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, 1997
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.)
15East 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 13, 1997,
the latest practicable date, was 69,808.
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THE HOME-STAKE ROYALTY CORPORATION
FORM 10-QSB
SEPTEMBER 30, 1997
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, 1997........... 5
Consolidated Condensed Statements of Income and Retained
Earnings for the Three Months ended September 30, 1997.......... 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,
1997 1996
---- ----
Current assets:
Cash and cash equivalents ....................... $ 790,244 $ 626,864
Accounts receivable ............................. 665,286 1,469,877
Receivable from affiliate ....................... 158,683 66,213
Prepaid expenses ................................ 122,026 255,957
----------- -----------
Total current assets ............................ 1,736,239 2,418,911
Investments (Note 2) ............................ 3,706,348 3,592,495
Property and equipment, at cost: ................ 24,291,086 25,235,245
Less accumulated depreciation,
depletion and amortization ...................... 15,824,663 16,437,277
----------- -----------
Net property and equipment ...................... 8,466,423 8,797,968
Other assets .................................... 23,877 24,119
----------- -----------
$13,932,887 $14,833,493
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........ $ 549,410 $ 1,514,282
Dividends declared .............................. 62,827 62,827
Income taxes payable ............................ 6,600 75,198
Bonus Payable ................................... 37,650 20,253
Current note payable (Note 3) ................... -- 964,260
----------- -----------
Total current liabilities ....................... 656,487 2,636,820
Long-term note payable (Note 3) ................. -- 401,775
Deferred income taxes ........................... 972,358 773,200
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 ............................... 5,668,206 4,385,862
----------- -----------
15,668,206 14,385,862
Less treasury stock, at cost - 30,192 shares .... 3,364,164 3,364,164
----------- -----------
Total stockholders' equity ...................... 12,304,042 11,021,698
----------- -----------
$13,932,887 $14,833,493
=========== ===========
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, 1997 and 1996
(Unaudited)
1997 1996
---- ----
Revenues:
Oil sales ....................................... $ 3,184,587 $ 3,437,465
Gas sales ....................................... 2,132,634 1,828,149
Lease bonuses and rentals ....................... 72,496 19,411
Interest and dividends .......................... 32,769 51,378
Gain on sales of assets ......................... 111,073 12,810
Income from equity affiliates ................... 333,541 298,896
Other ........................................... 133,433 149,957
----------- -----------
6,000,533 5,798,066
Costs and expenses:
Lease operating expenses ........................ 1,217,554 1,599,878
Production taxes ................................ 431,313 473,545
Depreciation, depletion and amortization ........ 914,248 1,054,179
Dry hole costs .................................. 459,016 47,064
Condemned and abandoned properties .............. 56,035 19,703
General and administrative expense .............. 833,264 579,504
Interest expense ................................ 37,713 193,841
Property, franchise and other taxes ............. 112,469 87,678
----------- -----------
4,061,612 4,055,392
Income before provision for income taxes ........ 1,938,921 1,742,674
Provision for income taxes:
Current ......................................... 268,937 236,740
Deferred ........................................ 199,158 72,675
----------- -----------
467,095 309,415
----------- -----------
Net income ...................................... 1,470,826 1,433,259
Retained earnings at beginning of period ........ 4,385,862 2,855,837
Cash dividends ($2.70 per share - 1997,
$3.60 per share - 1996)..................... (188,482) (251,309)
----------- -----------
Retained earnings at end of period............... $ 5,668,206 $ 4,037,787
=========== ===========
Weighted average number of
common shares outstanding................... 69,808 69,808
====== ======
Net income per common share...................... $21.07 $20.53
====== ======
See accompanying notes.
