-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IcStkkDhe0KTghkU/y6BQd3ITkwPZxbKaTAiSMw9mLaEhyt5zqIGzfJPQsvJnK2Y asI6bzBGpAaT/CysNJ5BeA== 0000950134-96-007052.txt : 19961224 0000950134-96-007052.hdr.sgml : 19961224 ACCESSION NUMBER: 0000950134-96-007052 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PANHANDLE ROYALTY CO CENTRAL INDEX KEY: 0000315131 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731055775 STATE OF INCORPORATION: OK FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-09116 FILM NUMBER: 96685294 BUSINESS ADDRESS: STREET 1: 5400 NW GRAND BLVD STREET 2: GRAND CENTRE STE 210 CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 BUSINESS PHONE: 4059481560 10KSB 1 FORM 10-K FISCAL YEAR END SEPTEMBER 30, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 1996 Commission File Number: 0-9116 PANHANDLE ROYALTY COMPANY (Exact name of small business registrant 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 NW Grand Blvd., Okla. City, OK 73112 (Address of principal executive offices) (zip code) Registrant's telephone number (405) 948-1560 Securities registered under Section 12(B) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: (Title of Class) CLASS A COMMON STOCK (VOTING) .10 par value (Title of Class) CLASS B COMMON STOCK (NON-VOTING) $1.00 par value Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. X Yes No - --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation SB contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. { X } Registrant's revenues for fiscal year-end September 30, 1996, were $6,016,168. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by using the closing price of registrant's common stock, at December 4, 1996, was $22,199,457. As of December 4, 1996, 677,846 class A common shares were outstanding. DOCUMENTS INCORPORATED BY REFERENCE ..... NONE 2 T A B L E O F C O N T E N T S
PART I PAGE - ------ ---- Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4 Item 2. Description of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-10 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 PART II - ------- Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-11 Item 6. Management's Discussion and Analysis or Plan of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-14 Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-31 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 PART III - -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . 32-34 Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-35 Item 11. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-36 Item 12. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36-37 Exhibit 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
( i ) 3 PART I ITEM 1. DESCRIPTION OF BUSINESS FORWARD-LOOKING STATEMENTS Forward-looking statements for 1997 and later periods are made throughout this document. Such statements represent estimates of management based on the Company's historical operating trends, its proved 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 risk, drilling risk, reserve quantity risk and operations and production risks. 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. BUSINESS DEVELOPMENT Panhandle Royalty Company ("Panhandle" or the "Company") is an Oklahoma Corporation, organized in 1926 as Panhandle Cooperative Royalty Company. In 1979, Panhandle Cooperative Royalty Company was merged into Panhandle Royalty Company. Panhandle's authorized and registered stock consisted of 100,000 shares of $1.00 par value class A common stock. In 1982, the Company split the stock on a 10-for-1 basis and reduced the par value to $.10, resulting in 1,000,000 shares of authorized class A common stock. Since its formation, the Company has been involved in the acquisition and management of mineral interests and the exploration for, and development of, oil and gas properties, principally involving wells located on the Company's mineral interests. Panhandle's mineral properties and other oil and gas interests are located primarily in Oklahoma, New Mexico and Texas. Properties are also located in twelve other states. The majority of the Company's oil and gas production is from wells located in the Anadarko Basin of western Oklahoma and the Dagger Draw Field in Eddy County, New Mexico. In 1988, the Company merged with New Mexico Osage Royalty Company, thus acquiring most of its New Mexico mineral interests. The Company's offices are located at Grand Centre Suite 210, 5400 N.W. Grand Blvd., Oklahoma City, OK 73112 (405)948-1560, FAX (405)948-2038. BUSINESS OF ISSUER The majority of Panhandle's revenues are derived from the production and sale of oil and natural gas. See "Item 7 - Financial Statements". The Company's oil and gas holdings, including its mineral interests and its interests in producing wells, both working interests and royalty interests, are centered in Oklahoma with increasingly more activity, in recent years, in New Mexico and Texas. See "Item 2 - Description of Properties". Exploration and development of the Company's oil and gas properties is conducted in association with operating oil and gas companies, including major and independent companies. The Company does not operate any of its oil and gas (1) 4 properties. Drilling operations have been active the last four years with wells drilled on the Company's mineral properties and on third party drilling prospects. A large percentage of the Company's recent drilling participations have been on properties in which the Company has mineral interests and in many cases already owns an interest in a producing well in the unit. This "increased density" drilling has accounted for a majority of the successful gas wells completed in the last four years and has added significant gas reserves for the Company. The Company has also been actively acquiring additional mineral interest properties the last five years. On November 17, 1995 the Company acquired a 50% interest in 65,632 net mineral acres from Petrocorp, Incorporated. These mineral interests are primarily located in Oklahoma and Texas and also in eleven other states, and are primarily non-producing properties. Included however, were small royalty interests in approximately 170 producing wells and working interests in 5 producing wells. See "Item 7 - Financial Statements, Note 7". Several of the mineral properties purchased the last four years have been in areas where the Company had no mineral holdings, thus expanding the Company's area of interest. PRINCIPAL PRODUCTS AND MARKETS The Company's principal products are crude oil and natural gas. These products are sold to various purchasers, including pipeline companies, which are generally located in and service the areas where the Company's producing wells are located. The Company does not act as operator for any of the properties in which it owns an interest, thus it relies on the operating expertise of numerous companies that operate in the area where the Company owns mineral interests. This expertise includes drilling operations and completions, producing well operations and, in some cases, the marketing or purchasing of the well's production. Natural gas sales are contracted by either the Company or the well operator and are contracted principally on a monthly basis with third party gas marketers and pipeline companies. Payment for gas sold is received either from the contracted purchasers or the well operator. Crude oil sales are generally handled by the well operator and payment for oil sold is received from the well operator or from the crude oil purchaser. COMPETITIVE BUSINESS CONDITIONS The oil and gas industry is highly competitive, both in the search for new oil and gas reserves and the marketing of the production from wells. There are many factors affecting Panhandle's competitive position and the market for its products which are beyond its control. Some of these factors are quantity and price of foreign oil imports, changes in prices received for its oil and gas production, business and consumer demand for refined oil products and natural gas, and the effects of federal and state regulation of oil and gas sales. Changes in existing economic conditions and actions taken by OPEC and other oil-producing countries have dramatic influence on the price Panhandle receives for its oil and, to some extent, gas production. The Company relies heavily on companies with greater resources, staff, equipment, research, and experience for operation of wells and the development and drilling of subsurface prospects. The Company uses its strong financial (2) 5 base and its mineral property ownership to participate in drilling operations with these larger companies. This method allows the Company to effectively compete in drilling operations it could not undertake on its own due to financial and personnel limits and to maintain low overhead costs. SOURCES AND AVAILABILITY OF RAW MATERIALS The existence of commercial oil and gas reserves is essential to the ultimate realization of value from the Company's mineral properties and these mineral properties may