<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, 1999
-----------------------------------------------------
( ) 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 August 10, 1999:
2,047,392
- ---------
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Consolidated Financial Statements Page
<S> <C>
Condensed Consolidated Balance Sheets -
June 30, 1999 (unaudited) and
September 30, 1998 ............................................ 1
Condensed Consolidated Statements of Income -
Three months and Nine months ended
June 30, 1999 and 1998 (unaudited) ............................ 2
Condensed Consolidated Statements of
Cash Flows Nine months ended June 30,
1999 and 1998
(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, 1999 is unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1999 1998
------------ -------------
<S> <C> <C>
Current assets:
Cash $ 378,976 $ 320,210
Oil and gas sales and other receivables 1,000,559 716,648
Income taxes receivable -- 152,090
Prepaid expenses 10,156 27,391
------------ ------------
Total current assets 1,389,691 1,216,339
Properties and equipment, at cost, based on
successful efforts accounting
Producing oil and gas properties 23,285,002 22,360,790
Non producing oil and gas properties 5,875,953 5,693,399
Other 253,443 241,567
------------ ------------
29,414,398 28,295,756
Less accumulated depreciation,
depletion and amortization 17,696,468 16,600,499
------------ ------------
Net properties and equipment 11,717,930 11,695,257
Other assets 107,716 107,716
------------ ------------
$ 13,215,337 $ 13,019,312
============ ============
Liabilities And Stockholders' Equity
Current liabilities:
Accounts payable, accrued liabilities
and gas imbalance liability $ 545,879 $ 620,413
Dividends payable 32,876 31,656
Income taxes payable 68,508 --
Deferred income taxes 112,000 112,000
------------ ------------
Total current liabilities 759,263 764,069
Deferred income taxes 1,532,000 1,451,000
Long-term debt 200,000 --
Stockholders' equity
Class A voting Common Stock, $.0333 par
value; 6,000,000 shares authorized,
2,047,392 issued and outstanding at
June 30,1999 and 2,047,602 at
September 30, 1998 68,246 68,254
Capital in excess of par value 514,234 515,823
Retained earnings 10,141,594 10,220,166
------------ ------------
Total stockholders' equity 10,724,074 10,804,243
------------ ------------
$ 13,215,337 $ 13,019,312
============ ============
</TABLE>
(1)
<PAGE> 4
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $1,529,696 $1,148,478 $3,498,511 $4,280,797
Lease bonuses and rentals 621 35,583 7,473 43,234
Interest 1,776 14,093 7,038 35,954
Other 10,687 1,585 13,901 2,357
---------- ---------- ---------- ----------
1,542,780 1,199,739 3,526,923 4,362,342
Costs and expenses:
Lease operating expenses
and production taxes 292,076 223,514 701,713 756,517
Exploration costs 99,796 95,384 396,863 360,948
Depreciation, depletion,
amortization
and impairment 366,059 310,418 1,101,969 923,862
General and administrative 289,215 228,452 935,502 856,228
Interest expense 6,010 778 14,900 2,337
---------- ---------- ---------- ----------
1,053,156 858,546 3,150,947 2,899,892
---------- ---------- ---------- ----------
Income before provision
for income taxes 489,624 341,193 375,976 1,462,450
Provision for income taxes 81,000 45,000 37,000 280,000
---------- ---------- ---------- ----------
Net income $ 408,624 $ 296,193 $ 338,976 $1,182,450
========== ========== ========== ==========
Basic earnings per share (Note 4) $ .20 $ .15 $ .17 $ .58
========== ========== ========== ==========
Diluted earnings per share (Note 4) $ .20 $ .14 $ .16 $ .58
========== ========== ========== ==========
Dividends declared per share
of common stock $ .07 $ .07 $ .20 $ .23
========== ========== ========== ==========
</TABLE>
(See accompanying notes)
(2)
<PAGE> 5
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 338,976 $ 1,182,450
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,101,969 923,862
Deferred income taxes 81,000 --
Exploration costs 396,863 360,948
Cash provided (used) by changes in assets and liabilities:
Oil and gas sales and income tax receivable (131,821) 172,851
Prepaid expenses and other assets 17,235 (7,568)
Income taxes payable 68,508 (11,646)
Accounts payable, accrued liabilities,
gas imbalance liability and dividends payable (73,314) 194,374
------------ ------------
Total adjustments 1,460,440 1,632,821
------------ ------------
Net cash provided by operating activities 1,799,416 2,815,271
Cash flows from investing activities:
Purchase of and development of
properties and equipment (1,521,505) (2,404,180)
------------ ------------
Net cash used in investing activities (1,521,505) (2,404,180)
Cash flows from financing activities:
Borrowings under line of credit 300,000 --
Payment of loan principal (100,000) --
Acquisition of Company's common shares (1,597) (3,369)
Payment of dividends (417,548) (477,251)
------------ ------------
Net cash used in financing activities (219,145) (480,620)
------------ ------------
Increase (decrease) in cash and cash equivalents 58,766 (69,529)
Cash and cash equivalents at beginning of period 320,210 872,797
------------ ------------
Cash and cash equivalents at end of period $ 378,976 $ 803,268
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 14,900 $ 2,337
Income taxes paid 180 291,646
------------ ------------
$ 15,080 $ 293,983
============ ============
</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, 1999 and 1998 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, if any. These credits are scheduled to
be available through the year 2002.
