<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended March 31, 1998
-----------------------
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------ ------------
Commission File Number 0-9116
-----------------------------------------------------
PANHANDLE ROYALTY COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1055775
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization ) Identification No.)
Grand Centre Suite 210, 5400 N Grand Blvd., Oklahoma City, Oklahoma 73112
- -------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code (405) 948-1560
------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x Yes No
--- ---
Outstanding shares of Class A Common stock (voting) at May 5, 1998:
679,709
-------
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 (unaudited) and
September 30, 1997 ............................................. 1
Condensed Consolidated Statements of Income -
Three months and Six months ended
March 31, 1998 and 1997 (unaudited) ............................ 2
Condensed Consolidated Statements of Cash Flows Six
months ended March 31, 1998 and 1997
(unaudited) .................................................... 3
Notes to Condensed Consolidated Financial
Statements (unaudited) ......................................... 4
Item 2. Management's discussion and analysis of financial
condition and results of operations ............................ 5
Part II. Other Information
Item 4. Submission of matters to a vote
of security holders ........................................... 7
Item 6. Exhibits and reports on Form 8-K ............................... 7
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at March 31, 1998 is unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
Assets 1998 1997
--------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 989,389 $ 872,797
Oil and gas sales and other receivables 794,667 893,779
Prepaid expenses 20,813 4,929
----------- -----------
Total current assets 1,804,869 1,771,505
Properties and equipment, at cost, based on
successful efforts accounting
Producing Oil and Gas Properties 21,030,163 20,063,953
Nonproducing Oil and Gas Properties 5,190,436 5,068,467
Other 238,120 213,474
----------- -----------
26,458,719 25,345,894
Less accumulated depreciation,
depletion and amortization 15,782,405 15,127,925
----------- -----------
Net properties and equipment 10,676,314 10,217,969
Other assets 107,716 107,716
----------- -----------
$12,588,899 $12,097,190
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities
and gas imbalance liability $ 321,736 $ 395,785
Dividends payable 30,856 29,856
Income taxes payable 134,470 112,336
Deferred income taxes 280,000 280,000
----------- -----------
Total current liabilities 767,062 817,977
Deferred income taxes 1,247,000 1,247,000
Stockholders' equity
Class A voting common stock, $.10 par value;
1,000,000 shares authorized,
679,729 issued and outstanding at
March 31, 1998 and 679,820 at
September 30, 1997 67,973 67,982
Capital in excess of par value 442,591 445,306
Retained earnings 10,064,273 9,518,925
----------- -----------
Total stockholders' equity 10,574,837 10,032,213
----------- -----------
$12,588,899 $12,097,190
=========== ===========
</TABLE>
(See accompanying notes)
( 1 )
<PAGE> 4
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $1,322,550 $2,491,004 $3,132,319 $4,034,387
Lease bonuses and rentals 200 7,336 7,651 8,444
Interest 12,663 1,782 21,861 5,890
Other 251 11,193 772 20,134
---------- ---------- ---------- ----------
1,335,664 2,511,315 3,162,603 4,068,855
Costs and expenses:
Lease operating expenses
and production taxes 249,048 341,907 533,003 573,436
Exploration costs 206,175 100,858 265,564 261,838
Depreciation, depletion,
amortization
and impairment 244,383 413,039 613,444 639,903
General and administrative 264,783 235,507 627,776 576,827
Interest expense 1,559 12,288 1,559 27,033
---------- ---------- ---------- ----------
965,948 1,103,599 2,041,346 2,079,037
---------- ---------- ---------- ----------
Income before provision
for income taxes 369,716 1,407,716 1,121,257 1,989,818
Provision for income taxes 70,000 325,000 235,000 431,000
---------- ---------- ---------- ----------
Net income $ 299,716 $1,082,716 $ 886,257 $1,558,818
========== ========== ========== ==========
Basic earnings per share (Note 3) $ .44 $ 1.60 $ 1.30 $ 2.30
========== ========== ========== ==========
Diluted earnings per share (Note 3) $ .44 $ 1.59 $ 1.30 $ 2.29
========== ========== ========== ==========
Dividends declared
per share of common stock $ .30 $ .20 $ .50 $ .40
========== ========== ========== ==========
</TABLE>
(See accompanying notes)
( 2 )
<PAGE> 5
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended March 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 886,257 $ 1,558,818
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 613,444 639,903
Exploration costs 265,564 261,838
Cash provided (used) by changes in assets
and liabilities:
Oil and gas sales and other receivables 99,112 (387,567)
Prepaid expenses and other assets (15,884) (7,208)
Income taxes payable 22,134 237,893
Accounts payable, accrued liabilities
and dividends payable (73,049) 124,710
----------- -----------
Total adjustments 911,321 869,569
----------- -----------
Net cash provided by operating activities 1,797,578 2,428,387
Cash flows from investing activities:
Purchase of and development of
properties and equipment (1,337,353) (1,581,655)
----------- -----------
Net cash used in investing activities (1,337,353) (1,581,655)
Cash flows from financing activities:
Payment of loan principal -- (450,000)
Acquisition of Company's common shares (2,724) (8,782)
Payment of dividends (340,909) (271,939)
----------- -----------
Net cash used in financing activities (343,633) (730,721)
----------- -----------
Increase in cash and cash equivalents 116,592 116,011
Cash and cash equivalents at beginning of period 872,797 399,423
----------- -----------
Cash and cash equivalents at end of period $ 989,389 $ 515,434
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 1,559 $ 27,033
Income taxes paid 212,866 193,107
----------- -----------
$ 214,425 $ 220,140
=========== ===========
</TABLE>
(See accompanying notes)
( 3 )
<PAGE> 6
PANHANDLE ROYALTY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated results presented for the three-month and six-month
periods ended March 31, 1998 and 1997 are unaudited, but management of
Panhandle Royalty Company believes that all adjustments necessary for a
fair presentation of the consolidated results of operations for the
periods have been included. All such adjustments are of a normal
recurring nature. The consolidated results are not necessarily indicative
of those to be expected for the full year.