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<PAGE>
THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND RETAINED EARNINGS
Three months ended September 30, 1997 and 1996
(Unaudited)
1997 1996
---- ----
Revenues:
Oil sales ....................................... $ 890,539 $ 1,139,419
Gas sales ....................................... 606,743 634,680
Lease bonuses and rentals ....................... 23,118 8,059
Interest and dividends .......................... 13,152 20,129
Gain (loss) on sales of assets .................. 11,365 10,042
Income from equity affiliates ................... 62,402 164,183
Other ........................................... 41,606 53,843
----------- -----------
1,648,925 2,030,355
Costs and expenses:
Lease operating expenses ........................ 438,597 562,784
Production taxes ................................ 125,260 167,921
Depreciation, depletion and amortization ........ 238,082 351,393
Dry hole costs .................................. 88,269 644
Condemned and abandoned properties .............. 9,520 24,784
General and administrative expense .............. 293,331 110,874
Interest expense ................................ 1,627 58,144
Property, franchise and other taxes ............. 25,272 22,219
----------- -----------
1,219,958 1,298,763
Income before provision for income taxes ........ 428,967 731,592
Provision for income taxes:
Current ......................................... 31,927 83,440
Deferred ........................................ 17,352 (20,837)
----------- -----------
49,279 62,603
----------- -----------
Net income ...................................... 379,688 668,989
Retained earnings at beginning of period ........ 5,351,346 3,431,625
Cash dividends ($ .90 per share) ................ (62,828) (62,827)
----------- -----------
Retained earnings at end of period .............. $ 5,668,206 $ 4,037,787
=========== ===========
Weighted average number of
common shares outstanding................... 69,808 69,808
====== ======
Net income per common share...................... $ 5.44 $ 9.58
====== ======
See accompanying notes.
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THE HOME-STAKE ROYALTY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1997 and 1996
(Unaudited)
1997 1996
---- ----
Operating activities:
Oil and gas sales, net of production taxes ...... $ 5,054,696 $ 4,756,669
Lease bonuses and rentals ....................... 72,496 19,411
Interest and dividends .......................... 32,769 51,378
Other ........................................... 133,433 149,957
----------- -----------
5,293,394 4,977,415
Cash paid to suppliers and employees ............ 2,175,858 2,283,470
Interest paid ................................... 37,713 193,841
Property, franchise and other taxes ............. 112,469 87,678
Income taxes paid ............................... 337,535 124,757
----------- -----------
2,663,575 2,689,746
----------- -----------
Net cash provided by operating activities ....... 2,629,819 2,287,669
Investing activities:
Proceeds from sales of property and equipment ... 509,539 61,792
Acquisition of property and equipment ........... (1,465,689) (366,383)
Dividends from equity affiliates ................ 45,506 56,818
----------- -----------
Net cash used in investing activities ........... (910,644) (247,773)
Financing activities:
Note payments ................................... (1,366,035) (1,285,680)
Cash dividends paid ............................. (189,760) (285,745)
----------- -----------
Net cash used in financing activities ........... (1,555,795) (1,571,425)
----------- -----------
Net increase in cash and cash equivalents ....... 168,380 468,471
Cash and cash equivalents at
beginning of period........................ 626,864 564,875
----------- -----------
Cash and cash equivalents at end of period ...... $ 790,244 $ 1,033,346
=========== ===========
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, 1996.
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,
1997 and 1996 for The Home-Stake Oil & Gas Company ("HSOG") and Alden Pipeline
Company is presented below:
1997 1996
---- ----
Income Statement data:
Revenues....................... $ 5,552,579 $ 5,475,148
Income before income taxes..... 1,583,216 1,280,330
Net income (1)................. 1,154,139 1,087,582
(1) Includes $242,683 and $305,481 in 1997 and 1996, respectively,
attributable to the equity earnings of the Company recorded by HSOG.
During the first quarter of 1997, the Company sold its interest in the N.E.
Alden Field, including Alden Pipeline Company. This sale was effective January
1, 1997. Accordingly, the 1997 information presented above does not include
amounts attributable to the operations of Alden Pipeline Company; amounts
included for 1996 operations are not material to the totals shown.