be considered a raw material to its business. The production and sale of oil and natural gas from the Company's oil and gas properties is essential to provide the cash flow necessary to sustain the ongoing viability of the Company. The Company continues to reinvest a large portion of its cash flow in the purchase of additional mineral properties to assure the continued availability of acreage with which to participate in exploration, drilling, and development operations and subsequently the production and sale of oil and gas. This participation in exploration and production and the purchasing of additional mineral interests will continue to supply the Company with the raw materials with which to generate additional cash flow. Mineral purchases are made from varied owners, and the Company does not rely on any particular companies or individuals for these acquisitions. MAJOR CUSTOMERS The Company's oil and gas production is sold to many different purchasers on a well-by-well basis. No one purchaser accounts for a major percentage of the Company's revenues. Generally, if one purchaser declines to continue purchasing the Company's oil and/or natural gas, several other purchasers can be located. Pricing is usually reasonably consistent from purchaser to purchaser. PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND ROYALTY AGREEMENTS The Company does not own any patents, trademarks, licenses or franchises. Royalty agreements on producing oil and gas wells stemming from the Company's ownership of mineral interests generate a substantial portion of the Company's revenues. These royalties are tied to the ownership of the mineral interests and this ownership is perpetual, unless sold by the Company. Royalties are due and payable to the Company whenever oil and/or gas is produced from wells located on the Company's mineral properties. GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS Oil and gas production is subject to various taxes, such as gross production taxes and, in some cases, ad valorem taxes. The State of Oklahoma and other states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration and production of oil and gas. Such states also have regulations addressing conserva- (3) 6 tion matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells and the regulation of spacing, plugging and abandonment of such wells. These statutes and regulations limit the rate at which oil and gas can be produced from certain of the Company's properties. Federal tax law allows producers of "tight gas" to utilize an approximate $.52/MMBTU tax credit for gas produced from approved wells. The credit is a direct reduction of regular federal income tax. Panhandle began receiving revenues from "tight gas" wells during fiscal 1992. This credit will be available for all tight gas sold prior to January 1, 2003, and is expected to substantially reduce the Company's cash outlay for income taxes. As the Company is directly involved in the extraction and use of natural resources, it is subject to various federal, state and local provisions regarding environmental and ecological matters. Compliance with these laws may necessitate significant capital outlays, however, to date the Company's cost of compliance has been insignificant, and the Company is not currently aware of any potentially material environmental problems on any of its properties. The Company does not feel the existence of these environmental laws will materially hinder or adversely affect the Company's business operations; however, there can be no assurances of future events. Since the Company does not operate any wells in which it owns an interest, actual compliance with environmental laws is controlled by others, with Panhandle being responsible for its proportionate share of the costs involved. Panhandle carries liability insurance and to the extent available at reasonable cost, pollution control coverage. However, all risks are not insured due to insurance availability and/or cost thereof. EMPLOYEES Panhandle employs eight persons on a full-time basis and has no part-time employees. Three of the employees are executive officers and one is also a director of the Company. ITEM 2. DESCRIPTION OF PROPERTIES As of September 30, 1996, Panhandle's principal properties consisted of perpetual ownership of 173,108 net mineral acres, held in tracts in Alabama, Arkansas, Colorado, Idaho, Kansas, Illinois, Indiana, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, Tennessee and Texas. The Company also held leases on 4,117 net acres of minerals in Louisiana, Oklahoma and Texas. At September 30, 1996, Panhandle held royalty and/or working interests in 1,124 producing oil or gas wells, 21 successfully completed but not yet producing wells, and 37 wells in the process of being drilled or completed. Panhandle does not have current abstracts or title opinions on all mineral properties owned and, therefore, cannot warrant that it has unencumbered title to all of its properties. In the period from 1927 through 1937, the Company lost title to a number of its then owned mineral acres through foreclosures and tax sales of the surface acreage (4) 7 overlying its minerals. In recent years, few challenges have been made against the Company's fee title to its properties. Panhandle pays ad valorem taxes on its minerals owned in Arkansas, Colorado, Idaho, Kansas and Texas. ACREAGE The following table of mineral interests owned reflects, as of September 30, 1996, in each respective state, the number of net and gross acres, net and gross producing acres, net and gross acres leased, and net and gross acres open (unleased).
MINERAL INTERESTS Net Gross Net Gross Net Gross Acres Acres Acres Acres Acres Acres Net Gross Prod'g Prod'g Leased Leased Open Open St. Acres Acres (1) (1) (2) (2) (3) (3) - --- ------- ------- ------ ------ ------ ------ ------- ------- AL 5 479 5 479 AR 5,890 32,016 20 40 44 160 5,826 31,816 CO 8,156 37,960 8,156 37,960 OK 79,451 603,102 15,051 71,332 1,754 24,801 62,646 506,969 ID 30 880 30 880 IL 1,018 4,393 1,018 4,393 IN 27 262 27 262 KS 620 5,360 620 5,360 MT 422 7,960 422 7,960 NE 439 5,960 439 5,960 ND 292 5,036 37 320 255 4,716 NM 53,285 151,933 1,089 3,749 2,063 5,602 50,133 142,582 TN 1,544 3,087 1,544 3,087 TX 21,929 204,672 1,020 33,992 291 2,502 20,618 168,179 ------- --------- ------ ------- ----- ------ ------- ------- TOT: 173,108 1,063,100 17,180 109,113 4,189 33,385 151,739 920,603 ------- --------- ------ ------- ----- ------ ------- -------
(1) "Producing" represents the mineral acres in which Panhandle owns a royalty or working interest in a producing well. (2) "Leased" represents the mineral acres, owned by Panhandle, that are leased to third parties but not producing. (3) "Open" represents mineral acres owned by Panhandle that are not leased or in production. This table reflects net mineral acres leased from others, lease expiration dates, and net leased acres held by production. LEASES
Net Acres Leases Expiring Net Acres Net -------------------- Held By State Acres 1997 1998 1999 Production ----- ------ ---- ---- ---- ---------- LA 137 137 OK 2,885 666 349 218 1,652 TX 1,095 352 675 68 ----- ----- ----- --- ----- TOT: 4,117 1,018 1,024 218 1,857 ----- ----- ----- --- -----
PROVED RESERVES The following table summarizes estimates of the proved reserves of oil and gas held by Panhandle. All reserves are located within the United States. Because the Company's nonproducing mineral and leasehold (5) 8 interests consist of various small interests in numerous tracts located primarily in Oklahoma, New Mexico and Texas and because the Company is a non-operator and must rely on third parties to propose and drill wells, it is not feasible to provide estimates of all proved undeveloped reserves and associated future net revenues. Prior to fiscal 1995, the Company did not provide estimates of any proved undeveloped reserves. Since 1995 the Company has provided estimates of proved undeveloped reserves for certain areas of western Oklahoma where a large amount of increased density gas drilling had taken place during the prior few years. In 1996 estimates of certain proved undeveloped reserves in the Dagger Draw field in southeastern New Mexico were added. Production in this field has grown rapidly over the last four years and numerous undrilled well locations are situated on minerals owned by Panhandle. Due to field production allowable rules in Dagger Draw, only those proved undeveloped reserves which the Company felt could be drilled, under existing allowable rules, have been included. Should the allowable rules be amended and/or production volumes change significantly, additional proved undeveloped reserves may be added in the future. The Company, in both cases, expects drilling to continue for the next several years, and thus made the decision to provide proved undeveloped reserve estimates for these areas. All reserve estimates were compiled by Campbell & Associates, Inc., an independent petroleum engineering firm. The Company's reserve estimates were not filed with any other federal agency.
