 11,606 3,865
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NET PRODUCTIVE AND DRY WELLS DRILLED
The following table summarizes the net wells drilled in which the Company had a working interest for the years ended December 31, 2003 and thereafter, as to net productive and dry exploratory wells drilled and net productive and dry development wells drilled.
Number of Net Working Interest Wells Drilled
---------------------------------------------------------------------------
Exploratory Development
------------------------------------ -------------------------------
Productive Dry Productive Dry
---------------------- ---------- -------------- -----------
2005 .83 .27 2.17 .21
2004 1.03 .50 1.01 --
2003 .46 .16 .19 .28
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RECENT ACTIVITIES
See Item 6, under the subheading, "Update of Oil and Gas Exploration Activity from December 31, 2004" for a summary of recent activities related to oil and natural gas operations.
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.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's stock is dually traded in the Pink Sheet Electronic Quotation Service and the OTC Bulletin Board under the symbol "RSRV". The following high and low bid information was quoted on the Pink Sheets OTC Market Report. Prices reflect inter-dealer prices without retail markup, markdown or commission and may not reflect actual transactions.
Quarterly Ranges
---------------------------------
Quarter Ending High Bid Low Bid
----------------------- ---------- ----------
03/31/04 35.30 35.00
06/30/04 39.00 35.30
09/30/04 41.25 36.00
12/31/04 55.00 42.50
03/31/05 58.00 45.00
06/30/05 83.00 52.25
09/30/05 120.00 74.00
12/31/05 172.00 120.00
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There was limited public trading in the Company's common stock in 2005 and 2004. In 2005 and 2004, there were 9 brokered trades appearing in the Company's transfer ledger for each year.
At March 17, 2006, the Company had approximately 1,457 record holders of its common stock. The Company paid dividends on its common stock in the amount of $2.00 per share in the second quarter of 2005 and $1.00 per share in 2004. Management will review the amount of the annual dividend to be paid in 2006 with the Board of Directors; however, it intends to recommend a dividend of at least $4.00 per share.
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares Approximate Dollar Value
Purchased as Part of of Shares that May Yet Be
Total Number of Average Price Publicly Announced Plans or Purchased Under the Plans
Period Shares Purchased Paid Per Share Programs (1) or Programs (1)
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October 1, 2005 to 33 $105.00 - -
October 31, 2005
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November 1, 2005 to 11 $105.00 - -
November 30, 2005
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December 1, 2005 to 354 $105.00 - -
December 31, 2005
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Total 398 $105.00 - -
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(1) The Company has no formal equity security purchase program or plan. The Company acts as its own transfer agent and most purchases result from requests made by shareholders receiving small odd lot share quantities as the result of probate transfers.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Please refer to the financial statements and related notes in Item 7 of this Form 10-KSB to supplement this discussion and analysis.
FORWARD-LOOKING STATEMENTS
In addition to historical information, from time to time the Company may publish forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements provide the reader with management's current expectations of future events. They include statements relating to such matters as anticipated financial performance, business prospects such as drilling of oil and gas wells, technological development and similar matters.
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, generate 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 engineer considers production performance data, reservoir data and geological data available to the Company, as well as makes 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's producing properties are composed of many small working interest and royalty interest properties. As a non-operating owner, the Company has limited access to the underlying data from which working interest reserve estimates are calculated, and estimates of royalty interest reserves are not made because the information required for the estimation is not available.
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 uncertainty.
Exploration 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 in a material change in estimated long-lived assets impairment. Depletion and depreciation of oil and gas properties are computed using the units-of-production method. A significant unanticipated change in volume of production or estimated reserves would result in a material un-forecasted change in the estimated depletion and depreciation provisions.
Income from available for sale securities and trading securities has made substantial contributions to net income in certain prior periods. Available for sale securities and trading securities are used to invest funds until needed in the Company's capital investing and financing activities. Net income has been materially affected in past and current years and could be in the future years by utilization of those funds in operations as well as significant fluctuation in the interest rates and/or quoted market values applicable to the Company's available for sale securities and trading securities.
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.
The Company has equity investments in organizations over which the Company has limited or no control. These equity investments have in the past made 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 "Equity Investments", below, in this Item 6 for information regarding these equity investments.
The Company does not undertake any obligation to publicly revise forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the information 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 2006 and any Current Reports on Form 8-K filed by the Company. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is affiliated by common management and ownership with Mesquite Minerals, Inc., (Mesquite), Mid-American Oil Company (Mid-American), Lochbuie Limited Partnership (LLTD) and Lochbuie Holding Company (LHC). The Company also owns interests in certain producing and non-producing oil and gas properties as tenants in common with Mesquite, Mid-American and LLTD.
Mason McLain and Robert T. McLain, Directors and officers of the Company, are directors and officers of Mesquite and Mid-American. Jerry Crow, a Director of the Company, is a director of Mesquite and Mid-American. Kyle McLain and Cameron R. McLain are sons of Mason McLain, who is a more than 5% owner of the Company, and are advisory directors and employees of the Company. Kyle McLain is a director and employee of Mesquite and an advisory director and employee of Mid-American. Cameron R. McLain is a director and employee of Mid-American and an advisory director and employee of Mesquite. Mason McLain and Robert T. McLain, who are brothers, each own an approximate 32% limited partner interest in LLTD, and Mason McLain is president of LHC, the general partner of LLTD. Robert T. McLain is not an employee of any of the above entities, and devotes only a small amount of time conducting their business.
The above named officers, directors and employees as a group beneficially own approximately 33% of the common stock of The Company, approximately 31% of the common stock of Mesquite, and approximately 17% of the common stock of Mid-American. These three corporations each have only one class of stock outstanding. Item 7, "Notes to Financial Statements," Note 12 includes additional disclosures regarding these relationships.
EQUITY INVESTMENTS
The Company has investments in four entities which it accounts for on the equity method. In using the equity method, the Company records the original investment in an entity as an asset and adjusts the asset balance for the Company's share of any income or loss as well as any additional contributions to or distributions from the entity. The four entities include one Oklahoma limited partnership, and three Oklahoma limited liability companies. The Company does not have actual or effective control of any of the entities. The management of these entities could at any time make decisions in their own best interests which could materially effect the Company's net income, or the value of the Company's investments.
These entities are Broadway Sixty-Eight, Ltd. (33% limited partnership interest), Millennium Golf Properties, LLC (9% ownership), OKC Industrial Properties, LLC (10% ownership) and JAR Investments, LLC (25% ownership). These entities collectively and/or individually have had a significant effect, both positively, and negatively, on the Company's net income in the past and are expected to in the future. Two of these entities have guarantee arrangements under which the Company is contingently liable. Item 7, Note 7 to the accompanying financial statements includes related disclosures.
LIQUIDITY AND CAPITAL RESOURCES
To supplement the following discussion, please refer to the Balance Sheets on Pages 23 and 24, and the Statements of Cash Flows beginning on page 27 of this Form 10-KSB.
In 2005, as in prior years, the Company funded its business activity through the use of internal sources of capital. For the most part, these internal sources are cash flows from operations, cash, cash equivalents and available for sale securities. When cash flows from operating activities are in excess of those needed for other business activities, the remaining balance is used to increase cash, cash equivalents and/or available for sale securities. When cash flows from operating activities are not adequate to fund other business activities, withdrawals are made from cash, cash equivalents and/or available for sale securities. Cash equivalents are highly liquid debt instruments purchased with a maturity of three months or less. Available for sale securities are US Treasury Bills.
In 2005, net cash provided by operating activities was $4,454,893. Sales, net of production, exploration general and administrative costs and income taxes paid of $4,322,097 accounted for 97% operations net cash flow. The remaining components provided $132,796 or 3% of cash flow. In 2005, net cash applied to investing and financing activities was $4,321,269. Net purchases of available for sale securities discussed below, capitalized property additions (net of disposals) of $3,503,888 and dividend payments and treasury stock purchases of $451,118 accounted for most of the net cash applied. Maturing available for sale securities provided $9,686,787 of gross cash flow due to their six month maturities. However, these funds plus $803,272 of excess cash from operations were re-invested in the same type of securities.
In 2004, cash utilized for capitalized property additions (net of disposals) of $2,102,080 and dividend payments and treasury stock purchases of $168,972 were $605,646 less than cash provided by operating activities.
Other than cash, cash equivalents and available for sale securities, other significant changes in working capital include the following:
Receivables increased $1,423,959 (213%) to $2,092,967 in 2005 from $669,008 in 2004. For the most part, the increase was the result of increased oil and gas product prices and volumes used for the Company's accrual estimates at year end. See the discussion of revenues under subheading "Operating Revenues", below for more information about the increased sales of oil and natural gas, including new wells in Robertson County, Texas.