2. The Company utilizes tight gas sands production tax credits to reduce its
federal income tax liability. These credits are scheduled to be available
through the year 2002.
3. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which was required to be adopted
on December 31, 1997. Statement No. 128 required a change in the method
used to compute earnings per share. The Company's diluted earnings per
share calculation takes into account certain shares that may be issued
under the Non-Employee Director's Deferred Compensation Plan. The
following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Numerator for primary
and diluted earnings
per share:
Net income $ 299,716 $1,082,716 $ 886,257 $1,558,818
---------- ---------- ---------- ----------
Denominator:
For basic earnings per share -
Weighted average shares 679,775 677,825 679,798 677,835
Effect of potential diluted shares:
Directors deferred
compensation shares 3,630 2,385 3,630 2,385
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted -
average shares and potential
shares 683,405 680,210 683,428 680,220
========== ========== ========== ==========
Basic earnings per share $ .44 $ 1.60 1.30 2.30
========== ========== ========== ==========
Diluted earnings per share $ .44 $ 1.59 1.30 2.29
========== ========== ========== ==========
</TABLE>
4. The Company has a revolving line of credit with Bank One, Texas, in the
amount of $2,500,000. The credit facility matures on January 3, 2001. At
May 6, 1998, the Company had no balance outstanding under the facility.
5. Certain reclassifications have been made in the financial statements for
the period ended March 31, 1997 to conform to the financial statement
presentation at March 31, 1998.
( 4 )
<PAGE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
All statements concerning the Company other than purely historical
information (collectively "Forward-Looking Statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended) provided herein are subject to all
the risks and uncertainties incident to the acquisitions, development, and
exploration for and production of oil and gas reserves. These risks include, but
are not limited to, oil and natural gas price risk, drilling risk, reserve
quantity risk and operations and production risks. For all the above reasons,
actual results may vary materially from any forward- looking statements and
there is no assurance that the assumptions used are necessarily the most likely
to occur.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 working capital was $1,035,130 as compared to $953,528
at September 30, 1997. Cash and cash equivalents were $989,389 at March 31,
1998. Cash flow provided by operating activities for the first six months of
1998 was $1,797,578 as compared to $2,428,387 for the first six months of 1997.
The decrease in cash flow is directly attributable to the decrease in oil and
gas sales revenues during the first six months of 1998. The decrease is
discussed in Results of Operations in this Item.
The Company has continued its operating strategy of actively pursuing the
development of its oil and gas properties through the participation with a
working interest in the drilling of wells on its fee mineral properties and by
participating in third party wells on leased properties. The Company spent
$1,252,000 developing its oil and gas properties in the first six months of
1998. This is down from the approximately $1,582,000 spent in the first six
months of 1997. At March 31, 1998 the Company had remaining projected costs of
$1,490,543 for its share of drilling and equipment costs on wells which had been
proposed or were in the process of being drilled or completed. These projected
expenditures, overhead expenses, dividend payments and other operating costs are
expected to be funded by cash flow from operating activities and existing
working capital. Should the Company require additional funding for an asset
purchase or other capital expenditures, it could access the $2,500,000 bank line
of credit.
RESULTS OF OPERATIONS
Revenues decreased for both the three-month and six-month periods ended
March 31, 1998, as compared to the same periods in fiscal 1997. The decreases
were the result of oil and gas sales revenues decreasing 22% and 47% for the
1998 six-month and three-month periods, respectively, as compared to the same
periods in fiscal 1997. Oil and gas sales revenues decreased due to decreased
sales prices for oil and natural gas in the 1998 periods, as well as decreased
oil sales volumes in the 1998 period. Natural gas sales volumes increased
slightly in the 1998 six-month period, while decreasing 13% in the three-month
period. The chart below outlines the Company's production and average sales
prices for oil and natural gas for the three-month and six-month periods of
fiscal 1998 and 1997:
<TABLE>
<CAPTION>
BARRELS AVERAGE MCF AVERAGE
SOLD PRICE SOLD PRICE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Three months ended 03/31/98 28,253 $ 14.33 433,206 $ 2.12
Three months ended 03/31/97 39,544 $ 23.21 495,472 $ 3.18
Six months ended 03/31/98 59,865 $ 16.93 875,254 $ 2.42
Six months ended 03/31/97 70,471 $ 23.57 866,318 $ 2.74
</TABLE>
The decrease in oil and natural gas sales prices was the largest factor
affecting oil and gas sales revenues. The oil sales price has declined further
and is currently around the $13.00 per barrel level. Gas prices have been
relatively consistent and remain in the low $2.00 range. Management currently
does not anticipate substantial movement in either the oil or gas price for the
remainder of fiscal 1998. Oil sales volumes continue to be adversely affected by
the production allowable situation in the Dagger Draw field of New Mexico and
gas sales volumes and prices are suffering due to the mild early spring weather
in the mid-west part of the nation, which reduced the demand for natural gas for
heating purposes.