Proved Developed Reserves Barrels of Oil MCF of Gas ------------------------- -------------- -------------- September 30, 1992 183,968 7,068,028 September 30, 1993 227,342 7,300,317 September 30, 1994 251,246 7,442,524 September 30, 1995 454,577 7,618,673 September 30, 1996 641,213 8,200,957 Proved Undeveloped Reserves --------------------------- September 30, 1995 10,339 1,570,440 September 30, 1996 297,582 1,638,104 Total Proved Reserves --------------------- September 30, 1995 464,916 9,189,113 September 30, 1996 938,795 9,839,061
Because the determination of reserves is a function of testing, evaluating, developing oil and gas reservoirs and establishing a production decline history, along with product price fluctuations, it would be expected that estimates will change as future information concerning those reservoirs is developed and as market conditions change. Estimated reserve quantities and future net revenues are affected by changes in product prices, and these prices have varied substantially in recent years. Proved developed reserves are those expected to be recovered through existing well bores under existing economic and operating conditions. Proved undeveloped reserves are reserves that may be recovered from undrilled acreage, but are usually limited to those sites directly offsetting established production units and have sufficient geological data to indicate a reasonable expectation of commercial success. (6) 9 ESTIMATED FUTURE NET CASH FLOWS Set forth below are estimated future net cash flows with respect to Panhandle's proved reserves (based on the estimated units set forth in the immediately preceding table) as of year ends, and the present value of such estimated future net cash flows, computed by applying a ten (10) percent discount factor as required by the rules and regulations of the Securities and Exchange Commission. Estimated future net cash flows have been computed by applying current year-end prices to future production of proved reserves less estimated future expenditures (based on costs as of year end) to be incurred with respect to the development and production of such reserves. Such pricing is based on SEC guidelines. No federal income taxes are included in estimated costs. However, the amounts are net of production taxes levied by respective states. Prices used for determining future cash flows from oil and natural gas for the periods ended September 30, 1996, 1995 and 1994 were as follows: 1996 - - $23.88, $1.84; 1995 - $17.23, $1.56; 1994 - $17.79, $1.55. These future net cash flows should not be construed as the fair market value of the Company's reserves. A market value determination would need to include many additional factors, including anticipated oil and gas price increases or decreases. Estimated Future Net Cash Flows
9-30-96 9-30-95 9-30-94 ----------- ----------- ----------- Proved Developed $25,166,810 $16,055,355 $12,778,920 Proved Undeveloped $ 8,363,380 $ 1,442,460 NA ----------- ----------- ----------- Total Proved $33,530,190 $17,497,815 $12,778,920
10% Discounted Present Value of Estimated Future Net Cash Flows
9-30-96 9-30-95 9-30-94 ----------- ----------- ----------- Proved Developed $17,827,160 $11,126,168 $ 8,690,835 Proved Undeveloped $ 5,328,364 $ 799,923 $ NA ----------- ----------- ----------- Total Proved (1) $23,155,524 $11,926,091 $ 8,690,835
(1) Approximately 53% of the increase from September 30, 1995 to September 30, 1996 is attributable to the increase in oil and gas sales prices at September 30, 1996 compared to the sales prices at September 30, 1995. OIL AND GAS PRODUCTION The following table sets forth the Company's net production of oil and gas for the fiscal periods indicated.
Year Year Year Ended Ended Ended 9-30-96 9-30-95 9-30-94 --------- --------- --------- Bbls - Oil 145,301 82,676 77,720 MCF - Gas 1,551,147 1,203,623 1,339,545
(7) 10 Average Sales Prices and Production Costs The following table sets forth unit price and cost data for the fiscal periods indicated.
Year Year Year Ended Ended Ended Average Sales Price 9-30-96 9-30-95 9-30-94 ------------------- --------- --------- --------- Per Bbl. Oil $ 19.93 $ 17.26 $ 16.13 Per MCF Gas $ 1.95 $ 1.39 $ 1.91
Average Production (Lifting Cost) --------------------------------- Per Equivalent Bbl. Oil (1)(2) $ 2.46 $ 2.62 $ 2.46
(1) Gas production is converted to barrel equivalents at the rate of 6 MCF per barrel, representing the estimated relative energy content of natural gas and oil. (2) Includes well operating costs and production taxes. Average production costs are influenced by the fact that the Company bears no costs of production on many of its well interests, as a large part of the Company's producing well interests are royalty interests, which bear no share of the operating costs. GROSS AND NET PRODUCTIVE WELLS AND DEVELOPED ACRES The following table sets forth Panhandle's gross and net productive oil and gas wells as of September 30, 1996. Panhandle owns fractional royalty interests or fractional working interests in these wells. The Company does not operate any wells.
Gross Wells Net Wells ----------- --------- Oil 263 10.930683 Gas 861 15.101761 ----- --------- TOTAL 1,124 26.032444
Information on multiple completions is not available from Panhandle's records, but the number of such is insignificant. As of September 30, 1996, Panhandle owned 109,113 gross developed mineral acres and 17,180 net developed mineral acres. Panhandle has also leased from others 23,079 gross developed acres which contain 1,857 net developed acres. UNDEVELOPED ACREAGE As of September 30, 1996, Panhandle owned 953,988 gross and 155,928 net undeveloped mineral acres, and leases on 28,572 gross and 2,260 net acres. (8) 11 DRILLING ACTIVITY The following net productive development and exploratory wells and net dry development and exploratory wells, in which the Company had a fractional royalty or working interest, were drilled and completed during the fiscal years indicated. Also shown are the net wells purchased during these periods.
-------------- ------- - ----------------- Net Productive Net Dry Development Wells Wells Wells - ----------------- -------------- ------- Fiscal year ending September 30, 1994 .948187 .267869 Fiscal year ending September 30, 1995 1.184040 .524182 Fiscal year ending September 30, 1996 1.6140027 .485562 - ----------------- Exploratory Wells - ----------------- Fiscal year ending .103746 .300875 September 30, 1994 Fiscal year ending September 30, 1995 .255000 .322656 Fiscal year ending September 30, 1996 .456455 .231341 - --------------- Purchased Wells - --------------- Fiscal year ending September 30, 1994 .078540 0 Fiscal year ending September 30, 1995 .389869 0 Fiscal year ending September 30, 1996 1.542173 0
PRESENT ACTIVITIES The following table sets forth the gross and net oil and gas wells drilling or testing as of September 30, 1996, in which Panhandle owns a royalty or working interest.
Gross Wells Net Wells ----------- --------- Oil 8 .493600 Gas 29 1.192700
(9) 12 The Company has very small interests in three waterflood operations in Oklahoma and Texas which have neglible revenues and expenses to the Company. No additional purchases or start-ups of waterflood, pressure maintenance or other related operations are currently planned. ITEM 3. LEGAL PROCEEDINGS There were no material legal proceedings involving Panhandle or its subsidiary, PHC, Inc., as of the date of this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Panhandle's security holders during the fourth quarter of the fiscal year ended September 30, 1996. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the NASDAQ Small-Cap Market (symbol PANRA). The following table sets forth the high and low trade prices of the Company's common stock, as reported by NASDAQ System Statistics furnished by NASD, during the periods indicated:
Quarter Ended HIGH LOW ----------------- ------ ------ December 31, 1994 16-3/4 15-1/2 March 31, 1995 16-1/2 15-1/4 June 30, 1995 17-1/2 15-1/2 September 30, 1995 18 16-1/2 December 31, 1995 18 16 March 31, 1996 18-1/2 15-3/4 June 30, 1996 21-1/2 18-1/2 September 30, 1996 22-1/4 19-1/4
As of November 30, 1996, the approximate number of holders of shares of Panhandle stock were:
Title of Class Number of Holders --------------------------- ----------------- Class A Common (Voting) . . . . . . . . . . . . . 2,300
During the past two years, cash dividends have been paid as follows on the class A common stock:
DATE RATE PER SHARE -------------- -------------- December 1994 $ .15 March 1995 $ .15 June 1995 $ .15 September 1995 $ .15 December 1995 $ .15 March 1996 $ .15 June 1996 $ .15 September 1996 $ .175
(10) 13 The Company's line of credit loan agreement contains a provision limiting the paying or declaring of a cash dividend to fifty percent of cash flow, as defined, of the preceding twelve-month period. See Note 3 to the consolidated financial statements contained herein at "Item 7 - Financial Statements", for a further discussion of the loan agreement. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At year end September 30, 1996 the Company had working capital of $567,422, a decrease of $54,063 compared to year end September 30, 1995. Cash flow from operating activities increased substantially from $1,535,334 for fiscal 1995 to $3,820,373 for fiscal 1996. The increased cash flow was a result of increased sales volumes and sales prices for both oil and natural gas in fiscal 1996 as compared to fiscal 1995. These increases are discussed in greater detail in "Results of Operations". The Company spent $1,747,992 on exploratory and developmental drilling and equipment costs in fiscal 1996 as compared to $1,323,950 in fiscal 1995. This increased spending is a continuation of the Company's business strategy established in 1991 to actively pursue the development of its mineral properties by participating in more drilling of wells on those properties. In addition, the Company continues to pursue outside generated drilling prospects which present good potential economic returns. Property acquisitions are also a focal point in the Company's business strategy. In fiscal 1996 the Company spent $2,318,416 acquiring mineral properties, as compared to $379,164 in fiscal 1995. These acquisitions were predominately non-producing mineral properties and did not provide substantial new cash flow. However, these properties are expected to generate future drilling opportunities and will eventually increase the Company's oil and gas reserve base and thereby increase the Company's cash flow as the properties are developed or begin producing oil and gas. The majority of the purchased properties were acquired in November 1995 when the Company purchased a 50% interest in 65,632 net mineral acres located primarily in Oklahoma and Texas. The purchase price for these properties was $2,071,557 net of post closing adjustments. Financing was provided by accessing the Company's bank line of credit for $2,100,000. During fiscal 1996 $1,350,000 of cash was utilized to reduce the outstanding amount of the line of credit to $750,000 at September 30, 1996. The Company expects to continue to increase its expenditures for exploratory and developmental drilling through 1997 and for several additional years. At September 30, 1996 the Company had commitments of $990,000 for drilling and equipment costs for wells which had been proposed or were in the process of being drilled or completed. The Company expects to commit a total of approximately $2,200,000 for well costs in fiscal 1997. These commitments and any additional drilling and development costs, overhead expenses, dividend payments and debt service (11) 14 payments are expected to be funded by cash flow from operating activities and existing working capital. Should the Company desire to make a large asset purchase in fiscal 1997, it could access the available portion of the bank line of credit. The continuing positive results of the last five years drilling operations have added significantly to the Company's reserve base and have significantly contributed to the increased cash flow in fiscal 1996. These new reserves should continue to provide increasing cash flow to the Company for the next several years. However, should natural gas and or oil sales prices decline dramatically from current levels, cash flow would be adversely affected. Currently, management does not anticipate such declines and has based 1997 capital expenditure levels on continuing strong cash flow levels. As stated earlier, the line of credit is available should cash flow decline to a level which would not support anticipated capital expenditures. RESULTS OF OPERATIONS Oil and gas revenues increased $2,843,730, or 92%, in fiscal 1996 as compared to fiscal 1995 oil and gas revenues. The improvement in revenues is attributable to larger sales volumes of oil and natural gas and increased average sales prices for oil and natural gas. The chart below summarizes the Company's production and average sales prices for oil and natural gas in fiscal 1995 and 1996.