Income taxes payable increased $327,018 to $331,412 in 2005 from $4,394 in 2004. This was due to the increased current tax expense as a result of the increased pretax income in 2005 versus 2004.
Accounts payable increased $154,852 (91%) to $324,675 in 2005 from $169,823 in 2004. This increase was primarily due to costs associated with increased drilling activity at year end 2005 versus 2004. See the discussion of this activity under "Update of Oil and Gas Exploration and Development Activity" from December 31, 2004 in the "Results of Operations" section below.
The following is a discussion of material changes in cash flow by activity between the years ending December 31, 2005 and 2004. Also see the discussion of changes in operating results under "Results of Operations" below in this Item 6.
OPERATING ACTIVITIES
As noted above, net cash flows provided by operating activities in 2005 were $4,454,893, which when compared against the $2,876,698 provided in 2004, represents an increase of $1,578,195 or a 55% increase in net cash flows provided by operating activities from 2004 to 2005. For the most part, the increase resulted because of an increase in oil and gas sales of $2,989,515, an increase in lease bonuses and rentals of $21,329, and an increase in interest income of $83,772. Those increases in cash flows were partially offset by increased production costs of $395,020, an increase in exploration costs charged to expense of $350,742, a decrease in class action lawsuit settlements of $283,421 and an increase in income taxes paid of $404,641. Additional discussion of the more significant items follows.
DISCUSSION OF SELECTED MATERIAL LINE ITEMS RESULTING IN AN INCREASE IN CASH FLOWS. The $2,989,515 (79%) increase in cash received from oil and gas sales to $6,752,119 in 2005 from $3,762,604 in 2004 was the result of an increase of both the price and volume of both oil and gas sales. See "Results of Operations", below, for a price/volume analysis and the related discussion of oil and gas sales.
Cash received for interest earned on cash equivalents and available for sale securities increased $83,772 (212%) to $123,272 in 2005 from $39,500 in 2004. The increase was primarily the result of an increase in the average rate of return to 2.21% in 2005 from 0.88% in 2004 with an average balance of cash equivalents and available for sale securities outstanding of $5,582,429 in 2005 and $4,475,655 in 2004.
DISCUSSION OF SELECTED MATERIAL LINE ITEMS RESULTING IN A DECREASE IN CASH FLOWS. Production costs increased $395,020 (66%) to $997,571 in 2005 from $602,551 in 2004. Most of the increase was due to a $246,644 increase in production taxes which increase as oil and gas sales increase. The remaining increase of $148,376 was due to increased lease operating expenses in 2005 versus 2004. Approximately $41,000 of the increase was attributable to wells which first produced in 2005 and the remaining approximately $107,000 was due to increased operating expenses on wells which began production prior to 2005.
Cash paid for exploration costs charged to expense increased $350,742 (252%) to $489,893 in 2005 from $139,151 in 2004. This increase is related to an increase in exploration activity in 2005 over 2004. This item consists of unsuccessful exploratory drilling expenditures as well as geological and geophysical costs that are directly related to the Company's oil and gas exploration drilling activity. That drilling activity also includes substantially all of the Company's property additions discussed below under the subheading "Investing Activities". In addition to the $489,893 classified as operating activities, $3,554,593 was classified as investing activities for a total of $4,044,486. This compares to 2004 cash applied to property additions which included $139,151 classified as operating activities and $2,183,687 classified as investing activities for a total of $2,322,838.
Cash received for class action lawsuit settlements decreased $283,421 (95%) to $13,775 in 2005 from $297,196 in 2004. The decrease was due entirely to the 2004 settlement of a class action lawsuit filed in 1995 relating to revenues received after 1982 from Company owned minerals in Beaver and Texas Counties, Oklahoma, with no similar settlement in 2005.
Income taxes paid increased $404,641 (100%) to $404,641 in 2005 from $-0- in 2004 due to increased income tax expense discussed above and below in the "Results of Operations".
INVESTING ACTIVITIES
Net cash applied to investing activities increased $1,386,755 (56%) to $3,870,151 in 2005 from $2,483,396 in 2004. In 2005, net cash flows from available for sale securities decreased $350,456 from cash applied of $452,816 in 2004 to cash applied of $803,272 in 2005, as a result of cash invested from excess 2005 cash flows provided by operations. Most of the additional net cash applied to investing activities is due to a $1,401,808 net increase in the application of cash to capitalized property additions, discussed above. In 2005, net cash flows applied to capitalized property were $3,503,888 as compared to $2,102,080 in 2004. These net cash application increases were offset somewhat by cash flows from an equity investment distribution increase of $199,450 and $166,059 cash from the surrender of a life insurance policy.
FINANCING ACTIVITIES
Cash applied to financing activities increased $282,146 (167%) to $451,118 in 2005 from $168,972 in 2004. Cash flows applied to financing activities consist of cash dividends on common stock and cash used for the purchase of treasury stock. In 2005, cash dividends paid on common stock amounted to $315,586 as compared to $155,052 in 2004. The increase was the result of an increase in the 2005 dividends per share to $2.00 from $1.00 in 2004. Cash applied to the purchase of treasury stock was $135,532 in 2005 as compared to $13,290 in 2004.
FORWARD-LOOKING SUMMARY
The latest estimate of business to be done in 2006 and beyond indicates the projected activity can be funded from cash flow from operations and other internal sources including net working capital. The Company is engaged in exploratory drilling. If this drilling is successful, substantial development drilling may result. Also, should other exploration projects which fit the Company's risk parameters become available, or other investment opportunities become known, capital requirements may be more than the Company has available. If so, external sources of financing could be required.
RESULTS OF OPERATIONS
As disclosed in the Statements of Operations in Item 7, of this Form 10-KSB, in 2005 the Company had net income of $3,812,095 as compared to a net income of $1,748,991 in 2004. Net income per share, basic and diluted was $23.17 in 2005, an increase of $12.61 per share from $10.56 in 2004. Material line item changes in the Statements of Operations will be discussed in the following paragraphs.
OPERATING REVENUES
Operating revenues increased $4,258,800 (100%) to $8,523,346 in 2005 from $4,264,546 in 2004. Oil and gas sales increased $4,146,565 (106%) to $8,067,949 in 2005 from $3,921,384 in 2004. In addition lease bonuses and other increased $112,235 (33%) to $455,397 in 2005 from $343,162 in 2004. The increase in oil and gas sales will be discussed in the following paragraphs.
The $4,146,565 increase in oil and gas sales was the net result of a $3,104,192 increase in gas sales plus a $998,853 increase in oil sales and a $43,520 increase in miscellaneous oil and gas product sales. The following price and volume analysis is presented to help explain the changes in oil and gas sales from 2004 to 2005. Miscellaneous oil and gas product sales of $108,215 in 2005 and $64,695 in 2004 are not included in the analysis.
Variance
---------------------
Production 2005 Price Volume 2004
---------- -------- -------- -------- --------
Oil -
Bbls (000 omitted) 36 11 25
$(000 omitted) $ 1,982 $ 546 $ 453 $ 983
Unit Price $ 54.69 $ 15.07 $ 39.62
Gas -
MCF (000 omitted) 791 272 519
$(000 omitted) $ 5,977 $ 1,599 $ 1,505 $ 2,873
Unit Price $ 7.55 $ 2.02 $ 5.53
|
The $3,104,192 (108%) increase in natural gas sales to $5,977,228 in 2005 from $2,873,036 in 2004 was the result of an increase in both the price and volume of sales. A positive price variance of $1,599,054 resulted because the average price received per thousand cubic feet (MCF) of natural gas sales increased $2.02 per MCF to $7.55 in 2005 from $5.53 in 2004. A positive volume variance of $1,505,138 resulted from an increase in volume sold of 272,176 MCF to 791,374 MCF in 2005 from 519,198 in 2004. The increase in the volume of production was the net result of production of 330,227 MCF from properties which first produced in 2005 as partially offset by a 58,050 MCF normal decline in production from mature producing properties. As disclosed in Supplemental Schedule 1 of the Unaudited Supplemental Financial Information included in Item 7, below, working interests in natural gas extensions and discoveries were adequate to replace reserves produced in 2005 and 2004.
The gas production from properties which first produced in 2005 includes production from several new royalty interest properties drilled by Burlington Resources in Robertson County, Texas. The first of these wells began producing in late March, 2005 and the last one began producing in October, 2005. These properties accounted for approximately 225,000 MCF and $1,780,000 of the increased gas sales for 2005. While the operator is currently drilling and plans more drilling in the future on the acreage in which the Company holds mineral interests, the Company has no control over the timing of such activity.
