10KSB 1 d82812e10ksb.txt FORM 10KSB FOR FISCAL YEAR END SEPTEMBER 30, 2000 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, 2000 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 N. 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) .0333 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. [ ] Registrant's revenues for fiscal year-end September 30, 2000, were $9,277,974. 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 November 30,2000, was $24,786,102. As of November 30, 2000, 2,060,202 class A common shares were outstanding. Documents Incorporated By Reference ..... NONE 2 TABLE OF CONTENTS -----------------
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 ........................... 11-13 Item 7. Financial Statements .............................. 14-33 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................ 34 PART III -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act ............... 34-36 Item 10. Executive Compensation ............................ 36-37 Item 11. Security Ownership of Certain Beneficial Owners and Management ........................... 37-38 Item 12. Certain Relationships and Related Transactions .................................... 38 Item 13. Exhibits and Reports on Form 8-K .................. 39 Exhibit 21 ................................................. 39 Signature Page ............................................. 40
(I) 3 PART I ITEM 1. DESCRIPTION OF BUSINESS FORWARD-LOOKING STATEMENTS Forward-looking statements for 2001 and later periods are made throughout this document. Such statements represent estimates of management based on the Company's historical operating trends, its proved oil and gas reserves and other information currently available to management. The Company cautions that the forward-looking statements provided herein are subject to all the risks and uncertainties incident to the acquisition, development and marketing of, and exploration for oil and gas reserves. These risks include, but are not limited to oil and natural gas price risk, environmental 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. In May 1999, the Company's shareholders voted to increase the authorized Class A Common shares of the Company to 6,000,000 and to split the shares on a three-for-one basis. In addition, voting rights for the shares were changed from one vote per shareholder to one vote per share. 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 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. 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 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 (1) 4 Company does not operate any of its oil and gas properties. The Company has been an active participant for several years in wells drilled on the Company's mineral properties and in 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 oil and gas wells completed during these years and has added significant reserves for the Company. The Company continues to acquire additional mineral interest properties, both producing and non-producing. Several of the mineral properties purchased 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 principally handled by the well operator and are normally contracted 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, particularly in the search for new oil and gas reserves. 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 the exploration, production and sales of oil and natural gas. Changes in existing economic conditions, weather patterns and actions taken by OPEC and other oil-producing countries have dramatic influence on the price Panhandle receives for its oil and 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 base and its mineral property ownership, coupled with it's own geologic and economic evaluaton 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 allows it to maintain low overhead costs. (2) 5 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 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 by the well operators, in most cases, to many different purchasers on a well-by-well basis. Currently, one purchaser, through the well operator, purchases approximately 26% of the Company's monthly gas production. Generally, if one purchaser declines to continue purchasing the Company's oil and/or natural gas, several other purchasers can be located, especially in the current market environment for natural gas. 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 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 conservation 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 currently limit the rate at which oil and gas can be produced from certain of the (3) 6 Company's properties. As previously discussed, the well operators are relied upon by Panhandle to comply with governmental regulations. 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 reduce the Company's cash outlay for income taxes. ENVIRONMENTAL MATTERS 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. 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 where 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 At September 30, 2000, Panhandle employed ten 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, 2000, Panhandle's principal properties consisted of perpetual ownership of 189,463 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 5,332 net acres of minerals in Louisiana, Oklahoma and Texas. At September 30, 2000, Panhandle held royalty and/or working interests in 2,213 producing oil or gas wells, 40 successfully completed but not yet producing wells, and 19 wells in the process of being drilled or completed. (4) 7 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 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, Indiana, Illinois, Kansas, Tennessee and Texas. ACREAGE The following table of mineral interests owned reflects, as of September 30, 2000, 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 7,546 38,579 64 220 119 400 7,363 37,959 CO 8,217 39,080 8,217 39,080 ID 30 880 30 880 IL 1,018 4,393 1,018 4,393 IN 27 262 27 262 KS 637 6,024 62 720 575 5,304 MT 422 7,960 422 7,960 NE 442 6,120 7 160 435 5,960 ND 292 5,036 37 320 255 4,716 NM 53,324 153,073 1,150 4,949 2,041 5,542 50,133 142,582 OK 92,731 839,107 18,336 155,638 2,495 26,387 71,900 657,082 TN 1,543 3,087 1,543 3,087 TX 23,228 220,335 1,123 35,032 256 3,081 21,849 182,222 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- TOT: 189,463 1,324,416 20,734 196,559 4,954 35,891 163,775 1,091,966