PRODUCTION --------------------------------------------------- OIL GAS --------------------- -------------------------- Total Average Total Average Bbls. Price/Bbl MCF Price/MCF ------ --------- --------- --------- Year ended 9/30/96 145,301 $ 19.93 1,551,147 $1.95 Year ended 9/30/95 82,676 $ 17.26 1,203,623 $1.39
The increased oil production is principally attributable to new wells in the Dagger Draw field in southeast New Mexico, and to a lesser extent increased production from wells in Louisiana and West Texas. The Dagger Draw field continues to be developed and has added substantially to the Company's oil production for the last three years. Additional drilling is expected in the field for at least the next two to three years, which should replace production lost due to normal decline in some of the field's older wells. Gas production was up principally due to increased demand for natural gas during the colder winter months of fiscal 1995 and 1996 and production from new gas wells coming on line in 1996. This increased demand also had the effect of raising average natural gas sales prices for the entire year as natural gas storage facilities were replenished during the summer months of fiscal 1996, when natural gas demand is usually low. In fiscal 1997 management currently expects oil prices to remain relatively stable, to slightly up, compared to fiscal 1996 average prices. Natural gas prices are expected to rise above the current mid $2.00 range in the winter months of fiscal 1997 and thus should average out somewhat higher than the 1996 average price of $1.95 per MCF. (12) 15 Fiscal 1997 oil production volumes are expected to be relatively stable while gas production volumes are expected to increase slightly. However, oil production could be adversely affected by production allowable limitations on certain wells in the Dagger Draw field of New Mexico. Management currently feels the reduced production due to the allowable limits will be replaced by production from wells, in New Mexico, which will begin production in fiscal 1997. Further, as natural gas production volumes are expected to increase slightly, and considering the expected pricing scenario discussed above, oil and gas revenues should continue on an upward trend in fiscal 1997. However, this trend is not expected to be as dramatic as the increase from fiscal 1995 to 1996. Costs and expenses increased $983,939 or 39% in 1996 as compared to 1995. Lease operating expenses, production taxes and seismic costs (LOE) along with depreciation, depletion and amortization accounted for $249,949 and $664,331, respectively, of the increase. LOE increased principally due to the increased production taxes paid on increased oil and gas sales revenues in 1996. In addition, the number of wells in which the Company owns a working interest continues to increase, thus increasing LOE expenses. LOE costs are expected to continue to increase as the Company will continue to participate in additional working interest wells. Production taxes, which are a percentage of oil and gas sales revenues, will track future revenue increases and/or decreases. Depreciation, depletion and amortization (DD&A) expenses were $664,331 higher (94%) than in fiscal 1995. This increase is again principally attributable to increased production levels as the Company computes DD&A on the units of production method. In addition, the Company adopted SFAS No. 121 (see Note 1., Summary of Significant Accounting Policies, to the Financial Statements contained herein at Item 7.) and included the $105,019 impairment provision calculated under SFAS 121 in DD&A during fiscal 1996. Dry hole costs were $138,270 lower in fiscal 1996 than in 1995. These costs will vary from year to year and are dependent upon the Company's participation in exploratory working interest wells drilled, and the success of those ventures. The Company utilizes the successful efforts method of accounting for oil and gas operations, thus dry hole costs are a result of drilling unsuccessful exploratory wells. There is no way to accurately estimate dry hole costs from year to year. The Company will continue exploratory well participation, and thus future dry hole costs can be expected. General and administrative costs increased 11.5% in fiscal 1996 to $875,923. The increase was the result of increased salary expenses, increased legal expenses for several administrative matters, increased engineering expenses for the Company's reserve report, and increased insurance costs. General and administrative costs will continue to moderately increase as the Company continues to increase its activity level. (13) 16 The $117,375 of interest expense was incurred on the $2,100,000 borrowed in November 1995 to purchase the Petrocorp minerals discussed in "Liquidity and Capital Resources". Interest expense should be substantially reduced in fiscal 1997 as the Company has paid down the outstanding balance of the line of credit to $750,000 at September 30, 1996, and expects to have the current borrowings paid off prior to fiscal year end 1997. However, the Company could incur additional borrowings and related interest under the line of credit should an additional acquisition be made. The provision for income taxes increased in 1996 due to substantially increased income before taxes in 1996. The provision for income taxes was approximately 20% of income before taxes for both 1996 and 1995. Both provisions differ from the calculated result should the federal statutory rate be applied due to percentage depletion and due to tight-sands gas production tax credits allowed on certain of the Company's gas wells. As discussed above, the increase in net income was a function of increased oil and gas sales revenues, offset somewhat by increased costs and expenses. Current production levels and sales prices are expected to continue into fiscal 1997. Management intends to continue the proactive approach adopted five years ago which includes increased drilling costs in 1997. Larger investments in drilling carry certain risks, principally dry hole costs as discussed above, the results of which can affect Company earnings. In addition, market prices for oil and gas, over which the Company has no control, can dramatically impact the Company's earnings, either positively or negatively. Management feels its increasing oil and gas reserves should translate into continually improving financial results in the near term, barring any large increases in dry hole costs related to exploratory drilling ventures, or a dramatic downturn in oil and or natural gas market prices. ITEM 7. FINANCIAL STATEMENTS
Report of Independent Auditors ............................ 15 Consolidated Balance Sheets As of September 30, 1996 and 1995 ................ 16 Consolidated Statements of Income For The Years Ended September 30, 1996 and 1995 .......... 17 Consolidated Statements of Stockholders' Equity For The Years Ended September 30, 1996 and 1995 ...... 18 Consolidated Statements of Cash Flows For The Years Ended September 30, 1996 and 1995 ...... 19 Notes To Consolidated Financial Statements ................ 20
(14) 17 Report of Independent Auditors Board of Directors and Stockholders Panhandle Royalty Company We have audited the accompanying consolidated balance sheets of Panhandle Royalty Company as of September 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Panhandle Royalty Company at September 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the accompanying consolidated financial statements, in fiscal year 1996, Panhandle Royalty Company changed its method of accounting for impairment of long-lived assets by adopting Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Oklahoma City, Oklahoma November 22, 1996 (15) 18 Panhandle Royalty Company Consolidated Balance Sheets
SEPTEMBER 30, 1996 1995 -------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 399,423 $ 443,862 Oil and gas sales and other receivables 817,258 529,274 Income tax refund receivable - 58,637 Prepaid expenses 4,520 2,221 -------------------------------------- Total current assets 1,221,201 1,033,994 Property and equipment, at cost, based on successful efforts accounting (Notes 3 and 7): Producing oil and gas properties 17,594,577 15,285,738 Nonproducing oil and gas properties 5,112,785 3,480,998 Furniture and fixtures 190,473 177,466 -------------------------------------- 22,897,835 18,944,202 Less accumulated depreciation, depletion and amortization 13,700,007 12,328,527 -------------------------------------- Net properties and equipment 9,197,828 6,615,675 Other assets 107,716 107,716 -------------------------------------- $ 10,526,745 $ 7,757,385 ====================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities (Note 6) $ 165,900 $ 103,041 Gas imbalance liability 44,380 44,380 Dividends payable (Note 4) 28,656 62,088 Income taxes payable (Note 2) 164,843 - Deferred income taxes (Note 2) 250,000 203,000 -------------------------------------- Total current liabilities 653,779 412,509 Deferred income taxes (Note 2) 908,000 710,000 Long-term debt (Note 3) 750,000 - Stockholders' equity (Notes 3, 5 and 6): Class A voting common stock, $.10 par value; 1,000,000 shares authorized, 677,846 issued and outstanding (679,642 in 1995) 67,785 67,964 Capital in excess of par value 383,790 400,334 Retained earnings 7,763,391 6,166,578 -------------------------------------- Total stockholders' equity 8,214,966 6,634,876 -------------------------------------- $ 10,526,745 $ 7,757,385 ======================================