The $998,853 (102%) increase in crude oil sales to $1,982,506 in 2005 from $983,653 in 2004 was the result of an increase in both the average price per barrel and oil sales volumes. The average price received per barrel (Bbl) of oil increased $15.07 (38%) to $54.69 per Bbl in 2005 from $39.62 per Bbl in 2004 resulting in an increase in oil sales of $546,259. An increase in oil sales volumes of 11,423 Bbls to 36,250 Bbls in 2005 from 24,827 Bbls in 2004 resulted in a positive volume variance of $452,594. The positive volume variance was the net result of production of 14,316 Bbls from properties which first produced in 2005 as partially offset by a 2,893 Bbls normal decline in production from mature producing properties. As disclosed in Supplemental Schedule 1 of the Unaudited Supplemental Financial Information included in Item 7 below, working interests in oil extensions and discoveries were adequate to replace reserves produced in 2005 and 2004. For both oil and gas sales, the price change was mostly the result of a change in the spot market prices upon which most of the Company's oil and gas sales are based. These spot market prices have had significant fluctuations in the past and these fluctuations are expected to continue.
OPERATING COSTS AND EXPENSES
Operating costs and expenses increased $1,282,932 (52%) to $3,745,369 in 2005 from $2,462,437 in 2004, primarily due to increases in production costs, exploration costs and depreciation, depletion and amortization. The material components of operating costs and expenses will be discussed below.
PRODUCTION COSTS. Production costs increased $385,228 (62%) to $1,005,720 in 2005 from $620,492 in 2004. For the most part, the increase was the net result of a $246,644 (123%) increase in gross production tax to $447,550 in 2005, from $200,906 in 2004, plus an increase in lease operating expense of $126,464 (34%) to $494,909 in 2005 from $368,445 in 2004. The increase in lease operating expense was the result of the additional costs of wells which first produced in late 2004 or in 2005. Gross production taxes are state taxes which are calculated as a percentage of gross proceeds from the sale of products from each producing oil and gas property; therefore, they fluctuate with the change in the dollar amount of revenues from oil and gas sales.
EXPLORATION COSTS. 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 $4,147,457 in 2005 and $2,322,918 in 2004. Costs charged to operations were $495,351 in 2005 and $139,231 in 2004 inclusive of geological and geophysical costs of $96,979 in 2005 and $36,420 in 2004.
UPDATE OF OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITY FROM DECEMBER 31, 2004. For the twelve months ended December 31, 2005, the Company participated in the drilling of 12 gross exploratory and 23 gross development working interest wells with net working interests ranging from a high of 19.6% to a low of 2.9%. Of the twelve exploratory wells, four were plugged, abandoned and charged to expense, seven were completed as producers and one is still being completed and tested. Of the twenty-three development wells, nineteen were completed as producers, two were plugged, abandoned and charged to expense and two wells are still being completed and tested. In management's opinion, the exploratory drilling summarized above has produced some possible development drilling opportunities which could increase the Company's oil and gas reserves.
The following is a summary as of March 13, 2006, updating both exploration and development activity from December 31, 2004.
The Company participated with its 18% working interest in the drilling of four step-out wells on a Barber County, Kansas prospect. The first was started in March 2005 and completed in April 2005 as a commercial gas well. The second was started in June 2005 and completed in September 2005 as a marginal oil and gas well. The third, a re-entry, was started in July 2005 and completed in September 2005 as a commercial oil and gas well. The fourth was started in January 2006, completed in February 2006 and is currently being tested. Another prospect well was recompleted in a new zone in July 2005 and is flowing oil and gas at a good rate. Three additional wells are planned for 2006. Capitalized costs for the period ended December 31, 2005 were $298,082.
The Company participated with a 50% interest in the development of a Bryan County, Oklahoma prospect. The Company sold a portion of its interest and participated with a 9% working interest in the drilling of an exploratory well. The well was commenced in July 2005, hole problems were encountered prior to reaching the objective depth, and it was plugged in August 2005. The prospect is being re-evaluated. Dry hole costs for the period ended December 31, 2005 were $31,813.
The Company has a 0.96% Phase I interest and a 4.32% Phase II interest in a Harding County, South Dakota waterflood unit. There were six horizontal oil producers in the unit. Water injection into one of the wells commenced in March 2006. Cumulative capitalized costs as of December 31, 2005 were $58,772.
The Company participated in the drilling of two step-out wells on a Dewey County, Oklahoma prospect. The first well, in which the Company has a 6% working interest, was started in March 2005 and completed in May 2005. The second well (Company working interest 5.4%) was started in April 2005 and completed in May 2005. Both are commercial gas and gas condensate producers. Drilling costs totaled $156,784 as of December 31, 2005.
In February 2005, the Company participated in the drilling of a step-out well in Morton County, Kansas with a 19.6% working interest. It was completed in March 2005 as a commercial gas well. Sales commenced in June 2005. Drilling costs capitalized as of December 31, 2005 were $120,057.
In March 2005, the Company participated with its 11.7% interest in the recompletion of a non-commercial well on a Woods County, Oklahoma prospect. The well is now a marginal gas producer. The Company participated in the drilling of two development wells on the prospect with interests of 18% and 16.56%. Both were started in August 2005 and completed in October 2005 as commercial gas wells. Drilling costs totaled $223,528 as of December 31, 2005. An impairment reserve of $23,788 has been recorded at December 31, 2005 for the marginal gas producer.
The Company participated in the drilling of nine development wells on a Canadian County, Oklahoma prospect. The first well (Company working interest 6.1%) was started in January 2005 and completed in March 2005. The second well (3.8% interest) was started in February 2005 and completed in June 2005. The third well (7.5% interest) was started in March 2005 and completed in June 2005. The fourth well (8.5% interest) was started in April 2005 and completed in July 2005. The fifth well (15% interest) was started in April 2005 and completed in July 2005. The sixth well (6.1% interest) was started in August 2005 and completed in September 2005. The seventh well (10.7% interest) was started in December 2005 and completed in February 2006. The third well is a marginal oil and gas producer. The other six are commercial oil and gas producers. The eighth and ninth wells (3.8% and 7.3% interests) were started in March 2006 and are currently drilling. New zones were added to three other prospect wells (7.3%, 8.5% and 15% interests). Drilling costs for 2005 totaled $1,076,875 as of December 31, 2005, including prepaid drilling costs. A total of $89,667 has been recorded for impairment reserve on two marginal wells.
The Company participated with its 16% working interest in the drilling of two step-out wells on a Creek County, Oklahoma prospect. The first well was started in February 2005 and completed in March 2005 as a commercial gas producer. The second well was started in December 2005, completed in February 2006 and is currently awaiting pipeline connection. Drilling costs of $109,143 have been capitalized as of December 31, 2005.
The Company participated in the drilling of a step-out well, four exploratory wells and three development wells on a Stephens County, Oklahoma prospect. The step-out well (Company working interest 2.9%) was drilled and completed in December 2004 and recompleted in February 2005. It is non-commercial. The first exploratory well (3% interest) was started in November 2004 and completed in March 2005 as a commercial oil and gas producer. A second exploratory well (3.6% interest) was started in February 2005 and completion attempts in April and May 2005 were unsuccessful. A third exploratory well (3% interest) was started in May 2005 and completed in January 2006. It appears to be a marginal gas well. A development well (3% interest) was started in October 2005 and completed in December 2005 as a commercial oil and gas producer. Two additional development wells (3% interests) were started in November 2005. One was completed in January 2006 and appears to be a commercial gas well. A completion attempt of the other is currently in progress. The fourth exploratory well (4.7% interest) was started in December 2005 and a completion attempt is currently in progress. An additional development well has been proposed. Capitalized drilling costs as of December 31, 2005 (net of an impairment reserve of $27,194) totaled $324,066, and dry hole costs were $67,014.
The Company participated with a 16% working interest in the drilling of an exploratory well on a McClain County, Oklahoma prospect. The well was started in October 2004 and completed in January 2005. Oil and gas production commenced in February 2005 at a commercial rate but declined rapidly. Pumping equipment, installed in May 2005, restored the well to commercial production, but it has since declined to marginal status. Drilling costs totaled $248,200 as of December 31, 2005. An impairment reserve of $112,919 has been recorded at December 31, 2005 for this well.
The Company participated with a fee mineral interest in the drilling of an exploratory horizontal well in Harding County, South Dakota. The Company has a 10.9% interest in the well which was started in February 2005 and completed in April 2005 as a commercial oil well. Capitalized costs as of December 31, 2005 were $229,682.