Note 3 - Note payable
On May 31, 1997, the Company paid off-its bank note payable which was due May 1,
1998. The Company has a line of credit in the amount of $700,000 available until
May 1, 1998, 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 a letter of credit in the amount of $60,000
which is guaranteed by this line.
The note payable and line of credit described above are collateralized by
certain of the Company's producing properties.
Note 4 - Contingencies
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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<PAGE>
Item 2. Management's Discussion and Analysis.
Results of Operations - First nine months of 1997 compared with first nine
months of 1996
Net income for the first nine months increased $37,567, from $1,433,259 in 1996
to $1,470,826 in 1997. The principal reasons for this increase are as follows:
Oil sales decreased 7% ($252,878) as a result of a decrease in the average oil
price from $19.17 per barrel to $19.06 per barrel, coupled with an decrease in
production volumes of 12,287 barrels. This decrease in production volumes was
primarily a result of property dispositions during 1996 and early 1997.
Gas sales increased $304,485 (17%) due to an increase in the average gas price
per mcf from $1.98 in 1996 to $2.33 in 1997, partially offset by a decrease in
production volumes from 923,324 mcf in 1996 to 913,979 mcf in 1997.
Lease rentals and bonuses increased $53,085 due to higher leasing activity in
1997 than in 1996.
Gains on sales of assets increased $98,263 in 1997, following the Company's sale
of their interest in the N.E. Alden Field. There were no comparable sales in
1996.
Income from equity affiliates increased $34,645 in 1997. The Company's principal
equity investee, The Home-Stake Oil & Gas Company, reported net income of
$1,154,139 in 1997 and $1,103,662 in the same period of 1996. In addition, the
Company's ownership in The Home-Stake Oil & Gas Company increased from 31.7% to
33.9% in November 1996.
Lease operating expenses decreased $382,324 (24%) from 1996. This decrease is
principally attributable to environmental remediation expenses in 1996
associated with a waterflood property in which the Company has a 9% working
interest, coupled with an insurance reimbursement in 1997 of certain of such
costs of approximately $145,250.
Production taxes decreased $42,232 as a result of lower production values
described above.
Dry hole costs increased $411,952 in 1997 due to the greater incidence of dry
holes and higher average costs per well. In 1996 there were 3 dry holes (.59
net) drilled at an average gross cost of $224,350 per well; in 1997 there were 8
dry holes (1.02 net) drilled at an average gross cost of $450,016 per well.
Condemned and abandoned property expense increased $36,332. 1996 expense
includes salvage credits of $12,488 received on a property abandoned during the
first quarter. 1997 expense was also higher due to the abandonment of acreage
costs associated with eight dry holes in 1997, compared to only three in 1996.
General and administrative expense increased $253,760. 1997 operations includes
$76,779 associated with the Company's proposed merger with The Home-Stake
Royalty Corporation (see Item 5 below). In addition, the Company added certain
full-time and contract employees in late 1996 and early 1997, in connection with
its exploration activities. 1996 operations include a reduction of $82,500
related to a settlement agreement reached with the Company's insurance carrier
for its officers and directors liability coverage.
Interest expense decreased $156,128 in 1997, reflecting the Company's lower
average borrowings.
Results of Operations - Third quarter 1997 compared with third quarter 1996
Net income for the third quarter decreased $289,301, from $668,989 in 1996 to
$379,688 in 1997. The principal reasons for this increase are as follows:
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<PAGE>
Oil sales decreased 22% ($248,880) due to lower average oil prices, which
decreased from $19.60 per barrel in 1996 to $16.89 per barrel in 1997, coupled
with a decrease in production volumes from 58,147 barrels to 52,719 barrels.
Gas sales decreased $27,937 (4%) due to a decrease in production volumes from
309,663 mcf to 289,284 mcf, partly offset by slightly higher average gas prices,
which increased from $2.05 per mcf in 1996 to $2.10 per mcf in 1997.