See accompanying notes. (16) 19 Panhandle Royalty Company Consolidated Statements of Income
YEAR ENDED SEPTEMBER 30, 1996 1995 --------------------------- Revenues: Oil and gas sales $5,944,018 $3,100,288 Lease bonuses and rentals 29,877 14,453 Interest 25,974 46,203 Other 16,299 57,495 --------------------------- 6,016,168 3,218,439 Costs and expenses: Lease operating expenses, production taxes and seismic costs 991,789 741,840 Dry hole costs 125,782 264,052 Depreciation, depletion and amortization (Note 1) 1,371,480 707,149 General and administrative 875,923 785,369 Interest expense 117,375 - --------------------------- 3,482,349 2,498,410 --------------------------- Income before provision for income taxes 2,533,819 720,029 Provision for income taxes (Note 2) 513,000 146,000 --------------------------- Net income $2,020,819 $ 574,029 =========================== Net income per common share $ 2.98 $ .85 =========================== Weighted average shares outstanding 677,586 676,914 ===========================
See accompanying notes. (17) 20 Panhandle Royalty Company Consolidated Statements of Stockholders' Equity
COMMON STOCK CAPITAL IN ------------------------ EXCESS OF RETAINED SHARES AMOUNT PAR VALUE EARNINGS ------------------------------------------------------------ Balances at September 30, 1994 678,136 $67,814 $370,904 $5,999,535 Purchase and cancellation of common shares (1,988) (199) (29,594) - Issuance of common shares to ESOP (Note 5) 3,494 349 59,024 - Dividends declared ($.60 per share) - - - (406,986) Net income - - - 574,029 ------------------------------------------------------------ Balances at September 30, 1995 679,642 67,964 400,334 6,166,578 Purchase and cancellation of common shares (4,712) (471) (77,488) - Issuance of common shares to ESOP (Note 5) 2,916 292 60,944 - Dividends declared ($.625 per share) - - - (424,006) Net income - - - 2,020,819 ------------------------------------------------------------ Balances at September 30, 1996 677,846 $67,785 $383,790 $7,763,391 ============================================================
See accompanying notes. (18) 21 Panhandle Royalty Company Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30, 1996 1995 ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $2,020,819 $ 574,029 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 1,371,480 707,149 Deferred income taxes 245,000 139,000 Dry hole costs 125,782 264,052 Common stock issued to Employee Stock Ownership Plan 61,236 59,373 Cash provided (used) by changes in assets and liabilities: Oil and gas sales and other receivables (287,984) (106,268) Income tax refund receivable 58,637 (58,637) Prepaid expenses (2,299) 1,242 Accounts payable and accrued liabilities 62,859 (20,527) Gas imbalance liability - 44,380 Income taxes payable 164,843 (68,449) ---------------------------- Total adjustments 1,799,554 961,315 ---------------------------- Net cash provided by operating activities 3,820,373 1,535,344 CASH FLOWS FROM INVESTING ACTIVITIES OF PROPERTY AND EQUIPMENT Purchases (4,079,415) (1,711,894) Purchases of other assets - (45,553) ---------------------------- Net cash used in investing activities (4,079,415) (1,757,447) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under line of credit 2,100,000 - Principal payments on line of credit (1,350,000) - Purchase and cancellation of common shares (77,959) (29,793) Payments of dividends (457,438) (403,910) ---------------------------- Net cash provided (used) in financing activities 214,603 (433,703) ---------------------------- Decrease in cash and cash equivalents (44,439) (655,806) Cash and cash equivalents at beginning of year 443,862 1,099,668 ---------------------------- Cash and cash equivalents at end of year $ 399,423 $ 443,862 ============================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 117,375 $ - Income taxes paid 132,650 84,086
See accompanying notes. (19) 22 Panhandle Royalty Company Notes to Consolidated Financial Statements September 30, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Panhandle Royalty Company and its wholly-owned subsidiary, P.H.C., Inc. All material intercompany transactions have been eliminated in the accompanying consolidated financial statements. CASH EQUIVALENTS All highly liquid short-term investments with original maturities of three months or less from the date of purchase by the Company are considered to be cash equivalents. Cash equivalents at September 30, 1996 and 1995 include certificates of deposit of $99,000 and $299,000, respectively, which are valued at cost (approximates market) and had original maturities of 90 days or less. OIL AND GAS SALES RECEIVABLE The Company sells oil and natural gas to various customers. Substantially all of the Company's accounts receivable are due from purchasers of oil and natural gas. Oil and natural gas sales are generally unsecured. The Company has not experienced significant credit losses in prior years and is not aware of any significant uncollectible accounts at September 30, 1996. OIL AND GAS PRODUCING ACTIVITIES The Company follows the successful efforts method of accounting for oil and gas producing activities. Intangible drilling and other costs of successful wells and development dry holes are capitalized and amortized. The costs of exploratory wells are initially capitalized, but charged against income if and when the well is determined to be nonproductive. Oil and gas mineral and leasehold costs are capitalized when incurred. Impairment of unproved properties is generally assessed on a property-by-property basis. (20) 23 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In the fourth quarter of 1996, the Company adopted the provisions of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair values are based on discounted future cash flows or information provided by sales and purchases of similar assets. The Company's oil and gas properties were reviewed for indicators of impairment on a field-by-field basis, resulting in the recognition of a $105,019 impairment provision in the fourth quarter of 1996 which is included in depreciation, depletion and amortization expense. DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and amortization of the costs of producing oil and gas properties are computed using the units of production method primarily on a separate-property basis using proved reserves as estimated annually by an independent petroleum engineer. The Company has significant royalty interests in wells for which the Company does not share in the costs associated with the wells. Estimated costs of future dismantlement, restoration and abandonment of wells in which the Company owns a working interest are not expected to differ significantly from the estimated salvage value of equipment from such wells and, accordingly, no accrual of such costs is included in the accompanying consolidated financial statements. Nonproducing oil and gas properties include nonproducing minerals, which have a net book value of $4,070,610 at September 30, 1996, consisting of perpetual ownership of mineral interests in several states, including Oklahoma, Texas and New Mexico. These costs are being amortized over a thirty-three year period using the straight-line method. An ultimate determination of whether these properties contain recoverable reserves in economical quantities can generally be made within this time frame. Depreciation of furniture and fixtures is computed using the straight-line method over estimated productive lives of five to eight years. (21) 24 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. PRODUCTION IMBALANCES During the course of normal production operations, joint interest owners will, from time to time, take more or less than their ownership share of natural gas volumes from jointly-owned wells. These volumetric imbalances are monitored over the life of the well to achieve balancing, or to minimize imbalances, by the time reserves are depleted, with final cash settlements made under a variety of arrangements at that time. The Company follows the sales method of accounting for imbalances. A liability is recorded only if takes of natural gas volumes from jointly-owned wells exceed the Company's interest in the well's remaining estimated natural gas reserves. At September 30, 1996, the Company's net liability for production imbalances of approximately 28,000 mcf of natural gas was $44,380. EARNINGS PER SHARE OF COMMON STOCK Earnings per share are computed using the weighted average number of shares outstanding during the year. FAIR VALUES OF FINANCIAL INSTRUMENTS The following information is provided regarding the estimated fair value of the Company's financial instruments at September 30, 1996 and 1995: Cash and cash equivalents, receivables, prepaid expenses, accounts payable and accrued liabilities are each estimated to have a fair value approximating the carrying amount due to the short maturity of those instruments. Long-term debt at September 30, 1996 has a variable interest rate with a carrying value approximating fair value. (22) 25 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 2. INCOME TAXES The Company's provision for income taxes is detailed as follows:
1996 1995 ------------------- Current: Federal $206,000 $ - State 62,000 7,000 ------------------- 268,000 7,000 Deferred: Federal 223,000 126,000 State 22,000 13,000 ------------------- 245,000 139,000 ------------------- $513,000 $146,000 ===================
The difference between the provision for income taxes and the amount which would result from the application of the federal statutory rate to income before provision for income taxes is analyzed below:
1996 1995 --------------------- Provision for income taxes at statutory rate $ 861,498 $244,810 Percentage depletion (314,979) (97,708) Tight-sands gas credits (90,412) (68,854) State income taxes, net of federal benefit 55,440 13,200 Reduction in alternative minimum tax credit carryforward - 54,000 Other 1,453 552 -------------------- $ 513,000 $146,000 ====================
(23) 26 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 2. INCOME TAXES (CONTINUED) Deferred tax assets and liabilities, resulting from differences between the financial statement carrying amounts and the tax bases of assets and liabilities, consist of the following:
1996 1995 ----------------------- Deferred tax liabilities: Capitalized costs and related depreciation, depletion and amortization $1,048,000 $ 952,000 Cash basis of accounting for income taxes 250,000 203,000 ----------------------- 1,298,000 1,155,000 Deferred tax assets: Alternative minimum tax credit carryforwards 140,000 242,000 Valuation allowance - - ----------------------- Net deferred tax liabilities $1,158,000 $ 913,000 =======================
3. LONG-TERM DEBT The Company has a revolving line of credit agreement with a bank, which extends through January 3, 1998, for borrowings, which bear interest at the bank's base rate plus .2% (8.45% at September 30, 1996), of up to $2,500,000. The outstanding borrowings are unsecured but subject to a negative pledge on all of the Company's oil and gas properties and are payable in full, with accrued and unpaid interest, January 3, 1998. The Company is required to pay an annual fee of .125% for the unused portion of the line of credit. The outstanding balance at September 30, 1996 was $750,000 (none at September 30, 1995). The agreement contains various restrictions which, among other things, require the Company to maintain, at the end of each quarter, positive net income for the preceding twelve-month period. Additionally, the Company is restricted from incurring certain indebtedness, selling oil and gas properties for which the proceeds received exceed $100,000, acquiring treasury stock in any one year in excess of $150,000 and paying or declaring cash dividends exceeding fifty percent of the cash flow from operations, as defined, of the preceding twelve-month period. (24) 27 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 4. DIVIDENDS PAYABLE Dividends payable represent accrued dividends which are due and payable, but have not been paid for various reasons, including estate problems of deceased stockholders, lost shareholders or questions of ownership of the underlying shares. 5. EMPLOYEE STOCK OWNERSHIP PLAN The Company has an employee stock ownership plan that covers substantially all employees and is established to provide such employees with a retirement benefit. These benefits become fully vested after three years of employment. Contributions to the plan are at the discretion of the Board of Directors and can be made in cash (none in 1996 or 1995) or the Company's common stock. For contributions of common stock, the Company records as expense, the fair market value of the stock at the time of contribution. The 21,288 shares of the Company's common stock held by the plan are allocated to individual participant accounts, are included in the weighted average shares outstanding for purposes of earnings per share computations and receive dividends. Contributions to the plan consisted of:
YEAR SHARES AMOUNT ----------------------------------------------------------- 1996 2,916 $61,236 1995 3,494 59,373
6. DEFERRED COMPENSATION PLAN FOR DIRECTORS Effective November 1, 1994, the Company formed the Panhandle Royalty Company Deferred Compensation Plan for Non-Employee Directors (the "Plan"). The Plan provides that each eligible director can individually elect to receive shares of Company stock rather than cash for board meeting fees and board committee meeting fees. These shares are unissued and vest at the date of grant. The shares are credited to each director's deferred fee account at the fair market value of the stock at the date of grant. Upon retirement, termination or death of the director, or upon change in control of the Company, the shares accrued under the Plan will be either issued to the director or may be converted to cash, at the director's discretion, for the fair market value of the shares on the conversion date as defined by the Plan. As of September 30, 1996, 1,848 shares (760 shares at September 30, 1995) are included in the Plan. The Company has accrued $38,801 at September 30, 1996 ($11,900 at September 30, 1995) in connection with the Plan which is included in accrued liabilities in the accompanying consolidated balance sheet. (25) 28 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 7. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES All oil and gas producing activities of the Company are conducted within the United States (principally Oklahoma and New Mexico) and represent substantially all of the business activities of the Company. AGGREGATE CAPITALIZED COSTS The aggregate amount of capitalized costs of oil and gas properties and related accumulated depreciation, depletion and amortization is as follows:
SEPTEMBER 30, 1996 1995 -------------------------- Producing properties $ 17,594,577 $ 15,285,738 Nonproducing properties 5,112,785 3,480,998 -------------------------- 22,707,362 18,766,736 Accumulated depreciation, depletion and amortization (13,538,170) (12,175,056) -------------------------- Net capitalized costs $ 9,169,192 $ 6,591,680 ==========================
COSTS INCURRED During the reporting period, the Company incurred the following costs in oil and gas producing activities: SEPTEMBER 30, 1996 1995 ------------------------ Property acquisition costs (principally nonproducing minerals) $ 2,318,416 $ 379,164 Exploration costs 590,095 798,259 Development costs 1,157,897 525,691 ------------------------ $ 4,066,408 $1,703,114 ========================
(26) 29 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 7. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) In November 1995, the Company closed the acquisition of a fifty percent interest in 65,632 net mineral acres (primarily located in Oklahoma) from Petrocorp, Inc. for a total acquisition price of $2.1 million. The Company allocated $1.4 million of the purchase price to nonproducing minerals with the remainder being attributed to producing minerals and working interests acquired. 8. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) The following unaudited information regarding the Company's oil and natural gas reserves is presented pursuant to the disclosure requirements promulgated by the Securities and Exchange Commission ("SEC") and SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." Proved reserves are estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Because the Company's nonproducing mineral and leasehold interests consist of various small interests in numerous tracts located primarily in Oklahoma, New Mexico, Louisiana and Texas, it has not been economically feasible for the Company to provide estimates of all proved undeveloped reserves. Beginning in 1995, the Company directed its independent petroleum engineering firm to include proved undeveloped reserves in certain areas of Western Oklahoma in the scope of properties which they evaluate for the Company. Beginning in 1996, the Company included certain proved undeveloped reserves in areas of New Mexico within the scope of evaluated properties. Due to field production allowable rules in the Dagger Draw field of New Mexico only those proved undeveloped reserves which the Company felt could be drilled, under existing allowable rules, have been included. Should the allowable rules be amended and/or production volumes change significantly, additional proved undeveloped reserves in the Dagger Draw field of New Mexico may be added in the future. (27) 30 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 8. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED) The Company's net proved (including undeveloped reserves in New Mexico in 1996 and Western Oklahoma in 1995) oil and gas reserves as of September 30, 1996 and 1995 have been estimated by Campbell & Associates, Inc., an independent petroleum engineering firm. All studies have been prepared in accordance with regulations prescribed by the Securities and Exchange Commission. The reserve estimates were based on economic and operating conditions existing at September 30, 1996 and 1995. Since the determination and valuation of proved reserves is a function of testing and estimation, the reserves presented should be expected to change as future information becomes available. ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES The following table presents the Company's estimate of net proved (including undeveloped reserves in New Mexico in 1996 and Western Oklahoma in 1995) oil and gas reserve quantities as of September 30, 1996 and 1995, and the changes in reserves for the years then ended: PROVED RESERVES OIL (BARRELS) GAS (MMCF) - ------------------------------------------------------------------------------ September 30, 1994 251,246 7,442 Revisions of previous estimates: Initial inclusion of Western Oklahoma proved undeveloped reserves 10,339 1,570 Other 54,127 (178) Extensions and discoveries 231,880 1,558 Production (82,676) (1,203) ----------------------- September 30, 1995 464,916 9,189 Revisions of previous estimates: Initial inclusion of certain New Mexico proved undeveloped reserves 277,642 294 Other 66,172 118 Extensions and discoveries 275,366 1,789 Production (145,301) (1,551) ----------------------- September 30, 1996 938,795 9,839 =======================
(28) 31 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 8. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)
PROVED DEVELOPED RESERVES OIL (BARRELS) GAS (MMCF) - ------------------------------------------------------------------------------ September 30, 1994 251,246 7,442 ======================== September 30, 1995 454,577 7,619 ======================== September 30, 1996 641,213 8,201 ========================
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS Estimates of future cash flows from proved oil and gas reserves, based on current prices and costs, are shown in the following table. Estimated income taxes are calculated by (i) applying the appropriate year-end tax rates to the estimated future pretax net cash flows less depreciation of the tax basis of properties and statutory depletion allowances and (ii) reducing the amount in (i) for estimated tax credits to be realized in the future for gas produced from "tight-sands." SEPTEMBER 30, 1996 1995 --------------------------- Future cash inflows $40,244,270 $22,316,615 Future production costs 5,628,840 4,030,951 Future development costs 1,085,240 787,849 --------------------------- Future net cash inflows before future income tax expenses 33,530,190 17,497,815 Future income tax expense 9,778,912 4,667,898 --------------------------- Future net cash flows 23,751,278 12,829,917 10% annual discount 7,463,967 4,144,328 --------------------------- Standardized measure of discounted future net cash flows $16,287,311 $ 8,685,589 ===========================
(29) 32 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 8. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED) Changes in the standardized measure of discounted future net cash flows are as follows:
1996 1995 ------------------------------- Beginning of year $ 8,685,589 $ 6,467,751 Changes resulting from: Sales of oil and gas, net of production costs (4,952,229) (2,358,448) Net change in sales prices and production costs 5,938,650 486,028 Future development costs 43,184 (3,453) Extensions and discoveries 5,317,949 3,052,621 Revisions of quantity estimates: Initial inclusion of New Mexico proved undeveloped reserves in 1996 and Western Oklahoma proved undeveloped reserves in 1995 2,783,712 996,260 Other 795,609 154,356 Accretion of discount 1,188,289 869,094 Net change in income taxes (3,670,908) (974,217) Other, net 157,466 (4,403) ------------------------------- End of year $ 16,287,311 $ 8,685,589 ===============================
(30) 33 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the Company's unaudited quarterly results of operations:
FISCAL 1996 ------------------------------------------------- QUARTER ENDED ------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------------------------------------------- Revenues $1,187,449 $1,533,007 $1,663,949 $1,631,763 Income before provision for income taxes (A) 416,584 635,681 750,201 731,353 Net income (B) 352,084 505,681 530,201 632,853 Earnings per share $ .52 $ .74 $ .78 $ .94
FISCAL 1995 ------------------------------------------------- QUARTER ENDED ------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------------------------------------------- Revenues $ 699,214 $ 705,681 $ 843,751 $ 969,793 Income before provision for income taxes 116,442 16,203 281,833 305,551 Net income (B) 116,442 16,203 281,833 159,551 Earnings per share $ .17 $ .02 $ .42 $ .24
(A) Fourth quarter income before provision for income taxes in 1996 includes a $105,019 charge related to the initial adoption of Financial Accounting Standards No. 121. (B) Year-end adjustments to the Company's provision for income taxes caused the effective rate for 1996 to be less than (more than in 1995) that estimated during the previous three quarters. The effect of this difference is reflected in the fourth quarter net income above. (31) 34 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE N O N E PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Listed below are the names, ages and positions, as of December 1, 1996, of the directors and executive officers of the Company. The Company's bylaws provide for seven directors who are elected for staggered three-year terms. Executive officers are appointed by the board of directors to serve in their respective capacities until their successors are duly appointed by the directors. DIRECTORS
A Served As g Term Director Name e Position & Offices Expires Since - ----------------------- -- ------------------ ------- --------- Dean Brown (c) 69 Director, Chairman 1998 1983 of the Board Michael A. Cawley (b) 49 Director 1998 1991 E. Chris Kauffman (b)(c) 56 Director 1997 1991 Sam J. Cerny (a) 64 Director 1997 1993 H W Peace II (b) 61 Director, Chief 1999 1991 Executive Officer, President Robert A. Reece (a)(c) 52 Director 1999 1986 Jerry L. Smith (a) 56 Director 1999 1987 (a) Member of Audit Committee (b) Member of Compensation Committee (c) Member of Retirement Committee
(32) 35 EXECUTIVE OFFICERS
Held Office Name Age Position & Offices Since - ------------------ --- ------------------- ----------- Dean Brown 69 Chairman of the 1991 Board, Director H W Peace II 61 Director, Chief 1991 Executive Officer, President Michael C. Coffman 43 Vice President, 1990 Secretary/Treasurer Wanda C. Tucker 59 Vice President of 1990 Land