In February 2005, the Company purchased a 16% interest in 3,830 net acres of leasehold on a Cheyenne and Rawlins Counties, Kansas prospect for $21,380. A 3-D seismic survey was conducted and an exploratory well was started in June 2005. It was completed as a dry hole in July 2005. No further drilling is planned. Drilling costs totaling $28,480 as of December 31, 2005 have been expensed as dry hole costs.
In August 2005, the Company purchased an 18% interest in 2,200 net acres of leasehold on a Woods County, Oklahoma prospect for $61,875. An exploratory well was started in October 2005 and completed in November 2005 as a commercial oil and gas producer. A step-out well was started in October 2005 following an unsuccessful attempt to re-enter an old dry hole. It was completed in December 2005 as a commercial oil and gas well. Sales from both wells commenced in February 2006. Additional acreage is being acquired and two additional wells are planned for 2006. Drilling costs of $8,649 were charged to dry hole expense and $163,260 were capitalized as of December 31, 2005.
In May 2005, the Company purchased a 16% interest in 640 net acres of leasehold on a Woods County, Oklahoma prospect for $9,600. An old dry hole was re-entered and washed down in July 2005 and completed in August 2005 as a marginal oil and gas well. Capitalized costs totaled $45,268 as of December 31, 2005, net of an impairment reserve of $42,543.
In May 2005, the Company purchased a 16% interest in a McClain County, Oklahoma prospect for $20,000. An exploratory well was started in June 2005 and completed in December 2005 as a commercial oil and gas producer. Capitalized drilling costs totaled $326,614 as of December 31, 2005.
In May 2005, the Company purchased a 2% interest in a Juab County, Utah prospect for $145,212. An exploratory well was started in June 2005 and completed as a dry hole in November 2005. The prospect is being re-evaluated. Drilling costs of $245,961 were charged to dry hole expense as of December 31, 2005.
In December 2005, the Company purchased a 14% interest in an Ellis County, Oklahoma prospect for $132,508. An exploratory well was started in January 2006 and completed in February 2006 as a dry hole. The prospect is being re-evaluated. Prepaid drilling costs were $188,886 as of December 31, 2005.
In December 2005, the Company purchased a 10% interest in a Grady County, Oklahoma prospect for $49,966. A 3-D seismic survey will be conducted in March 2006 followed by the drilling of an exploratory well.
In February 2006, the Company purchased a 15% interest in a Woods County, Oklahoma prospect for $15,600. A step-out well was started in February 2006, drilled to total depth and casing was set. A completion attempt is pending.
The Company will participate with its 15.7% working interest in the drilling of a horizontal development well on a Seminole County, Oklahoma prospect. The well is scheduled to commence in March 2006. Prepaid drilling costs were $112,471 as of December 31, 2005.
DEPRECIATION, DEPLETION, AMORTIZATION AND VALUATION PROVISIONS (DD&A). Major components are the provision for impairment of undeveloped leaseholds, provision for impairment of long-lived assets, depletion of producing leaseholds and depreciation of tangible and intangible lease and well costs. Undeveloped leaseholds are amortized over the life of the leasehold (most are 3 years) 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 of undeveloped leaseholds was $261,124 in 2005 and $168,819 in 2004. The increase in the provision for impairment is directly related to the exploration activity discussed under "Exploration Costs", above. The 2005 provision for impairment was primarily due to the annual amortization of undeveloped leaseholds of approximately $239,000 and only about $22,000 due to specific leasehold impairments. In 2004, a Coal County, Oklahoma marginal well resulted in an impairment of approximately $121,000.
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 2005 and 2004. The 2005 provision of $367,635 was partly the result of reserve adjustments on wells which first produced in 2004 but mostly due to wells completed in 2005 for which the estimated fair market value of future production was less than the Company's carrying amount in the well. The 2004 provision of $320,154 was to a great extent the result of similar declines in 2004.
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, a change in the rate of production or a change in the basis of the assets. The provision for depletion and depreciation totaled $723,980 in 2005 and $407,142 in 2004. Most of the increase of $316,838 is due to increased oil and gas property additions in recent years.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES (G&A). G&A increased $70,769 (9%) to $854,619 in 2005 from $783,850 in 2004. The increase was the result of an increase in employee salaries and benefits, an increase in accounting fees of approximately $5,000 and in increase in franchise and ad valorem taxes of almost $40,000.
EQUITY INCOME (LOSS) IN INVESTEES. The following is an analysis of equity income
(loss) in investees by entity for the years ended December 31, 2005 and 2004.
See Note 7 to the accompanying financial statements included in Item 7 below for
more information.
Net Income (Loss) 2005 Income (Loss)
-------------------- Over (Under)
2005 2004 2004
--------- --------- ------------------
Broadway Sixty-Eight, Ltd. $ 17,407 $ 22,066 $ (4,659)
Millennium Golf Properties, LLC 21,677 13,180 8,497
OKC Industrial Properties, LC 66,662 48,980 17,682
JAR Investment, LLC 82,952 2,455 80,497
--------- --------- ------------------
Total $ 188,698 $ 86,681 $ 102,017
========= ========= ==================
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OTHER INCOME (LOSS), NET. See Note 11 to the accompanying financial statements for an analysis of the components of this line item for the years ended 2005 and 2004. Other income, net decreased $146,016 (47%) to $167,256 in 2005 from $313,272 in 2004.
Realized and unrealized gain (loss) on trading securities decreased $18,951 (203%) to $(9,613) loss in 2005 from $9,338 gain in 2004. Realized gains or losses result when a trading security which is owned is sold. Unrealized gains or losses result from adjusting the Company's carrying amount in trading securities owned at the reporting date to estimated fair market value. In 2005, the Company had realized gains of $798 and unrealized losses of $10,411. In 2004, the Company had realized gains of $35,347 and unrealized losses of $26,009.
Accrual basis interest income increased $103,031 (206%) to $153,059 in 2005 from $50,028 in 2004. The increase was the result of an increase in the average rate of return on cash equivalents and available for sale securities from which most of interest income is derived. The average rate of return increased 1.33% to 2.21% in 2005 from 0.88% in 2004, and the average balance outstanding of $5,582,429 increased $1,106,863 (25%) from $4,475,566 in 2004.
Most of the decrease in this line item was due to the decrease in class action lawsuit settlements of $283,421 (95%) to $13,775 in 2005 from $297,196 in 2004. All of this decrease was due to settlement of litigation in 2004 described earlier under "Operating Activities" in the "Liquidity and Capital Reserves" section. The Company currently has no significant pending lawsuits.
Provision for (Benefit from) Income Taxes. See Note 6, to the accompanying financial statements for an analysis of the various components of income taxesIn 2005, the Company had an estimated provision for income taxes of $1,321,836 as the result of a current tax provision of $731,659 plus a deferred tax provision of $590,177. In 2004, the Company had an estimated provision for income taxes of $453,071 as the result of a current tax provision of $89,129 plus a deferred tax provision of $363,942.
ITEM 7. FINANCIAL STATEMENTS.
Index to Financial Statements.