3. On February 26, 1999, the Company's Board of Directors approved a
proposal to (1) amend the Company's duration from fifty years to
perpetuity; (2) amend the Company's Articles of Incorporation to
increase the number of authorized shares of Class A Common Stock from
1,000,000 shares to 6,000,000 shares; (3) effect a 3-for-1 stock split
of the outstanding Class A Common Stock and a corresponding reduction of
the par value per share from $.10 to $.03 1/3; (4) adopt amendments to
the Articles of Incorporation and Bylaws to change voting rights from
one vote per shareholder to one vote per share; and (5) amend the
Articles of Incorporation to provide that generally any merger,
consolidation, liquidation or dissolution of the Company or sale of
substantially all of the assets of the Company require the affirmative
vote of the holders of 662/3% or more of the Company's outstanding Class
A Common Stock. On May 7, 1999, these proposals were put forth to a vote
of the shareholders, for which a majority of the shareholders voted in
favor of each proposal, causing these proposals to become effective on
such date. The Class A Common Stock split was effected in the form of a
stock dividend, distributed on June 1, 1999, to shareholders of record
on May 7, 1999.
All agreements concerning Common Stock of the Company, including the
Company's Employee Stock Ownership Plan and the Company's commitment
under the Deferred Compensation Plan for Non-Employee Directors, provide
for the issuance or commitment, respectively of additional shares of the
Company's stock due to the declaration of the stock split. All
references to number of shares, per share, and authorized share
information in the accompanying condensed consolidated financial
statements have been adjusted to reflect the stock split and increase in
authorized shares approved on May 7, 1999, at the Special Meeting of the
Shareholders of the Company.
4. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which was adopted by the Company
on December 31, 1997. 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,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator for primary
and diluted earnings
per share:
Net income $ 408,624 296,193 $ 338,976 $1,182,450
---------- ---------- ---------- ----------
Denominator:
For basic earnings per share
Weighted average shares 2,047,394 2,039,145 2,047,516 2,039,316
Effect of potential diluted shares:
Directors deferred
compensation shares 16,538 11,586 15,038 11,586
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and potential
shares 2,063,932 2,050,731 2,062,554 2,050,902
========== ========== ========== ==========
Basic earnings per share $ .20 $ .15 $ .17 $ .58
========== ========== ========== ==========
Diluted earnings per share $ .20 $ .14 $ .16 $ .58
========== ========== ========== ==========
</TABLE>
(4)
<PAGE> 7
5. 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
June 30, 1999, the Company had $200,000 outstanding under the facility.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Forward-Looking Statements for 1999 and later periods are made in this
document. Such statements represent estimates of management based on the
Company's historical operating trends, its proved oil and gas reserves and other
information currently available to management. The Company cautions that the
forward-looking statements provided herein are subject to all the risks and
uncertainties incident to the acquisition, development and marketing of, and
exploration for oil and gas reserves. These risks include, but are not limited
to, oil and natural gas price risk, environmental risks, drilling risk, reserve
quantity risk and operations and production risk. For all the above reasons,
actual results may vary materially from the 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, 1999 working capital was $630,428 as compared to $452,270 at
September 30, 1998. Cash flow from operating activities for the first nine
months of fiscal 1999 was $1,799,416 as compared to $2,815,271 for the first
nine months of fiscal 1998. This decrease of $1,015,855 is directly attributable
to a decline in oil and gas sales revenue during the 1999 nine months. The
decline in oil and gas sales revenues is discussed in detail in "Results of
Operations".
