<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 December 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
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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 February 4, 1999:
682,524
- ------------
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 (unaudited) and
September 30, 1998 ............................................... 1
Condensed Consolidated Statements of Income -
Three months ended
December 31, 1998 and 1997 (unaudited) ........................... 2
Condensed Consolidated Statements of Cash Flows -
Three months ended December 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 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 December 31, 1998 is unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1998 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 156,523 $ 320,210
Oil and gas sales and other receivables 926,022 868,738
Prepaid expenses 11,072 27,391
----------- -----------
Total current assets 1,093,617 1,216,339
Properties and equipment, at cost, based on
successful efforts accounting
Producing Oil and Gas Properties 22,842,237 22,360,790
Non producing Oil and Gas Properties 5,698,175 5,693,399
Other 248,237 241,567
----------- -----------
28,788,649 28,295,756
Less accumulated depreciation,
depletion and amortization 16,973,242 16,600,499
----------- -----------
Net properties and equipment 11,815,407 11,695,257
Other assets 107,716 107,716
----------- -----------
$13,016,740 $13,019,312
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities
and gas imbalance liability $ 448,487 $ 620,413
Dividends payable 32,056 31,656
Income taxes payable -- --
Deferred income taxes 112,000 112,000
----------- -----------
Total current liabilities 592,543 764,069
Deferred income taxes 1,451,000 1,451,000
Long-term debt 300,000 --
Stockholders' equity
Class A voting common stock, $.10 par value;
1,000,000 shares authorized,
682,524 issued and outstanding at
December 31,1998 and 682,534 at
September 30, 1998 68,252 68,254
Capital in excess of par value 515,588 515,823
Retained earnings 10,089,357 10,220,166
----------- -----------
Total stockholders' equity 10,673,197 10,804,243
----------- -----------
$13,016,740 $13,019,312
=========== ===========
</TABLE>
(1)
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PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Oil and gas sales $1,031,133 $1,809,769
Lease bonuses and rentals 4,471 7,451
Interest 3,783 9,198
Other 3,086 521
---------- ----------
1,042,473 1,826,939
Costs and expenses:
Lease operating expenses
and production taxes 203,955 283,955
Exploration costs 88,083 59,389
Depreciation, depletion,
amortization
and impairment 372,743 369,061
General and administrative 371,595 362,993
---------- ----------
1,036,376 1,075,398
---------- ----------
Income before provision
for income taxes 6,097 751,541
Provision for income taxes -- 165,000
---------- ----------
Net income $ 6,097 $ 586,541
========== ==========
Basic earnings per share (Note 3) $ .01 $ .86
========== ==========
Diluted earnings per share (Note 3) $ .01 $ .86
========== ==========
Dividends declared
per share of common stock $ .20 $ .20
========== ==========
</TABLE>
(2)
<PAGE> 5
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,097 $ 586,541
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 372,743 369,061
Exploration costs 88,083 59,389
Cash provided (used) by changes in assets
and liabilities:
Oil and gas sales and other receivables (57,284) (207,305)
Prepaid expenses and other assets 16,319 (6,809)
Income taxes payable -- 159,826
Accounts payable, accrued liabilities,
gas imbalance liability and dividends payable (171,526) (74,449)
----------- -----------
Total adjustments 248,335 299,713
----------- -----------
Net cash provided by operating activities 254,432 886,254
Cash flows from investing activities:
Purchase of and development of
properties and equipment (580,976) (504,749)
----------- -----------
Net cash used in investing activities (580,976) (504,749)
Cash flows from financing activities:
Borrowings under line of credit 300,000 --
Acquisition of Company's common shares (237) --
Payment of dividends (136,906) (136,364)
----------- -----------
Net cash provided (used)
in financing activities 162,857 (136,364)
----------- -----------
Increase (decrease) in cash and cash equivalents (163,687) 245,141
Cash and cash equivalents at beginning of period 320,210 872,797
----------- -----------
Cash and cash equivalents at end of period $ 156,523 $ 1,117,938
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 787 $ 796
Income taxes paid 25 5,174
----------- -----------
$ 812 $ 5,970
=========== ===========
</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 periods ended
December 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 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 December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Numerator for primary
and diluted earnings
per share:
Net income $ 6,097 $586,541
-------- --------
Denominator:
For basic earnings per share
Weighted average shares 682,532 679,820
Effect of potential diluted shares:
Directors deferred
compensation shares 4,973 3,162
-------- --------
Denominator for diluted earnings
per share - adjusted weighted
average shares and potential
shares 687,505 682,982
======== ========
Basic earnings per share $ .01 $ .86
======== ========
Diluted earnings per share $ .01 $ .86
======== ========
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
December 31, 1998, and on February 4, 1999, the Company had $300,000
outstanding under the facility.
</TABLE>
(4)
<PAGE> 7
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 December 31, 1998 working capital was $501,074 as compared to $452,270
at September 30, 1998. Cash flow from operating activities for the first quarter
of fiscal 1999 was $254,432 as compared to $886,254 for the first quarter of
fiscal 1998. This decrease of $631,822 is directly attributable to a decline in
oil and gas sales revenue during the fiscal 1999 first quarter. The decline in
oil and gas sales revenues is discussed in detail in "Results of Operations".