(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 Net Net Acres Leases Held By State Acres Expiring Production ----- --------------- ------------------------------------------------------- --------------- 2001 2002 2003 --------------- --------------- --------------- LA 271 271 OK 5,008 600 1,044 356 3,008 TX 53 53 --------------- --------------- --------------- --------------- --------------- TOT: 5,332 600 1,044 356 3,332
(5) 8 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 non-producing mineral and leasehold 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. The Company directs its independent petroleum engineering firm to include proved undeveloped reserves in certain areas of western and eastern Oklahoma and New Mexico in the scope of properties evaluated for the Company. 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 quantity estimates were prepared 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, 1998 497,263 10,103,355 September 30, 1999 433,263 11,519,071 September 30, 2000 408,732 11,585,331 Proved Undeveloped Reserves September 30, 1998 279,824 1,557,965 September 30, 1999 287,940 1,596,149 September 30, 2000 251,508 2,803,789 Total Proved Reserves September 30, 1998 777,087 11,661,320 September 30, 1999 721,203 13,115,220 September 30, 2000 660,240 14,389,120
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, 2000, 1999, and 1998 were as follows: 2000 - $32.84, $3.96; 1999 - $23.29, $2.70; 1998 - $14.45, $1.63. 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
9-30-00 9-30-99 9-30-98 ----------- ----------- ------------ Proved Developed $48,481,740 $33,049,035 $18,256,510 Proved Undeveloped $16,604,661 $ 8,942,345 $ 4,868,946 ----------- ----------- ------------ Total Proved (1) $65,086,401 $41,991,380 $23,125,456
10% Discounted Present Value of Estimated Future Net Cash Flows
9-30-00 9-30-99 9-30-98 ----------- ----------- ----------- Proved Developed $32,122,191 $22,066,753 $12,469,019 Proved Undeveloped $11,417,769 $ 5,566,777 $ 2,929,190 ----------- ----------- ----------- Total Proved (1) $43,539,960 $27,633,530 $15,398,209
(1) The major portion of the increase from September 30, 1998, to September 30, 1999, and from September 30, 1999 to September 30, 2000, is attributable to the increased oil and gas prices used in the 1999 and 2000 reserve report versus the prices used in the 1998 and 1999 reserve reports, respectively. (7) 10 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 9-30-00 9-30-99 9-30-98 --------- --------- --------- Bbls - Oil 66,609 75,891 103,989 MCF - Gas 2,454,844 1,888,890 1,710,264
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 9-30-00 9-30-99 9-30-98 ------------------- ----------- ----------- --------- Per Bbl. Oil $ 27.13 $ 15.53 $ 15.16 Per MCF Gas $ 3.03 $ 2.06 $ 2.20 Average Production (Lifting Cost) Per Equivalent Bbl. Oil (1)(2) $ 1.04 $ 1.22 $ 1.20 (3) $ 2.03 $ 1.25 $ 1.27
(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 actual well operating costs only. (3) Includes production taxes, compression, handling and marketing fees paid on natural gas sales, and other minor expenses associated with well operations. Average well operating costs are influenced by the fact that the Company bears no cost 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, 2000. Panhandle owns fractional royalty interests or fractional working interests in these wells. The Company does not operate any wells.
Gross Wells Net Wells ----------- ---------- Oil 454 15.436797 Gas 1,759 22.404828 --------- ---------- TOTAL 2,213 37.841625
Information on multiple completions is not available from Panhandle's records, but the number of such is insignificant. (8) 11 As of September 30, 2000, Panhandle owned 196,559 gross developed mineral acres and 20,734 net developed mineral acres. Panhandle has also leased from others 55,159 gross developed acres which contain 3,332 net developed acres. UNDEVELOPED ACREAGE As of September 30, 2000, Panhandle owned 1,127,857 gross and 168,729 net undeveloped mineral acres, and leases on 11,906 gross and 2,000 net acres. 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, 1998 1.548498 .608732 Fiscal year ending September 30, 1999 1.813871 .582417 Fiscal year ending September 30, 2000 2.356519 .277873 Exploratory Wells ------------------------ Fiscal year ending September 30, 1998 .953696 .566764 Fiscal year ending September 30, 1999 .497868 .270698 Fiscal year ending September 30, 2000 .810099 .400511 Purchased Wells ------------------------ Fiscal year ending September 30, 1998 .174667 0 Fiscal year ending September 30, 1999 .178395 0 Fiscal year ending September 30, 2000 .007321 0
(9) 12 PRESENT ACTIVITIES The following table sets forth the gross and net oil and gas wells drilling or testing as of September 30, 2000, in which Panhandle owns a royalty or working interest.
Gross Wells Net Wells ----------- ---------- Oil 16 .263407 Gas 43 1.597584
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, 2000. 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 during the periods indicated: (all share or per share amounts, are adjusted for the effect of the 3-for-1 stock split effective May 7, 1999).