Page
Report of Independent Registered Public Accounting Firm -
Murrell, Hall, McIntosh & Co., PLLP, 2005. 21
Report of Independent Registered Public Accounting Firm -
Grant Thornton, LLP 2004, 2003. 22
Balance Sheets - December 31, 2005 and 2004 23
Statements of Operations - Years Ended December 31, 2005
and 2004 25
Statement of Stockholders' Equity - Years Ended December 31, 2005
and 2004 26
Statements of Cash Flows - Years Ended December 31, 2005
and 2004 27
Notes to Financial Statements 29
Unaudited Supplemental Financial Information 38
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
The Reserve Petroleum Company
We have audited the accompanying balance sheet of THE RESERVE PETROLEUM COMPANY as of December 31, 2005, and the related statements of operations, stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 2005, and the results of its operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/S/ MURRELL, HALL, MCINTOSH & CO., PLLP Oklahoma City, Oklahoma March 17, 2006 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
The Reserve Petroleum Company
We have audited the accompanying balance sheets of The Reserve Petroleum Company as of December 31, 2004 and 2003, 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP Oklahoma City, Oklahoma March 11, 2005 |
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
ASSETS
December 31,
--------------------------
2005 2004
------------ ------------
Current Assets:
Cash and Cash Equivalents (Note 2) $ 704,121 $ 570,497
Available for Sale Securities (Notes 2 & 5) 5,522,100 4,718,828
Trading Securities (Notes 2 & 5) 254,434 261,893
Receivables (Note 2) 2,092,067 669,008
------------ ------------
8,572,722 6,220,226
------------ ------------
Investments:
Equity Investments (Notes 2 & 7) 450,217 532,469
Other 15,298 15,298
------------ ------------
465,515 547,767
------------ ------------
Property, Plant & Equipment (Notes 2, 8 & 10):
Oil & Gas Properties, at Cost Based on the
Successful Efforts Method of Accounting
Unproved Properties 1,133,077 624,061
Proved Properties 9,612,125 7,172,141
------------ ------------
10,745,202 7,796,202
Less - Valuation Allowance and Accumulated
Depreciation, Depletion & Amortization 5,773,992 5,141,638
------------ ------------
4,971,210 2,654,564
------------ ------------
Other Property & Equipment, at Cost 404,726 375,568
Less - Accumulated Depreciation & Amortization 203,480 175,615
------------ ------------
201,246 199,953
------------ ------------
5,172,456 2,854,517
------------ ------------
Other Assets 304,797 461,722
------------ ------------
$ 14,515,490 $ 10,084,232
============ ============
|
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------------
2005 2004
------------ ------------
Current Liabilities:
Accounts Payable (Note 2) $ 324,675 $ 169,823
Income Taxes Payable 331,412 4,394
Other Current Liabilities -
Deferred Income Taxes and Other 465,108 147,682
------------ ------------
1,121,195 321,899
------------ ------------
Long Term Liabilities:
Dividends Payable (Note 3) 184,749 170,928
Deferred Tax Liability 655,470 384,484
------------ ------------
840,219 555,412
------------ ------------
Commitments & Contingencies (Notes 2 & 7)
Stockholder's Equity: (Notes 3 & 4)
Common Stock 92,368 92,368
Additional Paid-in Capital 65,000 65,000
Retained Earnings 12,786,650 9,303,963
------------ ------------
12,944,018 9,461,331
Less - Treasury Stock, at Cost 389,942 254,410
------------ ------------
12,554,076 9,206,921
------------ ------------
$ 14,515,490 $ 10,084,232
============ ============
|
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------
2005 2004
------------ ------------
Operating Revenues:
Oil & Gas Sales $ 8,067,949 $ 3,921,384
Lease Bonuses & Other 455,397 343,162
------------ ------------
8,523,346 4,264,546
------------ ------------
Operating Costs and Expenses:
Production 1,005,720 620,492
Exploration 495,351 139,231
Depreciation, Depletion, Amortization
& Valuation Provisions 1,389,679 918,864
General, Administrative and Other 854,619 783,850
------------ ------------
3,745,369 2,462,437
------------ ------------
Income from Operations 4,777,977 1,802,109
Equity Income in Investees (Note 7) 188,698 86,681
Other Income, Net (Note 11) 167,256 313,272
------------ ------------
Income before Income Taxes 5,133,931 2,202,062
Provision for Income Taxes (Notes 2 & 6) 1,321,836 453,071
------------ ------------
Net Income $ 3,812,095 1,748,991
============ ============
Per Share Data (Note 2):
Net Income, Basic and Diluted $ 23.17 $ 10.56
============ ============
Cash Dividends $ 2.00 $ 1.00
============ ============
Weighted Average Shares Outstanding, Basic and Diluted 164,531 165,661
============ ============
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See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 2005
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
------------ ------------ ------------ ------------
Balance at January 1, 2004 $ 92,368 $ 65,000 $ 7,720,645 $ (240,490)
Net Income -- -- 1,748,991 --
Cash Dividends on Common Stock -- -- (165,673) --
Purchase of Treasury Stock -- -- -- (13,920)
------------ ------------ ------------ ------------
Balance at December 31, 2004 92,368 65,000 9,303,963 (254,410)
Net Income -- -- 3,812,095 --
Cash Dividends on Common Stock -- -- (329,408) --
Purchase of Treasury Stock -- -- -- (135,532)
------------ ------------ ------------ ------------
Balance at December 31, 2005 $ 92,368 $ 65,000 $ 12,786,650 $ (389,942)
============ ============ ============ ============
|
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Year Ended December 31,
-----------------------------
2005 2004
------------- -------------
Cash Flows from Operating Activities:
Cash Received-
Oil and Gas Sales $ 6,752,119 $ 3,762,604
Lease Bonuses and Rentals 330,780 309,451
Agricultural Rentals & Other 5,303 5,415
Cash Paid-
Production Costs (997,571) (602,551)
Exploration Costs (489,893) (139,151)
General Suppliers, Employees and Taxes,
Other than Income (874,000) (786,160)
Interest Received 123,272 39,500
Interest Paid (3,778) (9,375)
Settlement of Class Action Lawsuits 13,775 297,196
Dividends Received on Trading
Securities 1,681 657
Purchase of Trading Securities (609,393) (533,568)
Sale of Trading Securities 607,239 532,680
Income Taxes Paid, net (404,641) --
------------- -------------
Net Cash Provided by Operating
Activities 4,454,893 2,876,698
------------- -------------
Cash Flows from Investing Activities:
Maturity of Available for Sale Securities 9,686,787 7,880,588
Purchase of Available for Sale Securities (10,490,059) (8,333,404)
Property Dispositions 50,705 81,607
Property Additions (3,554,593) (2,183,687)
Cash Distributions from Equity Investments 270,950 71,500
Distribution for Surrender of Life Insurance Policy 166,059 --
------------- -------------
Net Cash Applied to Investing Activities $ (3,870,151) $ (2,483,396)
------------- -------------
|
See Accompanying Notes
THE RESERVE PETROLEUM COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Year Ended December 31,
---------------------------
2005 2004
------------ ------------
Cash Flows Applied to Financing Activities:
Dividends Paid to Shareholders $ (315,586) $ (155,052)
Purchase of Treasury Stock (135,532) (13,920)
------------ ------------
Total Cash Applied to Financing Activities (451,118) (168,972)
------------ ------------
Net Change in Cash and Cash Equivalents 133,624 224,330
Cash and Cash Equivalents at Beginning of Year 570,497 346,167
------------ ------------
Cash and Cash Equivalents at End of Year $ 704,121 $ 570,497
============ ============
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net Income $ 3,812,095 $ 1,748,991
Net Income Increased (Decreased) by -
Net Change in -
Unrealized Holding (Gains) Losses
on Trading Securities 10,411 26,009
Accounts Receivable (1,438,941) (181,342)
Interest and Dividends Receivable (29,787) (10,240)
Income Taxes Refundable/Payable 327,018 39,079
Accounts Payable 3,582 55,214
Trading Securities (2,952) (36,236)
Other Assets (9,097) (14,556)
Deferred Taxes 590,177 413,942
Other Liabilities (1,765) (2,334)
Equity Income in Investees (188,698) (86,681)
Disposition of Property & Equipment (6,828) 5,988
Depreciation, Depletion, Amortization
and Valuation Provisions 1,389,678 918,864
------------ ------------
Net Cash Provided by Operating Activities $ 4,454,893 $ 2,876,698
============ ============
|
See Accompanying Notes
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
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.
Investments
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.
Trading securities, which consist primarily of equity securities, are carried at fair value with unrealized gains and losses included in operations.
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.
Receivables and Revenue Recognition
Oil and gas sales and resulting receivables are recognized when the product is delivered to the purchaser and title has transferred. Sales are to credit-worthy major energy purchasers with payments generally received within 60 days of transportation from the well site. The Company has historically had little, if any, uncollectible receivables; therefore, an allowance for uncollectible accounts is not required.
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. The Company has not historically had any capitalized exploratory drilling costs that are pending determination of reserves for more than one year. 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.
Income Taxes
Deferred income taxes are provided for significant carryforwards and temporary differences using the liability method. See Note 6 for additional information.
Net Income Per Share
Net income per share is calculated based on the weighted average of the number of shares outstanding during the year. There are no dilutive shares.
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, Kansas and Oklahoma. The Company had two purchasers in 2005 and one purchaser in 2004 whose purchases were in excess of 10% of total oil and gas sales. In 2005, XTO Energy purchases were $910,108, or 11.3% of total oil and gas sales and Burlington Resources purchases were $833,363, or 10.3% of total oil and gas sales. In 2004, XTO Energy purchases were $760,446, or 19.4% of total oil and gas sales and Burlington Resources purchases were less than 1% of total oil and gas sales.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Gas Balancing
Gas imbalances are accounted for under the sales method whereby revenues are recognized based on production sold. A liability is recorded when the Company's excess takes of natural gas volumes exceed its estimated remaining recoverable reserves (over produced). No receivables are recorded for those wells where the Company has taken less than its ownership share of gas production (under produced).
