<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 June 30, 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
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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 August 6, 1998:
679,709
- ----------
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1998 (unaudited) and
September 30, 1997 ............................................. 1
Condensed Consolidated Statements of Income -
Three months and Nine months ended
June 30, 1998 and 1997 (unaudited) ............................ 2
Condensed Consolidated Statements of Cash Flows Nine
months ended June 30, 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 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 June 30, 1998 is unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 803,268 872,797
Oil and gas sales and other receivables 720,928 893,779
Prepaid expenses 12,497 4,929
----------- -----------
Total current assets 1,536,693 1,771,505
Properties and equipment, at cost, based on
successful efforts accounting
Producing Oil and Gas Properties 21,711,738 20,063,953
Nonproducing Oil and Gas Properties 5,477,835 5,068,467
Other 240,589 213,474
----------- -----------
27,430,162 25,345,894
Less accumulated depreciation,
depletion and amortization 16,092,823 15,127,925
----------- -----------
Net properties and equipment 11,337,339 10,217,969
Other assets 107,716 107,716
----------- -----------
$12,981,748 $12,097,190
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities
and gas imbalance liability $ 588,759 $ 395,785
Dividends payable 31,256 29,856
Income taxes payable 100,690 112,336
Deferred income taxes 280,000 280,000
----------- -----------
Total current liabilities 1,000,705 817,977
Deferred income taxes 1,247,000 1,247,000
Stockholders' equity
Class A voting common stock, $.10 par value; 1,000,000 shares
authorized, 679,709 issued and outstanding at June 30, 1998 and
679,820 at September 30, 1997 67,971 67,982
Capital in excess of par value 441,948 445,306
Retained earnings 10,224,124 9,518,925
----------- -----------
Total stockholders' equity 10,734,043 10,032,213
----------- -----------
$12,981,748 $12,097,190
=========== ===========
</TABLE>
(See accompanying notes)
( 1 )
<PAGE> 4
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $1,148,478 $1,459,520 $4,280,797 $5,493,907
Lease bonuses and rentals 35,583 5,248 43,234 13,692
Interest 14,093 6,093 35,954 11,983
Other 1,585 4,912 2,357 25,046
---------- ---------- ---------- ----------
1,199,739 1,475,773 4,362,342 5,544,628
Costs and expenses:
Lease operating expenses
and production taxes 223,514 260,790 756,517 834,226
Exploration costs 95,384 80,929 360,948 342,767
Depreciation, depletion,
amortization
and impairment 310,418 278,180 923,862 918,083
General and administrative 228,452 205,027 856,228 781,854
Interest expense 778 2,139 2,337 29,172
---------- ---------- ---------- ----------
858,546 827,065 2,899,892 2,906,102
---------- ---------- ---------- ----------
Income before provision
for income taxes 341,193 648,708 1,462,450 2,638,526
Provision for income taxes 45,000 135,000 280,000 566,000
---------- ---------- ---------- ----------
Net income $ 296,193 $ 513,708 $1,182,450 $2,072,526
========== ========== ========== ==========
Basic earnings per share (Note 3) $ .44 $ .76 $ 1.74 $ 3.06
========== ========== ========== ==========
Diluted earnings per share (Note 3) $ .43 $ .76 $ 1.73 $ 3.05
========== ========== ========== ==========
Dividends declared
per share of common stock $ .20 $ .20 $ .70 $ .60
========== ========== ========== ==========
</TABLE>
(See accompanying notes)
( 2 )
<PAGE> 5
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended June 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,182,450 $ 2,072,526
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 923,862 918,083
Exploration costs 360,948 342,767
Cash provided (used) by changes in assets and liabilities:
Oil and gas sales and other receivables 172,851 (144,073)
Prepaid expenses and other assets (7,568) (8,688)
Income taxes payable (11,646) 279,493
Accounts payable, accrued liabilities,
gas imbalance liability and dividends payable 194,374 140,105
----------- -----------
Total adjustments 1,632,821 1,527,687
----------- -----------
Net cash provided by operating activities 2,815,271 3,600,213
Cash flows from investing activities:
Purchase of and development of
properties and equipment (2,404,180) (2,331,744)
----------- -----------
Net cash used in investing activities (2,404,180) (2,331,744)
Cash flows from financing activities:
Payment of loan principal -- (750,000)
Acquisition of Company's common shares (3,369) (9,701)
Payment of dividends (477,251) (407,423)
----------- -----------
Net cash provided (used)