Capital expenditures for oil and gas activities in the first nine months
of 1999 amounted to $1,521,505 as compared to $2,404,180 in the first nine
months of fiscal 1998. This decreased spending on oil and gas property
development was mainly a result of the low market price of crude oil. Several
oil wells projected to be drilled in the 1999 nine month period were postponed
due to low oil prices in the first half of the year. The Company expects to
continue its ongoing business strategy of actively pursuing the development of
its oil and gas properties by participating in the drilling of additional wells
on its properties. Currently, crude oil market prices have now recovered and
management expects drilling in the last three months of fiscal 1999 to increase.
The Company has historically funded drilling and other capital expenditures as
well as overhead costs and dividend payments from operating cash flow. However,
in December 1998, the Company borrowed $300,000 under its bank line of credit to
help fund these costs. As of August 10, the Company had repaid the $300,000,
which was outstanding under the line of credit.
At June 30, 1999, the Company had remaining projected costs of
$1,487,000, for its share of drilling and equipment costs on working interest
wells which have been proposed or were in the process of being drilled or
completed. The Company's cash flow for the year may be less than the amount
needed to fully fund the above drilling obligations, overhead and dividend
payments. Thus, the bank line of credit may be utilized, on an as needed basis,
to allow the Company to continue its aggressive approach of developing its oil
and gas properties. The line of credit and expected cash flow are more than
sufficient to meet all expected capital obligations. Future capital expenditure
amounts may vary due to many factors, including drilling results, oil and gas
prices, industry conditions and acquisition opportunities, among others. A
significant acquisition of producing properties could increase capital
expenditures greatly and would again be financed by additional debt or possibly
debt and equity.
(5)
<PAGE> 8
RESULTS OF OPERATIONS
Revenues increased for the three month period ended June 30, 1999, as
compared to the same period in fiscal 1998. However, for the nine month period
ended June 30, 1999, revenues decreased as compared to the same period in fiscal
1998. The increase and/or decrease in total revenues is a function of increased
oil and gas sales revenues for the 1999 three month period and decreased oil and
gas sales revenues for the 1999 nine month period as compared to the respective
1998 periods. The chart below outlines the Company's production and average
sales prices for crude oil and natural gas for the three month and nine month
periods of fiscal 1999 and 1998.
<TABLE>
<CAPTION>
BARRELS AVERAGE MCF AVERAGE
SOLD PRICE SOLD PRICE
------- ------- --------- -------
<S> <C> <C> <C> <C>
Three months ended 6/30/99 23,225 $ 16.75 537,186 $ 2.11
Three months ended 6/30/98 24,652 $ 13.30 378,739 $ 2.17
Nine months ended 6/30/99 57,393 $ 13.86 1,373,071 $ 1.97
Nine months ended 6/30/98 84,517 $ 15.87 1,253,993 $ 2.34
</TABLE>
As shown by the chart, oil production for the three month period
remained relatively flat, while the average oil sales price increased 26% to
$16.75 in the 1999 quarter. Gas production volumes increased 42% in the 1999
quarter to 537,186 MCF. The average sales price of natural gas declined
approximately 3% during the 1999 quarter as compared to the 1998 quarter. The
increase in the average oil sales price and the increase in gas sales volumes
accounted for the 33% increase in oil and gas sales revenues for the 1999
quarter. Conversely, when the 1999 nine month periods are compared, oil sales
volumes and the average oil sales price are both down for 1999, as compared to
the 1998 period. Gas sales volumes increased 9% in the 1999 nine month period,
but the average natural gas sales price decreased 16%, in the 1999 period. These
decreases caused oil and gas sales revenues to be down 18% in the 1999
nine-month period. During the third quarter of fiscal 1999, both oil and natural
gas sales prices have substantially increased over the prices seen earlier in
fiscal 1999. The oil price increase has caused several of the Dagger Draw Field
wells, which were shut-in, because of low market prices, to be placed back on
production. If current prices hold, oil sales volumes should increase for the
remainder of fiscal 1999, and into early fiscal 2000, as the Dagger Draw wells
reach full production. The gas production volume increase is principally due to
two wells in the Potato Hills Field being on production most of the fiscal year.
In addition, several new gas wells in western Oklahoma have come on line.
Management expects gas sales volumes to be moderately increased for the fourth
quarter of fiscal 1999, and into fiscal 2000.