Guarantees
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair market value of the obligation undertaken in issuing the guarantee. The Company previously did not record a liability when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. FIN 45 applied prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002. The Company historically issues guarantees only on a limited basis but has issued such guarantees associated with the Company's equity investments in Broadway Sixty-Eight, Ltd and JAR Investment, LLC. Disclosures required by FIN 45 and the effect of guarantees issued in 2002 are discussed in Note 7.
Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset, unless such items are immaterial. Subsequently, the asset retirement cost should be allocated to expense using a systematic and rational method. The Company has assessed the impact of SFAS No. 143 and based on the results of the assessment believes the impact of this statement is immaterial to its financial position and results of operations.
Accounting Changes
SFAS 123(R), SFAS 151, SFAS 152, SFAS 153 and SFAS 154 - SFAS 123 (R), Share Based Payment replaces SFAS 123, Accounting for Stock-Based Compensation, SFAS No. 151, Inventory Costs - an amendment of ARB No. 4 and SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67, SFAS No. 153, Exchange of Non-monetary Assets - an amendment of APB Opinion No. 29 and SFAS No. 154, Accounting Changes and Error Corrections - a replacement of APB No. 20 and SFAS 3 were recently issued. SFAS No. 123(R), 151, 152, 153 and 154 have no current applicability to the Company and have no effect on the consolidated financial statements.
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.
Note 4 - COMMON STOCK
The following table summarizes the changes in common stock issued and outstanding:
Shares of
Shares Treasury Shares
Issued Stock Outstanding
----------- ----------- -----------
January 1, 2004, $.50
par value stock, 400,000
shares authorized 184,735.28 18,797.64 165,937.64
Purchase of stock -- 429.00 (429.00)
----------- ----------- -----------
December 31, 2004, $.50
par value stock, 400,000
shares authorized 184,735.28 19,226.64 165,508.64
Purchase of stock -- 1,875.00 (1,875.00)
----------- ----------- -----------
December 31, 2005, $.50
par value stock, 400,000
shares authorized 184,735.28 21,101.64 163,633.64
=========== =========== ===========
|
Note 5 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
At December 31, 2005 and 2004, 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 at December 31, 2005:
As to the trading securities held at year end, unrealized trading (losses) gains included in earnings were $(10,411) for 2005 and $(26,009) for 2004.
Note 6 - INCOME TAXES
Components of deferred taxes follows:
December 31,
-----------------------------
2005 2004
------------- -------------
Assets
Leasehold Costs $ 230,052 $ 182,338
Gas Balancing Receivable 52,379 52,379
Long-Lived Asset Impairment 301,263 233,523
Other 8,431 271
------------- -------------
Total Assets 592,125 468,511
Liabilities
Marketable Securities 3,335 7,056
Receivables 421,048 98,137
Intangible Development Costs and Depreciation 1,247,595 852,994
------------- -------------
Total Liabilities 1,671,978 958,187
------------- -------------
Net Deferred Tax Liability $ (1,079,853) $ (489,676)
============= =============
|
The following table summarizes the current and deferred portions of income tax expense.
Year Ended December 31,
------------------------------
2005 2004
----------- -----------
Current Tax Provision:
Federal $ 727,162 $ 89,129
State 4,497 --
----------- -----------
731,659 89,129
Deferred Provision 590,177 363,942
----------- -----------
Total Provision $ 1,321,836 $ 453,071
=========== ===========
|
The total provision for income tax expressed as a percentage of income before income tax was 26% in 2005 and 21% in 2004. These amounts differ from the amounts computed by applying the statutory US Federal income tax rate of 35% for 2005 and 2004 to income before income tax as summarized in the following reconciliation:
Year Ended December 31,
----------------------------
2005 2004
----------- -----------
Computed Federal Tax
Provision $ 1,795,302 $ 770,722
Increase (Decrease) in Tax From:
Corporate Graduated Tax Rate
Structure (51,339) (22,021)
Refund for Capital Loss Carryback -- (49,312)
Allowable Depletion in Excess of Basis (439,533) (246,801)
Dividend Received Deduction (412) (161)
State Income Tax Provision 4,497 --
Other 13,321 644
----------- -----------
Provision for Income Tax $ 1,321,836 $ 453,071
=========== ===========
Effective Tax Rate 26% 21%
=========== ===========
|
Note 7 - INVESTMENTS AND RELATED COMMITMENTS AND CONTINGENT LIABILITIES INCLUDING GUARANTEES
The carrying value of Equity Investments consist of the following at December 31:
Ownership % 2005 2004
----------- --------------- ---------------
Broadway Sixty-Eight, Ltd. 33% 325,691 $ 308,284
JAR Investment, LLC 25% 8,022 93,820
Millennium Golf Properties, LLC 9% 63,153 57,676
OKC Industrial Properties, L.L.C. 10% 53,351 72,689
--------------- ---------------
$ 450,217 $ 532,469
=============== ===============
|
Broadway Sixty-Eight, Ltd., an Oklahoma limited partnership (the Partnership), owns and operates an office building in Oklahoma City, Oklahoma. Although the Company invested as a limited partner, along with the other limited partners, it agreed jointly and severally with all other limited partners to reimburse the general partner for any losses suffered from operating the Partnership. The indemnity agreement provides no limitation to the maximum potential future payments.
The Company leases its corporate office from the Partnership. The operating lease under which the space was rented expired December 31, 1995, and the space is currently rented on a year-to-year basis under the terms of the expired lease. Rent expense for lease of the corporate office from the Partnership was approximately $27,000 for each of the years ended December 31, 2005 and 2004.
JAR Investment, LLC, (JAR) an Oklahoma limited liability company, previously held Oklahoma City metropolitan area real estate that was sold in June 2005 (see below). JAR also owns a 70% management interest in Main-Eastern, LLC (M-E), also an Oklahoma limited liability company. M-E was formed in 2002 to establish a joint venture to develop a retail/commercial center on a portion of JAR's real estate.
The Company has a guarantee agreement limited to 25% of JAR's 70% interest in M-E's outstanding loan plus all costs and expenses related to enforcement and collection, or $154,359 at December 31, 2005. This loan matures November 27, 2008. Because the guarantee of the M-E loan has not been modified subsequent to December 31, 2002, no liability for the fair value of the obligation is required to be recorded by the Company. The maximum potential amount of future payments (undiscounted) the Company could be required to make under the M-E guarantee at December 31, 2005 (based on the original loan amount) is $169,750 plus costs and expenses related to enforcement and collection.
In late June 2005, JAR sold all real estate except the portion with the retail/commercial center developed by the M-E joint venture discussed above. At closing, the JAR bank loan secured by the property being sold was paid off and the Company's guarantee agreement relating to this loan was terminated. The Company's share of the gain on this sale was approximately $80,000 and in early July 2005, the Company received a cash distribution of $165,000 from JAR.
Millennium Golf Properties, LLC, an Oklahoma limited liability company, owns and operates two Oklahoma City area golf courses, Coffee Creek Golf Course and River Oaks Golf Course. It is also involved in real estate development around each golf course.
OKC Industrial Properties, L.L.C., an Oklahoma limited liability company, holds certain Oklahoma City metropolitan area real estate as an investment.
Note 8 - COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND DEVELOPMENT ACTIVITIES
All of the Company's oil and gas operations are within the continental United States. In connection with its oil and gas operations, the following costs were incurred:
Year Ended December 31,
------------------------------
2005 2004
----------- -----------
Acquisition of Properties
Unproved $ 856,712 $ 359,005
Proved -- $ --
Exploration Costs $ 1,649,796 $ 1,333,434
Development Costs $ 1,640,879 $ 636,747
|
Note 9 - FINANCIAL INSTRUMENTS
The following table includes various estimated fair value information as of December 31, 2005 and 2004, which pertains to the Company's financial instruments 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 The carrying amount approximates fair value. Fair value is the amount that will be paid on demand at the reporting date.
The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
2005 2004
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
Financial Assets
Cash and Cash Equivalents $ 704,121 $ 704,121 $ 570,497 $ 570,497
Available for Sale Securities 5,522,100 5,522,100 4,718,828 4,718,828
Trading Securities 254,434 254,434 261,893 261,893
Financial Liabilities
Dividends Payable (184,749) (184,749) (180,928) (180,928)
|
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 $367,634 for the year ended December 31, 2005 and $320,154 for the year ended December 31, 2004 are included in the Statements of Operations in the line item, Depreciation, Depletion, Amortization and Valuation Provisions.
