UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period
ended September 30, 1996
Commission file number 0-19767
THE HOME-STAKE ROYALTY CORPORATION
(Exact name of small business issuer as specified in its charter)
Oklahoma 73-0288040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 East 5th Street, Suite 2800
Tulsa, Oklahoma 74103
(Address of principal executive offices)
(918) 583-0178
Registrant's telephone number
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
The number of shares outstanding of the Registrants's common stock, all of
which comprise a single class with $40 par value, as of November 12, 1996, the
latest practicable date, was 69,808.
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THE HOME-STAKE ROYALTY CORPORATION
FORM 10-QSB
SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets ..................... 4
Consolidated Condensed Statements of Income and Retained
Earnings for the Nine Months ended September 30, 1996.... 5
Consolidated Condensed Statements of Income and Retained
Earnings for the Three Months ended September 30, 1996... 6
Consolidated Condensed Statements of Cash Flow ............ 7
Notes to Consolidated Condensed Financial Statements ...... 8
Item 2. Management's Discussion and Analysis ...................... 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 12
Item 2. Changes in Securities ..................................... 12
Item 3. Defaults upon Senior Securities ........................... 12
Item 4. Submission of Matters to a Vote of Security Holders ....... 12
Item 5. Other Information ......................................... 13
Item 6. Exhibits and Reports on Form 8-K .......................... 13
SIGNATURES ......................................................... 14
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PART I - FINANCIAL INFORMATION
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<PAGE>
THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1996 1995
---- ----
Current assets:
Cash....................................... $ 1,033,346 $ 564,875
Accounts receivable........................ 740,293 1,024,200
Receivable from affiliate.................. 8,085 195,320
Prepaid expenses........................... 138,252 144,726
------------ -----------
Total current assets................. 1,919,976 1,929,121
Investments (Note 2)......................... 3,351,252 3,223,735
Property and equipment, at cost:............. 28,150,453 28,147,639
Less accumulated depreciation,
depletion and amortization........... 19,071,205 18,356,014
------------ -----------
Net property and equipment........... 9,079,248 9,791,625
Other assets................................. 24,201 21,288
------------ -----------
$14,374,677 $14,965,769
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.... $ 812,148 $ 1,404,133
Dividends declared.......................... 62,827 94,241
Deferred compensation payable............... 46,733 57,517
Income taxes payable........................ 84,303 5,745
Bonus Payable............................... 45,000 49,412
Current note payable (Note 3)............... 964,260 964,260
------------- -------------
Total current liabilities.... 2,015,271 2,575,308
Long-term note payable (Note 3)............... 1,124,970 2,410,650
Deferred income taxes......................... 560,813 488,138
Contingencies (Note 4)
Stockholders' equity:
Preferred stock, $1 par value -
200,000 shares authorized; none issued
Common stock, $40 par value -
100,000 shares authorized and issued...... 4,000,000 4,000,000
Additional paid-in capital.................. 6,000,000 6,000,000
Retained earnings........................... 4,037,787 2,855,837
------------- -------------
14,037,787 12,855,837
Less treasury stock, at cost -
30,192 shares............................. 3,364,164 3,364,164
------------- -------------
Total stockholders' equity............. 10,673,623 9,491,673
------------- -------------
$ 14,374,677 $ 14,965,769
============= =============
See accompanying notes.