Lease operating expenses decreased $124,187 (22%). This decrease is principally
attributable to environmental remediation expenses in 1996 associated with a
waterflood property in which the Company has a 9% working interest, coupled with
an insurance reimbursement in 1997 of certain of such costs of approximately
$145,250.
Production taxes decreased $42,661 as a result of lower production values
described above.
Dry hole costs increased $87,625. There were three dry holes drilled in 1997 and
none in 1996.
General and administrative expense increased $182,457. 1997 operations includes
$56,644 associated with the Company's proposed merger with The Home-Stake
Royalty Corporation (see Item 5 below). In addition, the Company added certain
full-time and contract employees in late 1996 and early 1997, in connection with
its exploration activities. 1996 operations include a reduction of $82,500
related to a settlement agreement reached with the Company's insurance carrier
for its officers and directors liability coverage.
Interest expense decreased $56,517 in 1997, reflecting the Company's lower
average borrowings.
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 a capital expenditures budget for 1997 of $1.7 million. The
Company has spent approximately $1 million in the first three quarters of 1997
and has current commitments of approximately $500,000 for the remainder of the
year. In addition, the Company is actively pursuing acquisition opportunities
when they arise.
Since the beginning of 1997, product prices have decreased approximately 25% for
oil and 36% for natural gas. Despite these decreases, the Company expects to
finance its budgeted 1997 drilling activities from internally generated cash
flows. In addition, the Company has a revolving line-of-credit with NationsBank,
N.A,. in the amount of $700,000 which expires May 1, 1998. There is no balance
currently outstanding under this line, however the Company has issued a letter
of credit in the amount of $60,000 which is guaranteed by this line.
The Company does not engage, nor does it expect to engage, in any hedging or
other similar transactions which are intended to manage risks relating to
movements in oil and natural gas prices.
The Company does not expect its costs of addressing the "Year 2000" problem to
be significant. Nor is this problem expected to cause any disruption in the
operations or business activities of the Company.
Statement of Financial Accounting Standards No. 128, Earnings Per Share, will
become effective for periods ending after December 15, 1997. Adoption of this
statement will not have a material effect on the Company's results of
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, 1996
(the "Form 10-KSB"). Since the date of that report there have been no
material changes in the status of such matters.
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.
Item 5. Other Information.
At a special meeting of stockholders scheduled to be held on December
11, 1997, stockholders will be asked to consider and vote on a
proposal to approve and adopt a Merger Agreement between the Company
and The Home-Stake Oil & Gas Company ("HSOG"), pursuant to which the
Company will be merged with and into HSOG. The terms of the Merger
Agreement provide that the holders of the Company's common stock will
receive 48.66 shares of HSOG new stock for each share of the
Company's common stock owned at the effective time of the Merger.
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, 1997.
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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 14, 1997 By: /s/ Robert C. Simpson
-----------------------------
Robert C. Simpson
Chairman of the Board, C.E.O.,
President and Treasurer
Date: November 14, 1997 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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 790,244
<SECURITIES> 0
<RECEIVABLES> 665,286
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,736,239
<PP&E> 24,291,086
<DEPRECIATION> 15,824,663
<TOTAL-ASSETS> 13,932,887
<CURRENT-LIABILITIES> 656,487
<BONDS> 0
0
0
<COMMON> 4,000,000
<OTHER-SE> 6,000,000
<TOTAL-LIABILITY-AND-EQUITY> 13,932,887
<SALES> 5,389,717
<TOTAL-REVENUES> 6,000,533
<CGS> 0
<TOTAL-COSTS> 1,648,867
<OTHER-EXPENSES> 515,051
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,713
<INCOME-PRETAX> 1,938,921
<INCOME-TAX> 468,095
<INCOME-CONTINUING> 1,470,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,470,826
<EPS-PRIMARY> 21.07
<EPS-DILUTED> 21.07
</TABLE>