Note 11 - OTHER INCOME, NET
The following is an analysis of the components of Other Income, Net for the years ended 2005 and 2004:
2005 2004
--------- ---------
Realized and Unrealized Gain
On Trading Securities $ (9,613) $ 9,338
Gain (Loss) on Asset Sales 6,829 (39,651)
Interest Income 153,059 50,028
Settlements of Class Action Lawsuits 13,775 296,908
Agricultural Rental Income 5,600 5,600
Dividend and Other Income 1,681 657
Interest and Other Expenses (4,075) (9,608)
--------- ---------
Other Income, Net $ 167,256 $ 313,272
========= =========
|
Note 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company is affiliated by common management and ownership with Mesquite Minerals, Inc., (Mesquite), Mid-American Oil Company (Mid-American), Lochbuie Limited Partnership (LLTD) and Lochbuie Holding Company (LHC). The Company also owns interests in certain producing and non-producing oil and gas properties as tenants in common with Mesquite, Mid-American and LLTD.
Mesquite, Mid-American and LLTD share facilities and employees, including executive officers, with the Company. The Company has been reimbursed for services, facilities and miscellaneous business expenses incurred during 2005 by payment to the Company in the amount of $182,013 by Mesquite, $128,480 by Mid-American and $85,653 by LLTD. Reimbursements for 2004 were $169,950 by Mesquite, $119,965 by Mid-American and $79,976 by LLTD. Included in the 2005 amounts, Mesquite paid $119,594, Mid-American $84,419 and LLTD $56,280 for their share of salaries. In 2004, the share of salaries paid by Mesquite was $112,888, Mid-American $79,686, and LLTD $53,124.
UNAUDITED SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTAL SCHEDULE 1
THE RESERVE PETROLEUM COMPANY
WORKING INTERESTS RESERVE QUANTITY INFORMATION
(Unaudited)
Year Ended December 31,
-----------------------
2005 2004
---------- ----------
Oil & Natural Gas Liquids (Bbls)
Proved Developed and Undeveloped Reserves
Beginning of Year 90,473 53,605
Revisions of Previous Estimates 1,063 6,088
Extensions and Discoveries 44,556 43,100
Production (23,453) (12,320)
---------- ----------
End of Year 112,639 90,473
========== ==========
Proved Developed Reserves
Beginning of Year 90,473 53,605
End of Year 112,639 90,473
Gas (MCF)
Proved Developed and Undeveloped Reserves
Beginning of Year 1,329,700 1,089,402
Revisions of Previous Estimates 39,485 66,204
Extensions and Discoveries 553,830 421,434
Production (285,134) (247,340)
---------- ----------
End of Year 1,637,881 1,329,700
========== ==========
Proved Developed Reserves
Beginning of Year 1,329,700 1,089,402
End of Year 1,637,881 1,329,700
|
See notes on next page
SUPPLEMENTAL SCHEDULE 1
THE RESERVE PETROLEUM COMPANY
WORKING INTERESTS RESERVE QUANTITY INFORMATION
(Unaudited)
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 12,797 Bbls of oil and 506,241 MCF of gas for the year ended December 31, 2005, and 12,507 Bbls of oil and 271,858 MCF of gas for the year ended December 31, 2004.
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, 2005 and 2004. 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 geological and reservoir data, as well as actual production performance data available to the Company. These estimates are reviewed annually and are revised upward or downward, as warranted by additional performance data.
SUPPLEMENTAL SCHEDULE 2
THE RESERVE PETROLEUM COMPANY
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED WORKING INTERESTS
OIL AND GAS RESERVES
(Unaudited)
At December 31,
------------------------------
2005 2004
------------ ------------
Future Cash Inflows $ 21,759,009 $ 12,666,911
Future Production and
Development Costs (5,945,084) (3,701,502)
Future Income Tax Expense (4,411,695) (2,504,856)
------------ ------------
Future Net Cash Flows 11,402,230 6,460,553
10% Annual Discount for
Estimated Timing of Cash Flows (3,820,779) (1,932,192)
------------ ------------
Standardized Measure of Discounted
Future Net Cash Flows $ 7,581,451 $ 4,528,361
============ ============
|
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. 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.
SUPPLEMENTAL SCHEDULE 3
THE RESERVE PETROLEUM COMPANY
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS FROM PROVED WORKING INTERESTS RESERVE QUANTITIES
(Unaudited)
Year Ended December 31,
---------------------------
2005 2004
----------- -----------
Standardized Measure,
Beginning of Year $ 4,528,361 $ 2,240,748
Sales and Transfers, Net of
Production Costs (2,700,022) (1,380,392)
Net Change in Sales and Transfer
Prices, Net of Production Costs 2,237,750 1,314,998
Extensions, Discoveries and Improved
Recoveries, Net of Future Production
and Development Costs 3,527,634 2,376,102
Revisions of Quantity Estimates 650,125 500,544
Accretion of Discount 628,402 309,122
Net Change in Income Taxes (1,177,682) (905,186)
Changes in Production Rates
(Timing) and Other (113,117) 72,425
----------- -----------
Standardized Measure,
End of Year $ 7,581,451 $ 4,528,361
=========== ===========
|
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Information regarding changes in and disagreements with accountants on accounting and financial disclosure in the Proxy Statement is incorporated herein by reference.
ITEM 8A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company's Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the Company's disclosure controls and procedures and concluded that the Company's disclosure controls and procedures were effective as of December 31, 2005.
INTERNAL CONTROL OVER FINANCIAL REPORTING
As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term "internal control over financial reporting" means a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material adverse effect on the financial statements.
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. There were no changes in the Company's internal control over financial reporting during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information regarding directors, executive officers, promoters and control persons and compliance with Section 16(a) of the Exchange Act in the Proxy Statement is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information regarding executive compensation in the Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information regarding security ownership of certain beneficial owners and management and related stock holder matters in the Proxy Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Item 6, "Management's Discussion and Analysis or Plan of Operation" and Item 7, Note 12 to Financial Statements.
ITEM 13. EXHIBITS.
The following documents are exhibits to this Form 10-KSB. Each document marked by an asterisk is filed electronically herewith.
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation dated November 1, 1988 is incorporated by reference to Exhibit 3.1 of The Reserve Petroleum Company's Annual Report on Form 10-KSB (Commission File No. 0-8157) filed March 28, 1997.
3.2* Amended By-Laws dated November 16, 2004.
14* Code of Ethics
31.1* Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2* Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32* Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding fees billed to the Company by its independent registered public accounting firms in the Proxy Statement is incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the 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/ James L. Tyler
---------------------------------------
By: James L. Tyler, 2nd Vice President
(Principal Financial Officer)
Date: March 24, 2006
|
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 McLain /s/ Jerry L. Crow -------------------------------- -------------------------------- Mason W. McLain (Director) Jerry L. Crow (Director) March 24, 2006 March 24, 2006 /s/ Robert L. Savage /s/ William M. Smith -------------------------------- -------------------------------- Robert L. Savage (Director) William M. Smith (Director) March 24, 2006 March 24, 2006 |
EXHIBIT 3.2
THE RESERVE PETROLEUM COMPANY
RESTATED BYLAWS
AS AMENDED NOVEMBER 16, 2004
These Restated Bylaws only restate and integrate and do not further amend the Bylaws of this corporation as heretofore amended or supplemented and there is no discrepancy between those provisions and the provisions of these Restated Bylaws.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. The corporation may also have offices in such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETING OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of directors or for the conduct of other business shall be held in the offices of The Reserve Petroleum Company, in the City of Oklahoma City, State of Oklahoma, or at such other place either, within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, shall be held on the fourth Tuesday of May if not a legal holiday, and if a legal holiday, then on the next secular day following, at 3:00 p.m., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a board of directors, and transact such other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting.
Section 4. The officer who has charge of the stock ledger if the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, at the offices of The Reserve Petroleum Company, in the City of Oklahoma City, State of Oklahoma. The list shall also be produce and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the chairman of the board or the president and shall be called by the chairman of the board, president or secretary at the request in writing of a majority of the board of directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than thirty days before the date of the meeting to each stockholder entitled to vote at such meeting.
Section 7. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, or if a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting
Section 8. Upon adjournment of a meeting for lack of a quorum, if notice of such adjourned meeting is sent to the stockholders entitled to receive the same, containing a statement of the purpose of the meeting and that the previous meeting failed for lack of a quorum and specifying that pursuant to this Section it is proposed to hold the adjourned meeting with a quorum of those present, then any number of stockholders, in person or by proxy, shall constitute a quorum at such meeting, unless otherwise provided by statute.
Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question.