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THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND RETAINED EARNINGS
Nine months ended September 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Revenues:
Oil sales................................... $ 3,437,465 $ 2,793,909
Gas sales................................... 1,828,149 1,394,105
Lease bonuses and rentals................... 19,411 22,045
Interest and dividends...................... 51,378 39,247
Gain on sales of assets..................... 12,810 66,042
Income from equity affiliates............... 298,896 173,013
Other....................................... 149,957 141,260
----------- -----------
5,798,066 4,629,621
Costs and expenses:
Lease operating expenses.................... 1,599,878 989,448
Production taxes............................ 473,545 349,700
Depreciation, depletion and amortization.... 1,054,179 951,582
Dry hole costs.............................. 47,064 132,366
Condemned and abandoned properties.......... 19,703 55,733
General and administrative expense.......... 579,504 827,675
Interest expense............................ 193,841 230,125
Property, franchise and other taxes......... 87,678 95,478
----------- -----------
4,055,392 3,632,107
Income before provision for income taxes...... 1,742,674 997,514
Provision for income taxes:
Current..................................... 236,740 86,001
Deferred.................................... 72,675 91,984
----------- -----------
309,415 177,985
----------- -----------
Net income.................................... 1,433,259 819,529
Retained earnings at beginning of period...... 2,855,837 2,632,908
Cash dividends ($3.60 per share - 1996,
$4.35 per share - 1995).................. (251,309) (303,665)
----------- -----------
Retained earnings at end of period............ $ 4,037,787 $ 3,148,772
=========== ===========
Weighted average number of common
shares outstanding....................... 69,808 69,808
====== ======
Net income per common share................... $20.53 $11.74
====== ======
See accompanying notes.
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THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND RETAINED EARNINGS
Three months ended September 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Revenues:
Oil sales................................ $ 1,139,419 $ 863,248
Gas sales................................ 634,680 464,798
Lease bonuses and rentals................ 8,059 9,754
Interest and dividends................... 20,129 20,499
Gain (loss) on sales of assets........... 10,042 (2,673)
Income from equity affiliates............ 164,183 68,287
Other.................................... 53,843 82,424
----------- -----------
2,030,355 1,506,337
Costs and expenses:
Lease operating expenses................. 562,784 378,081
Production taxes......................... 167,921 112,421
Depreciation, depletion and amortization. 351,393 310,812
Dry hole costs........................... 644 12,896
Condemned and abandoned properties....... 24,784 13,813
General and administrative expense....... 110,874 229,386
Interest expense......................... 58,144 99,000
Property, franchise and other taxes...... 22,219 28,743
----------- -----------
1,298,763 1,185,152
Income before provision for income taxes... 731,592 321,185
Provision for income taxes:
Current.................................. 83,440 5,476
Deferred................................. (20,837) 5,212
----------- -----------
62,603 10,688
----------- -----------
Net income................................. 668,989 310,497
Retained earnings at beginning of period... 3,431,625 2,932,516
Cash dividends ($ .90 per share - 1996,
$1.35 per share - 1995)............... (62,827) (94,241)
----------- -----------
Retained earnings at end of period......... $ 4,037,787 $ 3,148,772
=========== ===========
Weighted average number of common shares
outstanding........................... 69,808 69,808
====== ======
Net income per common share................ $ 9.58 $ 4.45
====== ======
See accompanying notes.
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THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Operating activities:
Oil and gas sales,
net of production taxes............... $ 4,756,669 $ 3,854,885
Lease bonuses and rentals................ 19,411 22,045
Interest and dividends................... 51,378 39,247
Other.................................... 149,957 141,260
----------- -----------
4,977,415 4,057,437
Cash paid to suppliers and employees..... 2,283,470 1,505,359
Interest expense......................... 193,841 237,751
Property, franchise and other taxes...... 87,678 95,478
Income taxes paid........................ 124,757 50,641
----------- -----------
2,689,746 1,889,229
----------- -----------
Net cash provided by
operating activities.................. 2,287,669 2,168,208
Investing activities:
Proceeds from sales of property and
equipment............................. 61,792 157,713
Acquisition of property and equipment.... (366,383) (2,988,403)
Dividends from equity affiliates......... 56,818 78,125
----------- -----------
Net cash used in investing activities.. (247,773) (2,752,565)
Financing activities:
Proceeds from notes payable.............. -- 2,435,680
Note payments............................ (1,285,680) (649,151)
Cash dividends paid...................... (285,745) (311,478)
----------- -----------
Net cash used in financing activities.. (1,571,425) 1,475,051
----------- -----------
Net increase in cash....................... 468,471 890,694
Cash at beginning of period................ 564,875 289,219
----------- -----------
Cash at end of period...................... $ 1,033,346 $ 1,179,913
=========== ===========
See accompanying notes.