Quarter Ended HIGH LOW ---------------------- --------- --------- December 31, 1998 $ 8.750 $ 5.3125 March 31, 1999 $ 8.625 $ 6.625 June 30, 1999 $ 10.6875 $ 7.3125 September 30, 1999 $ 9.500 $ 7.625 December 31, 1999 $ 9.000 $ 6.500 March 31, 2000 $ 8.250 $ 7.000 June 30, 2000 $ 9.500 $ 7.375 September 30, 2000 $ 17.000 $ 8.750
As of November 30, 2000, the approximate number of holders of shares of Panhandle stock were: Title of Class Number of Holders ----------------------- ----------------- Class A Common (Voting) . . . . . . .. . . . . . . . . . . . 2,600 (10) 13 During the past two years, cash dividends have been paid as follows on the class A common stock: DATE RATE PER SHARE ----------------- -------------- December 1998 $ .06 March 1999 $ .07 June 1999 $ .07 September 1999 $ .07 December 1999 $ .07 March 2000 $ .07 June 2000 $ .07 September 2000 $ .07 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 September 30, 2000, the Company had positive working capital of $1,712,806, an increase of $1,100,587, compared to year-end September 30, 1999. Cash flow from operating activities increased 89% to $5,366,066 for fiscal 2000, as compared to fiscal 1999. This increase was a result of increased oil and gas sales revenues during fiscal 2000, which are discussed in detail in "Results of Operations." Capital expenditures on oil and gas activities in fiscal 2000 amounted to $4,089,851, a 72% increase from the $2,382,296 expended in fiscal 1999. This increased spending was principally the result of increased market prices for natural gas and crude oil stimulating new wells to be drilled. As the market prices increased during the year, and have continued to increase into fiscal 2001, well proposals submitted to the Company for drilling participations increased allowing the Company to participate in a record number of wells in fiscal 2000. The Company currently expects fiscal 2001 to be the busiest drilling year in Company history. Historically, the Company has funded drilling costs and other capital expenditures, as well as overhead costs and dividend payments, from operating cash flow. However, in fiscal 2000, the Company borrowed $500,000 under it's bank line-of-credit to help fund the above costs and to finance a small acquisition of mineral properties. As of September 30, 2000, the Company had repaid the $500,000 and had no-debt outstanding. The Company expects to continue its business strategy of aggressive drilling participation in fiscal 2001, and well into the future. At September 30, 2000, the Company had projected costs of $2,499,116, for its share of drilling and equipment costs on working interest wells which have been proposed or were in the process of being drilled or (11) 14 completed. Management currently anticipates spending approximately $5,500,000, for exploration and development costs on its oil and gas properties in fiscal 2001. In addition , the Company will continue to seek acquisitions of producing, and to a lessor extent non-producing mineral properties and working interests in producing wells. These capital costs along with overhead expenses and dividend payments are expected to be funded by cash flow and from borrowings, if needed, under the Company's bank line-of-credit. In addition, the Company has available, approximately 4,000,000 shares of authorized but unissued common stock, which could be used for an asset purchase. Anticipated cash flows are more than sufficient to meet all currently expected capital obligations. As capital expenditure amounts can vary due to many factors, including drilling results, oil and gas prices, industry conditions and acquisition opportunities, the exact amount of future capital expenditures is not known. Thus, the Company has provided the sources of capital, discussed above, to supplement cash flow from operations, if needed. RESULTS OF OPERATIONS Revenues increased $4,160,499 or 81% in fiscal 2000, as compared to fiscal 1999. The increased revenues were attributable to a $4,014,680 increase in oil and gas sales revenues. Oil and gas sales revenues increased due to large increases in the average sales price for natural gas and crude oil in fiscal 2000, as compared to fiscal 1999 sales prices. In addition, natural gas sales volumes increased 30%. The chart below summarizes the Company's sales volumes and average sales prices for oil and natural gas in fiscal 2000 and 1999. OIL AND GAS SALES
OIL GAS ------------------- ------------------------ Total Average Total Average ----- --------- ----- --------- BBLS Price/BBL MCF Price/MCF Year-Ended 9/30/00 66,609 $ 27.13 2,454,844 $ 3.03 Year-Ended 9/30/99 75,891 $ 15.53 1,888,890 $ 2.06
The increase in gas sales volume was principally due to increased sales volume of natural gas from the Potato Hills field in southeast Oklahoma and from new wells coming on line in western Oklahoma. The Potato Hills field continues to be developed and several wells are expected to be drilled in fiscal 2001. As the price of natural gas increased throughout 2000, the pace of drilling for natural gas increased and the Company continues to have increased opportunities for drilling. Gas production and gas prices are currently expected to increase well into fiscal 2001. A normal winter weather pattern could lead to some natural gas shortages in the upcoming winter months, causing natural gas production and market prices to reach record levels in 2001. The 12% decline in oil production volume from fiscal 1999 to fiscal 2000, is the continuing result of decreased production volume in the Dagger Draw field in New Mexico. This decreased production volume