in financing activities (480,620) (1,167,124)
----------- -----------
Increase in cash and cash equivalents (69,529) 101,345
Cash and cash equivalents at beginning of period 872,797 399,423
----------- -----------
Cash and cash equivalents at end of period $ 803,268 $ 500,768
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 2,337 $ 29,172
Income taxes paid 291,646 286,507
----------- -----------
$ 293,983 $ 315,679
=========== ===========
</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 nine-month
periods ended June 30, 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 June 30, Nine months ended June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator for primary
and diluted earnings
per share:
Net income $ 296,193 $ 513,708 $1,182,450 $2,072,526
---------- ---------- ---------- ----------
Denominator:
For basic earnings per share -
Weighted average shares 679,715 677,424 679,772 677,698
Effect of potential diluted shares:
Directors deferred
compensation shares 3,862 2,767 3,862 2,767
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted -
average shares and potential
shares 683,577 680,191 683,634 680,465
========== ========== ---------- ----------
Basic earnings per share $ .44 $ .76 1.74 3.06
========== ========== ========== ==========
Diluted earnings per share $ .43 $ .76 1.73 3.05
========== ========== ========== ==========
</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
August 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 June 30, 1997 to conform to the financial statement
presentation at June 30, 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 acquisition, 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 risk. 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 June 30, 1998 working capital was $535,988 as compared to $953,528 at
September 30, 1997. Cash and cash equivalents were $803,268 at June 30, 1998.
Cash flow provided by operating activities for the first nine months of 1998 was
$2,813,871 as compared to $3,600,213 for the first nine months of 1997. This
decrease in cash flow is directly attributable to the decrease in oil and gas
sales revenues during the first nine months of 1998. The decrease is discussed
in Results of Operations in this, Item 2.
The Company has continued its operating strategy of actively pursuing the
development of its oil and gas properties through 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 actually
increased its expenditures for purchasing and development its oil and gas
properties in the first nine months of fiscal 1998 as compared to the same
period in fiscal 1997. These expenditures totaled $2,404,180 in the 1998 period
as compared to $2,331,744 in the 1997 period. At June 30, 1998 the Company had
remaining projected costs of $1,735,437 for its share of drilling and equipment
costs on working interest 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. In addition, management has
decided to suspend taking new drilling participations in third party working
interest wells (those not on Company mineral acreage) until oil and gas sales
prices increase from the current depressed levels. The Company will continue to
aggressively participate in drilling on its mineral properties and will complete
drilling on those third party wells and projects already committed.
RESULTS OF OPERATIONS
Revenues decreased for both the three-month and nine-month periods ended
June 30, 1998, as compared to the same periods in fiscal 1997. The decreases
were the result of oil and gas sales revenues decreasing 22% and 21% for the
1998 nine-month and three-month periods, respectively, as compared to the same
periods in fiscal 1997. Oil and gas sales revenues decreased principally as a
result of decreased oil sales volumes and decreased sales prices for crude oil.
The chart below outlines the Company's production and average sales prices for
oil and natural gas for the three-month and nine-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 06/30/98 24,652 $ 13.30 378,739 $ 2.17
Three months ended 06/30/97 40,669 $ 19.48 360,890 $ 1.85
Nine months ended 06/30/98 84,517 $ 15.87 1,253,993 $ 2.34
Nine months ended 06/30/97 111,140 $ 22.07 1,227,208 $ 2.47
</TABLE>
As can be seen from the above chart, the decrease in oil sales volumes along
with the decreased oil sales prices, both for the three-month and nine-month
periods, were the major reason for the oil and gas revenue decrease. The oil
sales price has continued to decline and the Company is currently receiving in
the $11-$12 per barrel range. Gas sales prices were slightly lower in the fiscal
1998 nine months as compared to 1997, and are currently expected to be somewhat
lower in the fourth quarter of fiscal 1998 than in the third quarter of 1998.