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THE HOME-STAKE ROYALTY CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - General
The unaudited financial information provided in this report includes all normal
recurring adjustments which are, in the opinion of management, necessary to
fairly present the financial position, result of operations and cash flows of
the Company. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted or condensed. The Company believes that the
disclosures herein are adequate to make the information presented not
misleading; however, these financial statements should be read in conjunction
with the audited financial statements and related notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
The results for interim periods are not necessarily indicative of trends or of
results to be expected for the full year.
Note 2 - Summarized financial information of equity investees
Summarized income statement information for the nine months ended September 30,
1996 and 1995 for The Home-Stake Oil & Gas Company ("HSOG") and Alden Pipeline
Company is presented below:
1996 1995
---- ----
Income Statement data:
Revenues............................... $ 5,475,148 $ 4,405,681
Income before income taxes............. 1,280,330 719,541
Net income (1)......................... 1,087,582 630,582
(1) Includes $305,481 and $128,591 in 1996 and 1995, respectively,
attributable to the equity earnings of the Company recorded by HSOG.
Note 3 - Note payable
Note payable at September 30, 1996, represents the amounts due under the
Company's financing agreement which is due May 1, 1998, and provides for monthly
maturities of $80,355, plus interest at bank prime. In addition, the Company has
a line of credit in the amount of $700,000 available until May 1, 1997, which
provides for monthly payments of interest on the outstanding borrowings at bank
prime. There is no balance currently outstanding under this line, however the
Company has issued letters of credit in the amount of $60,000 which are
guaranteed by this line.
The note payable and line of credit described above are collateralized by the
28,409 shares of common stock of HSOG owned by the Company and certain of the
Company's producing properties.
Note 4 - Contingencies
In August 1995, the Company was notified that a property in which it owns a 9%
working interest was subject to certain claims by surface owners regarding
possible saltwater contamination. The operator of the property, Mobil Oil
Corporation, has settled some claims and is currently pursuing resolution of
this matter with other surface owners. It is currently estimated that the
Company's share of the total claims and related costs may be approximately
$300,000. On June 13, 1996, the Company and HSOG (collectively "the Companies")
filed suit in the United States District Court for the Eastern District of
Oklahoma, against Mobil Oil Corporation and Mobil Exploration & Production U.S.,
Inc. (collectively "Mobil"). This suit is styled The Home-Stake Royalty
Corporation and The Home-Stake Oil & Gas Company v Mobil Oil Corporation and
Mobil Exploration & Production U.S., Inc. (Case No. CIV-6- 271-S). This action
alleges Mobil's breach of the related Unit Agreement; breach of fiduciary duty;
gross negligence and willful misconduct; and fraud in connection with Mobil's
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Note 4 - Contingencies (continued)
operation of the property. The Companies are seeking actual damages, punitive
damages and equitable relief in this matter, including a declaration that Mobil
is barred from charging costs related to certain saltwater contamination claims
and other related costs to the Companies. Mobil has counter claimed for the
Companies share of environmental costs which the Companies have not paid. Mobil
has also filed a Motion for Summary Judgement, to which the Companies have filed
a response. Discovery is ongoing in this matter, which is tentatively set for
trial in January, 1997. At this time management cannot estimate the financial
impact of the litigation. Operations of the property are being reviewed as a
result of the contamination claims and a determination of the effects thereof on
the carrying value of the assets affected will be made in the fourth quarter of
1996.
The Company is involved in various other legal actions arising in the normal
course of business. In the opinion of management, the Company's liabilities, if
any, in these matters will not have a material effect on the Company's financial
position or the results of operations.
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Item 2. Management's Discussion and Analysis.
Results of Operations - First nine months of 1996 compared with first nine
months of 1995
Net income for the first nine months increased $613,730 from $819,529 in 1995 to
$1,433,259 in 1996. The principal reasons for this increase are as follows:
Oil sales increased 23% ($643,556) as a result of an increase in the average
price from $16.08 per barrel to $19.17 per barrel, coupled with an increase in
production volumes of 5,598 barrels. This increase in production was primarily a
result of new drilling activities and property acquisitions during 1995.
Gas sales increased $434,044 (31%) due to an increase in the average gas price
per mcf from $1.40 in 1995 to $1.98 in 1996, partially offset by a decrease in
production volumes from 994,954 mcf to 923,796 mcf.