( 5 )
<PAGE> 8
Costs and expenses decreased in both the three-month and six-month
periods of fiscal 1998 as compared to the same periods in fiscal 1997. The
decrease was a result of lease operating expenses and production taxes (LOE),
depreciation, depletion, amortization and impairment (DD&A) and interest expense
all decreasing, offset somewhat by increases in exploration costs and general
and administrative costs.
LOE decreased in both the 1998 periods, as compared to the 1997 periods,
principally due to decreased production taxes, which resulted from the decreased
oil and gas sales revenues. DD&A were 41% lower in the three-month period of
1998 as a result of the Company fully impairing the costs of certain oil and gas
leasehold costs on two prospects totaling $112,000 in the 1997 three-month
period. In addition, the decreased sales volumes lowered DD&A costs in 1998 as
DD&A is calculated on the units of production method. Interest expense decreased
due to the Company's line of credit being paid off early in fiscal 1997.
Exploration costs increased in the 1998 periods as a result of the
Company participating in the drilling of several exploratory wells which were
non-productive. These costs amounted to $206,175 in the 1998 three-month period.
There is no way to anticipate these costs from period to period. The Company
will continue drilling exploratory wells, thus future costs related to
non-productive exploratory wells are anticipated. General and administrative
costs increased 12% and 9% for the 1998 three and six-month periods,
respectively, as compared to the same periods in fiscal 1997. These increases
are due to increased salaries in the 1998 periods; increased rent expense in the
1998 periods, as a result of additional office space being acquired; and costs
associated with Company presentations to investment professional meetings.
The provision for income taxes is lower in the 1998 periods due to the
decrease in income before taxes, which was a result of the above discussed
factors. In addition, the provision continues to be favorably affected by tax
credits available from the Company's production of "tight gas sands" natural gas
and from excess percentage depletion.
Net income decreased in both the 1998 periods as compared to the 1997
periods principally as a result of decreased sales prices for oil and natural
gas in the periods and from reduced oil sales volumes. Management has no control
over the market prices of oil and natural gas and currently expect the depressed
oil price to continue for the remainder of fiscal 1998. In addition, oil
production volumes are expected to remain lower than 1997 volumes because of the
production allowable situation in the Dagger Draw field of New Mexico. As a
result of the above, management currently anticipates earnings to remain below
the record levels of fiscal 1997 for the remainder of fiscal 1998. Should
additional exploratory drilling projects result in nonproductive wells, earnings
would again be negatively impacted.
( 6 )
<PAGE> 9
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of shareholders was held on February 27, 1998.
(b) Two directors were elected for three year terms at the meeting.
Also, ratification of the selection of Ernst & Young LLP as
independent auditors for the Company was voted upon. The
directors elected and the results of voting were as follows:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
Directors
---------
Michael A. Cawley 851 25
Ray H. Potts 851 24
Auditors
--------
Ernst & Young LLP 843 12 21
</TABLE>
Item 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits - Exhibit 27 -- Financial Date Schedule
(b) There were no reports on FORM 8-K filed for the three months
ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PANHANDLE ROYALTY COMPANY
<TABLE>
<S> <C>
May 13, 1998 /s/ H W Peace II
- --------------------------- ----------------------------
Date H W Peace II, President
and Chief Executive Officer
May 13, 1998 /s/ Michael C. Coffman
- --------------------------- ----------------------------
Date Michael C. Coffman, Vice President,
Chief Financial Officer and
Secretary and Treasurer
</TABLE>
( 7 )
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 989,389
<SECURITIES> 0
<RECEIVABLES> 794,667
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,804,869
<PP&E> 26,458,719
<DEPRECIATION> 15,782,405
<TOTAL-ASSETS> 12,588,899
<CURRENT-LIABILITIES> 767,062
<BONDS> 0
67,973
0
<COMMON> 0
<OTHER-SE> 10,506,864
<TOTAL-LIABILITY-AND-EQUITY> 12,588,899
<SALES> 3,132,319
<TOTAL-REVENUES> 3,162,603
<CGS> 533,003
<TOTAL-COSTS> 1,506,784
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,559
<INCOME-PRETAX> 1,121,257
<INCOME-TAX> 235,000
<INCOME-CONTINUING> 886,257
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 886,257
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
</TABLE>