Capital expenditures on oil and gas activities in the first quarter of
1999 amounted to $580,976 as compared to $504,749 in the first quarter of fiscal
1998. This increased spending on oil and gas property development is a
continuation of the Company's business strategy which is to actively pursue the
development of the Company's oil and gas properties by participating in the
drilling of wells on these properties. The Company has historically funded this
drilling and other capital expenditures as well as overhead costs and dividend
payments from cash flow. However, in December 1998, the Company borrowed
$300,000 under its bank line of credit to help fund these costs.
At December 31, 1998, the Company had remaining projected costs of
$1,451,781, 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. As the current low oil price is expected to continue well into fiscal
1999, 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 will 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.
RESULTS OF OPERATIONS
Revenues decreased in the first quarter of fiscal 1999 by $784,466 or
43%, as compared to the same period in fiscal 1998. The revenue reduction is due
to oil and gas sales revenues declining; which in turn, was caused by lower
sales prices for both oil and natural gas, and in addition, decreased sales
volumes for both oil and natural gas. The chart below summarizes the Company's
production and average sales prices for oil and natural gas.
<TABLE>
<CAPTION>
BARRELS AVERAGE MCF AVERAGE
SOLD PRICE SOLD PRICE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Quarter ended 12/31/98 18,984 $ 12.22 379,666 $ 2.10
Quarter ended 12/31/97 31,612 $ 19.26 442,048 $ 2.72
</TABLE>
An oversupply of crude oil worldwide and a warm early heating season caused the
prices of oil and natural gas and natural gas production volumes to be lower
than the comparable fiscal 1998 quarter. Oil sales volumes were and continue to
be adversely affected by the operator of the
(5)
<PAGE> 8
Dagger Draw Field in New Mexico (the Company's major oil producing field)
electing to shut-in those wells due to low crude oil prices. Management is
uncertain as to when full production will resume in the Dagger Draw Field.
The above discussed shut-in oil wells along with continuing low sales
prices for oil and gas will continue to reduce the Company's oil and gas sales
revenues during the remainder of fiscal 1999. However, several new gas wells
will come on line in fiscal 1999, increasing gas sales volumes, and if gas sales
prices remain steady, new gas production should reduce the impact of lost oil
sales revenues.
Costs and expenses decreased slightly, 4%, during the 1999 period as
compared to the 1998 period. The reduction in expenses was principally due to
reduced production taxes on oil and gas sales revenues, as these taxes are paid
as a percentage of oil and gas sales. Exploration costs increased $28,694, or
48%, in the 1999 first quarter somewhat offsetting the production tax decrease.
Exploration costs are principally dry hole costs associated with the drilling of
nonproductive exploratory wells. There is no way to predict these costs from
quarter to quarter and as the Company will continue drilling exploratory wells,
future exploration costs are anticipated.
There is no provision for income taxes in the fiscal 1999 first quarter
due to the negligible income before provision for income taxes, coupled with the
fact the Company continues to be able to utilize tax credits from production of
"tight gas sands", natural gas, and excess percentage depletion.
Net income decreased in the 1999 first quarter as compared to the 1998
first quarter as a result of decreased oil and gas sales revenues. Management
currently expects the depressed market price for oil to continue well into
fiscal 1999. This low price and reduced production volumes for oil, as discussed
above, will negatively impact earnings for the remainder of fiscal 1999.
Further, should oil and or gas prices go substantially lower, the Company could
be required to recognize an impairment provision on its oil and gas properties.
In addition, should more of the Company's current or projected exploratory
drilling prospects result in non-productive wells, earnings could be further
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 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 July 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.
Should any of the operators of the 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
address the year 2000 matter, there could be some delay in the Company receiving
payment for the sale of oil and gas. Should this occur, the Company may be
required to borrow additional amounts on its available line of credit, thus
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.
(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 December 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
February 11, 1999 /s/ H W Peace II
- ----------------------- -------------------------------------
Date H W Peace II, President
and Chief Executive Officer
February 11, 1999 /s/ Michael C. Coffman
- ----------------------- -------------------------------------
Date Michael C. Coffman, Vice President,
Chief Financial Officer and
Secretary and Treasurer
(7)
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 156,523
<SECURITIES> 0
<RECEIVABLES> 926,022
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,093,617
<PP&E> 28,788,649
<DEPRECIATION> 16,973,242
<TOTAL-ASSETS> 13,016,740
<CURRENT-LIABILITIES> 592,543
<BONDS> 0
0
0
<COMMON> 68,252
<OTHER-SE> 10,604,945
<TOTAL-LIABILITY-AND-EQUITY> 13,016,740
<SALES> 1,031,133
<TOTAL-REVENUES> 1,042,473
<CGS> 203,955
<TOTAL-COSTS> 832,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,097
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,097
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