Interest income increased $12,131 from 1995 primarily as a result of greater
excess funds available for investment.
Gains on sales of assets were lower in 1996 (decrease of $53,232). In 1995 the
Company sold several marginal properties for which there were no comparable
transactions in 1996.
Income from equity affiliates increased $125,883. The Company's principal equity
investee, HSOG, reported income of $1,103,662 in 1996 compared to $630,582 in
1995.
Lease operating expenses increased $610,430 (62%) in 1996. This increase is
principally attributable to operating costs associated with properties acquired
in 1995.
Production taxes increased $123,845 as a result of higher production values
described above.
Dry hole costs decreased $85,302 in 1996. In 1995 there were 3 dry holes (.59
net) drilled at an average gross cost of $224,350 per well; in 1996 there were 3
dry holes (.18 net) drilled at an average gross cost of $261,500 per well.
Condemned and abandoned property expense decreased $36,030. 1996 expense
includes salvage credits of $12,488 received on a property abandoned during the
first quarter. 1995 expense was unusually high due to the non-recurring
abandonment of acreage costs associated with three dry holes, coupled with the
expiration of leases on certain non-producing acreage owned by the Company.
General and administrative expense decreased $248,171. 1995 operations included
$137,115 associated with the Company's unsuccessful merger with The Home-Stake
Oil & Gas Company. 1996 operations include a reduction of $82,500 related to a
settlement agreement reached with the Federal Insurance Company (see Part II,
Item 1, Legal Proceedings).
Results of Operations - Third quarter 1996 compared with third quarter 1995
Net income for the third quarter increased $358,492 from $310,497 in 1995 to
$668,989 in 1996. The principal reasons for this increase are as follows:
Oil sales increased 32% ($276,171) due to higher average prices which increased
from $14.89 per barrel in 1995 to $19.60 per barrel in 1996, coupled with a
slight increase in production volumes from 57,986 barrels to 58,147 barrels.
Gas sales increased $169,882 (37%) due to higher average prices which increased
from $1.43 per mcf in 1995 to $2.05 per mcf in 1996, partially offset by a
decrease in production volumes from 324,234 mcf to 309,663 mcf.
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<PAGE>
Gains on sales of assets in 1996 increased $12,715. In the third quarter of 1996
the Company sold certain properties for which there were no comparable
transactions in 1995.
Income from equity affiliates increased $95,896. The Company's principal equity
investee, HSOG, reported income of $594,001 in 1996 compared to $248,924 in
1995.
Lease operating expenses increased $184,703 (49%). This increase in principally
attributable to operating costs associated with properties acquired in 1995.
Production taxes increased $55,500 as a result of higher production values
described above.
Condemned and abandoned property expense increased $10,971 due to an increase in
the number of non-producing leaseholds whose lease terms expired in the third
quarter of 1996, as compared to 1995.
General and administrative expense decreased $118,512. 1995 operations included
$19,867 associated with the Company's unsuccessful merger with The Home-Stake
Oil & Gas Company. 1996 operations include a reduction of $82,500 related to a
settlement agreement reached with the Federal Insurance Company (see Part II,
Item 1, Legal Proceedings).
Financial Condition and Liquidity
The Company's operating activities have traditionally been self-financed through
internally generated cash flows. The principal uses of cash flows have been to
fund the Company's exploration and production activities and for the payment of
dividends to stockholders. The use of borrowed funds has generally been limited
to the acquisition of producing oil & gas properties where future revenues from
such purchases are expected to fund the debt.
The Company has an exploration and development budget for 1996 of $1,680,000.
The Company has spent approximately $343,000 in the first three quarters of 1996
and has current commitments of approximately $667,000 for the remainder of the
year. In addition, the Company is actively pursuing acquisition opportunities
when they arise.
The Company has a revolving line-of-credit with Boatmen's National Bank of
Oklahoma in the amount of $700,000 which expires May 1, 1997. There is no
balance currently outstanding under this line, however the Company has issued
letters of credit in the amount of $60,000 which are guaranteed by this line.