Costs and expenses increased in both 1999 periods as compared to the
1998 periods. The increases were principally due to greater depreciation,
depletion, amortization, and impairment costs (DD&A), along with higher general
and administrative expenses. Lease operating expenses and production taxes
(LOE), also increased in the 1999 three month period due to proportionate
increases in production taxes on the increased oil and gas sales revenues; and
plugging expenses in excess of $20,000 on a depleted well in the 1999 quarter.
Conversely, for the nine month period LOE was down due to the proportionate
decrease in production taxes on the decreased amount of oil and gas sales
revenues. The increase in DD&A expense was the result of high initial production
DD&A rates on several of the Company's newer wells in the fiscal 1999 periods.
These new wells initial flush production increases the unit-of-production DD&A
for those wells. In addition, DD&A rates were increased on several of the
Company's marginal producing wells during the 1999 periods as these wells are
producing at less than expected rates, and may not have the reserve quantities
which had been expected. General and administrative expenses increased in both
periods due to the Company having an additional employee in the 1999 periods and
costs incurred for the May 1999, special meeting of the shareholders voting on
various changes to the Company's Articles of Incorporation and stock split.
The Company's provision for income taxes differs from the statutory rate
due to benefits from tight gas sands production tax credits and percentage
depletion.
The Company's earnings benefited from the increase in oil and gas sales
revenues in the quarter ended June 30, 1999. The factors causing the increases
were discussed above. The nine month period of 1999 earnings were depressed
by the lower oil and gas sales prices and lower oil sales volumes experienced in
the first six months of fiscal 1999. It now appears that sales prices of both
oil and natural gas will stay near the current levels for the remainder of
fiscal 1999, thus, fourth quarter financial results are anticipated to be
comparable to the third quarter. However, should additional exploratory drilling
prospects result in non productive wells thus increasing exploration costs, or
the market price of oil and or natural gas decline, expected earnings would be
negatively impacted.
(6)
<PAGE> 9
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 completed its assessment of both its computer ("IT
systems") and operational equipment ("non-IT systems") as of June 30, 1998. The
Company has replaced its computer system hardware with new hardware which has
operating systems that are represented as being 2000 compliant. The Company's
software supplier is in the process of revising software licensed by the Company
with software represented to be year 2000 compliant. The system software
reprogramming is expected to be complete in mid 1999 with installation and
testing by September 1999. The Company has no non-IT systems which are expected
to be impacted in any material manner by year 2000.
The cost of replacement of the Company's IT systems noted above was less
than $25,000. Cost of the year 2000 compliant system software will be included
in the Company's standard annual license fee. Other costs to access the year
2000 matter or become compliant therewith are not expected to be significant.
Management currently feels the most likely worst case scenario of a Year
2000 effect on the Company would be the operators of the oil & gas properties in
which the Company has an interest, purchasers who buy oil and gas from the
Company's properties or financial institutions ("External Agents") used by the
Company not properly addressing the year 2000 matter, thus causing a delay in
the Company receiving payment for the sale of its oil and gas. Should this
occur, the Company would be required to borrow additional amounts on its
available line of credit to fund normal operating and capital costs, incurring
additional interest expense over that otherwise anticipated. However, the
Company does not expect the year 2000 will have a material impact on its
financial position or results of operations. The Company has no systems which
directly interface with External Agents.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORT ON FORM 8-K
(a) EXHIBITS - Exhibit 27 -- Financial Date Schedule
(b) FORM 8-K - There were no reports on FORM 8-K filed for the three
months ended June 30, 1999.
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, 1999 /s/ H W Peace II
--------------- ----------------------------------
Date H W Peace II, President
and Chief Executive Officer
August 11, 1999 /s/ Michael C. Coffman
--------------- ----------------------------------
Date Michael C. Coffman,
Vice President,
Chief Financial Officer and
Secretary and Treasurer
(7)
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 378,976
<SECURITIES> 0
<RECEIVABLES> 1,000,559
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,389,691
<PP&E> 29,414,398
<DEPRECIATION> 17,696,468
<TOTAL-ASSETS> 13,215,337
<CURRENT-LIABILITIES> 759,263
<BONDS> 0
68,246
0
<COMMON> 0
<OTHER-SE> 10,655,828
<TOTAL-LIABILITY-AND-EQUITY> 13,215,337
<SALES> 3,498,511
<TOTAL-REVENUES> 3,526,923
<CGS> 701,713
<TOTAL-COSTS> 2,434,334
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,900
<INCOME-PRETAX> 375,976
<INCOME-TAX> 37,000
<INCOME-CONTINUING> 338,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 338,976
<EPS-BASIC> .17
<EPS-DILUTED> .16
</TABLE>