( 5 )
<PAGE> 8
Oil sales volumes were adversely affected by a continued production
allowable situation in the Dagger Draw field of New Mexico (the Company's major
oil producing field) during the first nine months of fiscal 1998. In addition,
the majority operator of these wells recently decided to shut them in due to low
crude oil sales prices, thus effectively reducing production to nil. The
operator's current intentions are to keep the wells essentially shut-in until
the price of oil recovers to the mid-teens. This will adversely affect the
Company's oil and gas sales revenues until such time as that operator decides to
return these wells to production. The slightly increased gas production for both
the 1998 periods and the increased gas sales price in the 1998 three-month
period did partially offset the oil revenue declines.
Costs and expenses increased slightly in the 1998 three-month period as
compared to the 1997 three-month period and decreased slightly in the 1998
nine-month period compared to the 1997 nine-month period. Lease operating
expenses and production taxes decreased for both the 1998 periods as a result of
production taxes decreasing. Production taxes are a fixed percentage of oil and
gas sales revenues, thus taxes decreased along with the decrease in oil and gas
sales revenues. Exploration costs increased in both the 1998 periods as a result
of increased dry hole costs. These costs are the result of non-productive
exploratory well drilling costs and will vary from period to period. There is no
way to accurately predict these costs. Depreciation, depletion, amortization and
impairment (DD&A) increased in both the 1998 periods. These moderate increases
were the result of the amortization rates on several marginal wells being
increased, offset, somewhat, by the reduced production volumes in the New Mexico
oil wells, which reduced amortization on those wells. General and administrative
costs increased moderately in both 1998 periods as a result of increased
salaries and personnel in the 1998 periods; increased rent expense in the 1998
periods, due to additional office space being acquired; and for costs associated
with Company presentations to investment professional meetings.
The provision for income taxes is lower in both the 1998 periods as
compared to the 1997 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 price and sales volume for
crude oil. Management has no control over the market prices of oil and currently
expects the depressed oil price to continue for the remainder of fiscal 1998. In
addition, oil production volumes will decrease in the fourth quarter due to the
factors discussed above. As a result, management expects earnings to remain
below 1997 levels for the remainder of fiscal 1998. In addition, should any of
the Company's current and projected exploratory drilling prospects result in
non-productive wells, earnings would again be negatively impacted.
YEAR 2000 ISSUES
Much of the computer software in use today may not be able to accurately
process data beyond the year 1999. The majority of computer systems process data
using two digits for the year of transaction, rather than the full four digits.
This may cause many systems to be unable to accurately process year 2000
transactions.
The Company has replaced its computer system hardware with new hardware
which has operating systems that are year 2000 compliant. The Company's software
supplier is in the process of revising their software to be year 2000 compliant.
This process is expected to be complete by the end of 1998, allowing one year to
install and test the revisions. Management does not anticipate any inhouse
software issues that could materially impact the Company's financial condition
or operations. However, should any operators of the Company's oil and gas
properties, any purchasers of the crude oil or natural gas from those properties
or financial institutions dealing in check clearing, etc., experience year 2000
problems, there could be some temporary effect on the Company's financial
position.
( 6 )
<PAGE> 9
PART II. OTHER INFORMATION
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 June 30, 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
August 11, 1998 /s/ H W Peace II
- --------------------------- ----------------------------------
Date H W Peace II, President
and Chief Executive Officer
August 11, 1998 /s/ Michael C. Coffman
- --------------------------- ----------------------------------
Date Michael C. Coffman, Vice President,
Chief Financial Officer and
Secretary and Treasurer
( 7 )
<PAGE> 10
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ---------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 803,268
<SECURITIES> 0
<RECEIVABLES> 720,928
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,536,693
<PP&E> 27,430,162
<DEPRECIATION> 16,092,823
<TOTAL-ASSETS> 12,981,748
<CURRENT-LIABILITIES> 1,000,705
<BONDS> 0
0
0
<COMMON> 67,971
<OTHER-SE> 10,666,072
<TOTAL-LIABILITY-AND-EQUITY> 12,981,748
<SALES> 4,280,797
<TOTAL-REVENUES> 4,362,342
<CGS> 756,517
<TOTAL-COSTS> 2,141,038
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,337
<INCOME-PRETAX> 1,462,450
<INCOME-TAX> 280,000
<INCOME-CONTINUING> 1,182,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,182,450
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.73
</TABLE>