The working capital deficit of $646,187 at December 31, 1995 has been reduced to
$95,295 at September 30, 1996 since the Company has used cash flows to reduce
current liabilities. Product prices remain above 1995 levels and the Company's
drilling commitments are over $650,000 below budget. Excess cash flows will
continue to be used to reduce the bank note payable and fund future business
operations.
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<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
There is a complete discussion of legal proceedings in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995 (the "Form 10-KSB").
During the third quarter of 1996 there have been the following material changes
in the status of such matters.
(a) In connection with the Company's and HSOG's (collectively "the
Companies") action against Federal Insurance Company ("Federal") in
the United States District Court for the Northern District of
Oklahoma, the Companies entered into a settlement agreement with
Federal on August 5, 1996, pursuant to which, the Companies received
an aggregate of $165,000 ($82,500 each company) and each party agreed
to dismiss all of their respective claims against each other.
(b) In connection with the Company's dispute with the Bureau of Indian
Affairs, the Interior Board of Land Appeals of the United States
Department of the Interior (the "Appeals Board") ruled on September
17, 1996 on the Company's petition for clarification and
reconsideration of certain aspects of the Appeals Board's earlier
ruling. The Appeals Board determined that royalty payments are due to
the Kiowa Indians on 100% of sales from the date of first production.
As a result, there will be additional royalties, as well as Kiowa
severance tax, due on this production. The Company is still reviewing
this decision, its impact on the owners of the affected properties and
whether the Company will appeal the ruling though a federal court
action. At September 30, 1996, the Company accrued $38,187 in this
matter, representing its share of additional royalties and severance
taxes.
(c) In connection with the matter discussed in the Company's Form 10-KSB
described as "saltwater contamination claims", the Companies filed
suit in the United States District Court for the Eastern District of
Oklahoma on June 13, 1996, against Mobil Oil Corporation and Mobil
Exploration & Production U.S., Inc. (collectively "Mobil"). This suit
is styled The Home-Stake Royalty Corporation and The Home-Stake Oil &
Gas Company v Mobil Oil Corporation and Mobil Exploration & Production
U.S., Inc. (Case No. CIV-96-271-S). This action alleges Mobil's breach
of the Unit Agreement; breach of fiduciary duty; gross negligence and
willful misconduct; and fraud in connection with Mobil's operation of
a property in which the Companies each own a 9% working interest. The
Companies are seeking actual damages, punitive damages and equitable
relief in this matter, including a declaration that Mobil is barred
from charging costs related to certain saltwater contamination claims
and other related costs to the Companies. Mobil has counter claimed
for the Companies share of environmental costs which the Companies
have not paid. Mobil has also filed a Motion for Summary Judgement, to
which the Companies have filed a response. Discovery is ongoing in
this matter, which is tentatively set for jury trial in January, 1997.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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<PAGE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following documents are included as exhibits to this Form
10-QSB.
Exhibit
Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1996.
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<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Home-Stake Royalty Corporation
(Registrant)
Date: November 13, 1996 By: /s/ Robert C. Simpson
-----------------------------
Robert C. Simpson
Chairman of the Board, C.E.O.,
President and Treasurer
Date: November 13, 1996 By: /s/ Chris K. Corcoran
-----------------------------
Chris K. Corcoran
Executive Vice President,
Chief Financial Officer and
Corporate Secretary
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,033,346
<SECURITIES> 0
<RECEIVABLES> 740,293
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,919,976
<PP&E> 28,150,453
<DEPRECIATION> 19,071,205
<TOTAL-ASSETS> 14,374,677
<CURRENT-LIABILITIES> 2,015,271
<BONDS> 1,124,970
0
0
<COMMON> 4,000,000
<OTHER-SE> 6,000,000
<TOTAL-LIABILITY-AND-EQUITY> 14,374,677
<SALES> 5,285,025
<TOTAL-REVENUES> 5,798,066
<CGS> 0
<TOTAL-COSTS> 2,073,423
<OTHER-EXPENSES> 66,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193,841
<INCOME-PRETAX> 1,742,674
<INCOME-TAX> 309,415
<INCOME-CONTINUING> 1,433,259
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,433,259
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