BUSINESS EXPERIENCE Dean Brown is an attorney and certified public accountant. He has been engaged in the practice of law since 1957, and is a member of the law firm of Green, Brown and Stark, in Oklahoma City. Michael A. Cawley is an attorney and is the president and chief executive officer of the Samuel Roberts Noble Foundation, Inc. He has been employed by the Noble Foundation for the last five years. Prior to joining the Noble Foundation, he was engaged in the practice of law in Ardmore, Oklahoma with the firm of Thompson & Cawley. He is also a director of Noble Drilling Corporation and Noble Affiliates Inc. Sam J. Cerny is a geological engineer and has been employed by Shell Oil Company, Cleary Petroleum Corporation and its successor company, Grace Petroleum Corporation, where he served as President/CEO from 1976 to 1991. He is a past president of the Oklahoma Independent Petroleum Association and for the last five years has been active as a petroleum management consultant. E. Chris Kauffman is a vice-president of Campbell-Kauffman, Inc., an independent insurance agency in Oklahoma City. He has been involved with the agency since it was formed in 1981. He is also an advisory director of Memorial Bank of Oklahoma City and trustee of the Central Oklahoma Transportation & Parking Authority. Robert A. Reece is an attorney, and for the last five years has been of counsel with the firm of Crowe & Dunlevy. He is also active in the management of his family's investments. H W Peace II holds bachelors and masters degrees in geology. For thirty-two years he has been employed as a geologist, in management or as an officer and/or director in the petroleum industry. He has been employed by Union Oil Company of California, Cotton Petroleum and Hadson Petroleum Corporation. He has been president of the Company since 1991. (33) 36 Jerry L. Smith for the last six years has been the owner of Smith Capital Corporation in Dallas. This corporation is a private investment firm focusing on commercial real estate and securities. Mr. Smith also serves as Treasurer and as a Director of the Association of Graduates of the United States Air Force Academy. Michael C. Coffman is a certified public accountant. Since 1975, he has worked in public accounting and as a financial officer of three publicly owned companies involved in the oil and gas industry. He has been employed by the Company for the last six years. Wanda C. Tucker has been a full-time employee of the Company since 1978, has served in various positions with the Company and is currently vice president of land. None of the organizations described in the business experiences of company directors and officers are parents, subsidiaries or affiliates of Panhandle Royalty Company. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table
Name and Principal All Other Position Year Salary Bonus Compensation - ------------ ---- -------- ------- ------------ H W Peace II 1996 $108,750 $15,600 $18,653 (1) President & 1995 $103,750 $15,600 $17,880 (1) Chief Exec. 1994 $ 98,750 $15,500 $17,146 (1) Officer
(1) Represents the value of 888 shares for 1996, 1,052 shares for 1995 and 1,079 shares for 1994 of Company stock contributed to the Panhandle Employee Stock Ownership Plan (ESOP) on Mr. Peace's behalf. The ESOP is a defined contribution plan, non-voluntary and non-contributory and serves as the retirement plan for the Company's employees. Contributions are at the discretion of the board of directors and, to date, all contributions have been made in shares of Company stock. Contributions are allocated to all participants in proportion to their salaries for the plan year and 100% vesting occurs after three years' of service. (34) 37 DIRECTORS FEES Outside directors of the Company are paid $750 plus travel expenses for attending each meeting of the board of directors and $200 for attending each committee meeting of the board. Any director who travels in excess of 50 miles to attend a meeting receives an additional $100 for each meeting. Outside directors can elect to be included in the Panhandle Royalty Company Deferred Compensation Plan For Non-Employee Directors (the "Plan"). The Plan provides that each eligible director can individually elect to receive shares of Company stock rather than cash for board meeting fees and board committee meeting fees. These unissued shares are credited to each director's deferred fee account at the fair market value of the shares on the date of the meeting. Upon retirement, termination or death of the director, or upon a change in control of the Company, the shares accrued under the Plan will be either issued to the director or may be converted to cash, at the directors' discretion, at the fair market value of the shares on the conversion date, as defined. In addition to the above, Dean Brown, chairman of the board of directors, who is not an employee of the Company, is entitled to receive a $100 per hour fee for time spent, other than board or committee meetings, on Company business. During fiscal 1996 and 1995, no payments were made to Mr. Brown under this arrangement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS As of December 4, 1996, no person or "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, was known to Panhandle to be the beneficial owner of more than five percent of the outstanding shares of Panhandle's class A common stock. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of September 30, 1996, all shares of class A common stock held beneficially, directly or indirectly by each director and by all directors and officers as a group.
Amount And Nature Of Percent Of Name Beneficial Ownership Class - --------------------- ------------------------- ---------- Dean Brown (A) 1,250 shares, sole voting * and investment powers Michael A. Cawley (B) 100 shares, sole voting * and investment powers Sam J. Cerny (C) 100 shares, sole voting * and investment powers
(35) 38 E. Chris Kauffman (D) 3,100 shares, shared voting * and investment powers H W Peace II (E) 6,523 shares, shared voting * and investment powers Robert A. Reece (F) 5,848 shares, sole voting * and investment powers Jerry L. Smith (G) 7,024 shares, sole voting 1.0% and investment powers All directors and 8,544 shares, shared 1.3% officers as a voting and investment group (9 persons) powers 24,325 shares, sole voting 3.6% and investment powers 32,869 shares total 4.8% * less than 1.0%
(A) 5550 N. Francis, Oklahoma City, OK 73118 (B) P.O. Box 2180, Ardmore, OK 73402 (C) 3330 Liberty Twr, 100 N. Broadway, Okla. City, OK 73102 (D) 701 N.W. 63rd Street - Suite #200, Okla. City, OK 73116 (E) 5400 N.W. Grand Blvd - Suite #210, Okla. City, OK 73112 (F) 6403 N. Grand Blvd. - Suite #204, Okla. City, OK 73116 (G) 5944 Luther Lane - Suite #401, Dallas, TX 75225 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS N O N E ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ( 3) Articles of Incorporation (Incorporated by reference to Exhibit attached to Form 10 filed January 27, 1980, and to Forms 8-K dated June 1, 1982 and December 3, 1982) By-Laws as amended (Incorporated by reference to Form 8-K dated October 31, 1994) ( 4) Instruments defining the rights of security holders (Incorporated by reference to Articles of Incorporation and By-Laws listed above) (36) 39 (10) Agreement indemnifying directors and officers (Incorporated by reference to Form 10-K dated September 30, 1989) (22) Subsidiaries of the Registrant (27) Financial Data Schedule REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1996. (37) 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PANHANDLE ROYALTY COMPANY By: /s/ H W Peace II ----------------------- H W Peace II, Chief Executive Officer, President, Director Date: December 17, 1996 ------------------- In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Dean Brown /s/ E. Chris Kauffman - ----------------------------- ----------------------------- Dean Brown, Chairman of Board E. Chris Kauffman, Director Date December 17, 1996 Date December 17, 1996 ------------------------ ------------------------ /s/ Robert A. Reece /s/ Jerry L. Smith - ----------------------------- ----------------------------- Robert A. Reece, Director Jerry L. Smith, Director Date December 17, 1996 Date December 17, 1996 ------------------------ ------------------------ /s/ Sam J. Cerny /s/ Michael A. Cawley - ----------------------------- ----------------------------- Sam J. Cerny, Director Michael A. Cawley, Director Date December 17, 1996 Date December 17, 1996 ------------------------ ------------------------ /s/ Michael C. Coffman - ----------------------------------- Michael C. Coffman, Vice President Treasurer and Secretary (Principal Financial and Accounting Officer) Date December 17, 1996 ------------------------------
(38) 41 Exhibit Index Description ----------- Exhibit No. ----------- ( 3) Articles of Incorporation (Incorporated by reference to Exhibit attached to Form 10 filed January 27, 1980, and to Forms 8-K dated June 1, 1982 and December 3, 1982) By-Laws as amended (Incorporated by reference to Form 8-K dated October 31, 1994) ( 4) Instruments defining the rights of security holders (Incorporated by reference to Articles of Incorporation and By-Laws listed above) (10) Agreement indemnifying directors and officers (Incorporated by reference to Form 10-K dated September 30, 1989) (22) Subsidiaries of the Registrant (27) Financial Data Schedule EX-22 2 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 22 SUBSIDIARIES OF PANHANDLE ROYALTY COMPANY AT SEPTEMBER 30, 1996 The following table sets forth certain information with respect to Panhandle's subisdiary: Corporation PHC, Inc. PHC, Inc. was incorporated in Oklahoma and is included in Panhandle's consolidated financial statements. PHC, Inc. is inactive, and has never done any business. EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR SEP-30-1996 OCT-1-1996 SEP-30-1996 399,423 0 817,258 0 0 1,221,201 22,897,835 13,700,007 10,526,745 653,779 0 0 0 67,785 8,147,181 10,526,745 5,944,018 6,016,168 991,789 2,373,185 0 0 117,375 2,533,819 513,000 2,020,819 0 0 0 2,020,819 2.98 2.98
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