Section 10. Each stockholder entitled to vote at every meeting, as provided in Section 5 of Article VI of these Bylaws, shall be entitled to vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after one year from its date, unless the proxy provides for a longer period.
Section 11. Whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, by any provision of the statutes, the meeting and vote of stockholders may be dispensed with if all the stockholders who would have been entitled to vote upon the action if such meeting were held shall consent in writing to such corporate action being taken; or if the certificate of incorporation authorizes the action to be taken with the written consent of the holders of less than all of the stock who would have been entitled to vote upon the action if a meeting were held, then on the written consent of the stockholders having not less than such percentage of the number of votes as may be authorized in the certificate of incorporation; provided that in no case shall the written consent be by the holders of stock having less than the minimum percentage of the vote required by statute for the proposed corporate action, and provided that prompt notice must be given to all stockholders of the taking of corporate action without a meeting and by less than unanimous written consent.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole board shall be not less than three (3) nor more than fifteen (15). The number of directors shall be determined by resolution of the board of directors, subject to change by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. The board of directors by vote of the majority of the whole board, may, between annual meetings of stockholders, increase the membership of the board by not more than four members and by like vote appoint qualified persons to fill the vacancies created thereby. Directors need not be stockholders.
Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), and Court of Chancery of Delaware may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office.
Section 3. The business of the corporation shall be managed by its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these Restated Bylaws directed or required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected board of directors shall be held without notice immediately after, and at the same place as, the annual meeting of the stockholders for the purpose of organization of the board, the election of officers, and the transaction of such other business as may properly come before the meeting, provided a quorum shall be present. In the event such meeting is not held at the time and place above fixed, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver, signed by all of the directors.
Section 6. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Absent action by the board of directors, a regular meeting of the board of directors shall be held on the third Tuesday in November at 3:00 p.m.
Section 7. Special meetings of the board may be called by the chairman of the board or the president on three days' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the chairman of the board, the president or secretary in like manner and on like notice on the written request of two directors.
Section 8. At all meetings of the board not less than one-half of the total number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the Certificate of incorporation or these Restated Bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed, with the minutes of proceedings of the board or committee.
COMMITTEES OF DIRECTORS
Section 10. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors.
Section 11. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
Section 12. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director as determined by the board. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefore. Members of special or standing committees may be allowed compensation as determined by the board for attending committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these Restated Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given Under the provisions of the statutes or of the certificate of incorporation or of these Restated Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the board of directors and shall be a chairman of the board, a president, a vice president, a secretary and a treasurer. The board of directors may also choose such additional vice presidents, as in the opinion of the board the business of the corporation requires, and one or more assistant secretaries and assistant treasurers. The chairman of the board and the president need not be stockholders, but shall be directors of the corporation. The vice president, secretary, treasurer, and such other officers as may be elected or appointed need not be stockholders or directors of the corporation. Any number of offices may be held by the same person, unless the certificate of incorporation or these Restated Bylaws otherwise provide.
Section 2. The board of directors at its first meeting after each annual meeting of stockholders shall choose a chairman, a president, a secretary, a treasurer and, at its option, one or more vice presidents.
Section 3. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors.
THE CHAIRMAN OF THE BOARD
Section 6. The chairman of the board shall preside at all meetings of the board of directors and the stockholders and shall perform such other duties as may be prescribed from time to time by the board of directors.
THE PRESIDENT
Section 7. The president shall be the chief executive officer of the corporation and shall have the general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. In the absence of the chairman, or in the event of his inability or refusal to act, he shall perform the duties of chairman. The president shall perform such other duties and have such other powers as may be prescribed from time to time by the board of directors or these Restated Bylaws.
THE VICE PRESIDENTS
Section 8. In the absence of the chairman and the president, or in the event of their inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated, or in the absence of any designation, then in the order of election) shall perform the duties of chairman and president, and when so acting, shall have all the powers of and be subject to all the restrictions upon such officer, and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 9. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or the president, under whose supervise on he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing of his signature.
Section 10. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors.
Section 12. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer of the financial condition of the corporation.
Section 14. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the president or vice president and the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. The corporation shall not issue fractions of shares of its stock.
Section 2. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. The officers of the corporation may require that any such person furnish an indemnity bond in an amount not more than twice the value of the stock on the date of said bond indemnifying the corporation against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Provided, however, the board of directors may, by appropriate resolution, waive any requirement for the furnishing of said indemnity bond.
TRANSFERS OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholder entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect' of any change, conversion or exchange of stock or for the purpose of any other lawful action, the record date for all of said dividends, payments and actions shall be the close of business thirty days in advance of the date fixed for any directors or stockholders meeting at which any dividend, payments, meeting or other action may be decided; provided, however, the board of directors may establish any other record date by appropriate resolution. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of. the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of capital stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for divide such sum or sums as the directors from time to time, in their a solute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.
ANNUAL STATEMENT
Section 3. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.
CHECKS
Section 4. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate.
FISCAL YEAR
Section 5. The fiscal year of the corporation shall begin January 1 and end December 31.
SEAL
Section 6. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
Section 1. These Restated Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the stockholders or by the board of directors, when such power is conferred upon the board of directors by the certificate of incorporation, at any regular meeting of the stockholders or of the board of directors or any special meeting of the stockholders or of the board of directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting.
Adopted by the Board of Directors by unanimous consent as of the 16th day of November, 2004.
/s/ Mason McLain ------------------------------------ Mason McLain President /s/ James L. Tyler ------------------------------------ James L. Tyler Secretary |
EXHIBIT 14
THE RESERVE PETROLEUM COMPANY
CODE OF ETHICS FOR SENIOR OFFICERS
(AS OF NOVEMBER 18, 2003)
The Board of Directors of The Reserve Petroleum Company (the "Company") in order to promote ethical conduct in the practice of financial management throughout the Company has adopted this Code of Ethics for Senior Officers (the "Code"). This Code is designed to deter wrongdoing and provides principles to which the undersigned officers (the Company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions) are expected to adhere and advocate. These principles embody rules regarding individual and peer responsibilities, as well as responsibilities to the shareholders, the public and others who have a stake in our continued success and reputation for excellence.
To the best of my knowledge and ability:
1. I will act with honesty and integrity, and avoid actual or apparent conflicts of interest between personal and professional relationships.
2. I will provide information that is full, fair, accurate, timely and understandable, including information in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission and in other public communications made by the Company.
3. I will comply with rules and regulations of federal, state, provincial and local governments, and other appropriate private and public regulatory agencies.
4. I will act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing my independent judgment to be subordinated.
5. I will respect the confidentiality of information acquired in the course of my work except when authorized or otherwise legally obligated to disclose. Confidential information acquired in the course of my work will not be used for personal advantage.
6. I will share knowledge and maintain skills important and relevant to my constituents' needs.
7. I will proactively promote ethical behavior as a responsible partner among peers in my work environment.
8. I will achieve responsible use of, and control over, all assets and resources employed or entrusted to me.
9. I will promptly report known violations of this Code to the Chief Executive Officer, unless the Chief Executive Officer is responsible for the violation, in which case I will report known violations to two members of the Board of Directors who are not employees of the Company.
VIOLATIONS OF THIS CODE MAY SUBJECT THE UNDERSIGNED OFFICER TO APPROPRIATE DISCIPLINARY ACTION BY THE COMPANY, WHICH MAY INCLUDE TERMINATION OF EMPLOYMENT.
Date: January 1, 2004 /s/ Mason McLain
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Mason McLain
President
/s/ James L. Tyler
------------------------------
James L. Tyler
Secretary/Treasurer
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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULES 13A-14(A)
AND 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Mason McLain, certify that:
1. I have reviewed this report on Form 10-KSB of The Reserve Petroleum Company;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: March 24, 2006 /s/ Mason McLain
------------------------ -----------------------------
Mason McLain, President
(Principal Executive Officer)
|
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULES 13A-14(A)
AND 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, James L. Tyler, certify that:
1. I have reviewed this report on Form 10-KSB of The Reserve Petroleum Company;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: March 24, 2006 /s/ James L. Tyler
------------------------ ----------------------------------
James L. Tyler, 2nd Vice President
(Principal Financial Officer)
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EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Annual Report of The Reserve Petroleum Company (the "Company") on Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Mason McLain and James L. Tyler, Principal Executive Officer and Principal Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly present, in all material respects, the financial condition and results of operations of the Company for the year ended December 31, 2005.
March 31, 2006 /s/ Mason McLain
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Mason McLain
Principal Executive Officer
/s/ James L. Tyler
-------------------------------
James L. Tyler
Principal Financial Officer
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