is a continuing result of the wells being shut-in due to low oil prices in late 1998 and early 1999. The well drainage patterns were apparently altered by the shutting-in process. Additional drilling is planned by the two operators in the area. Panhandle will have an interest in several wells expected to be drilled in the Dagger Draw field in fiscal 2001. (12) 15 Costs and Expenses increased $1,073,671 or 24% in fiscal 2000, as compared to fiscal 1999. The increase was principally due to increased production taxes on the increased oil and gas sales revenues of fiscal 2000, increased non-cash depreciation, depletion, amortization and impairment costs (DD&A) and increased general and administrative costs. Increased DD&A costs in fiscal 2000, were principally the result of increased production volume during the year, several new wells having initial high production volumes compared to total expected reserve volumes and, in some cases, reserves which were substantially lower than the previous year's estimates. This increase was offset by a reduction in impairment of proved oil and gas properties of approximately $95,000. Impairment results primarily from single well fields which are not expected to produce sufficient future net cash flow to recover the Company's carrying cost based on currently forecast market prices. Gross production taxes are paid as a percentage of oil and gas sales revenues. Thus, increased revenues in fiscal 2000 increased gross production taxes paid in fiscal 2000 approximately $314,000, as compared to fiscal 1999. Lease operating expenses continue to increase each year, $181,000 higher in 2000 as compared to 1999, as the Company adds additional working interest wells each year. A component of lease operating expenses, the costs associated with selling natural gas, compression, handling and marketing fees, increases each year as the Company produces more natural gas. General and administrative costs increased $285,496, or 25% in fiscal 2000,as compared to fiscal 1999. Approximately $175,000 of this increase, was related to the Non-Employee Director's Deferred Compensation Plan (The Director's Plan). During fiscal 2000, Panhandle's share price increased from a September 30, 1999, price of $7.625 per share to end fiscal 2000 at $14.00 per share. This increase in share price caused recognition of a current year expense based on shares that could currently be issued under the terms of The Director's Plan. The Non-Employee Directors have taken these potential shares, rather than a cash payment, for their Director's fees. In addition, personnel related expenses, including salaries, insurance costs, payroll taxes and ESOP expenses increased during fiscal 2000. The provision for income taxes increased in fiscal 2000, due to a much larger income before taxes (as discussed above). The Company continues to be able to utilize tax credits from production of "tight gas sands" natural gas and excess percentage depletion on it's oil and gas properties to reduce its tax liability, resulting in an effective tax rate of 24% in 2000. As discussed above, the increase in net income is attributable to increased oil and gas sales revenues, partially offset by increased expenses. Management currently expects natural gas sales price to increase over fiscal 2000 average levels during fiscal 2001. In addition, recent well completions should keep natural gas and crude oil production at equal to or slightly higher than fiscal 2000 levels. The above factors, should allow the Company in fiscal 2001, to continue reporting strong earnings. However, as management has no control over market prices of natural gas or crude oil, substantial price reductions, could affect year 2001 results. Also, unexpected production declines from large volume wells or investments in exploratory well drilling resulting in dry hole costs, could adversely affect 2001 earnings. (13) 16 ITEM 7. FINANCIAL STATEMENTS Report of Independent Auditors ............................. 15 Consolidated Balance Sheets As of September 30, 2000 and 1999 ........................ 16 Consolidated Statements of Income For The Years Ended September 30, 2000 and 1999 .................. 17 Consolidated Statements of Stockholders' Equity For The Years Ended September 30, 2000 and 1999 .............. 18 Consolidated Statements of Cash Flows For The Years Ended September 30, 2000 and 1999 .............. 19 Notes To Consolidated Financial Statements ................. 20-33
(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, 2000 and 1999, 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP November 27, 2000 (15) 18 Panhandle Royalty Company Consolidated Balance Sheets
SEPTEMBER 30, 2000 1999 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 815,912 $ 213,207 Oil and gas sales receivable 1,955,590 1,134,153 Prepaid expenses 3,817 4,132 ------------- ------------- Total current assets 2,775,319 1,351,492 Property and equipment, at cost, based on successful efforts accounting: Producing oil and gas properties 27,282,697 24,074,383 Nonproducing oil and gas properties 6,154,159 5,804,543 Furniture and fixtures 280,877 263,695 ------------- ------------- 33,717,733 30,142,621 Less accumulated depreciation, depletion and amortization 20,390,441 18,337,952 ------------- ------------- Net properties and equipment 13,327,292 11,804,669 Other assets 107,716 107,716 ------------- ------------- $ 16,210,327 $ 13,263,877 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities (Note 8) $ 703,917 $ 522,269 Gas imbalance liability 55,527 44,380 Dividends payable 7,742 33,296 Income taxes payable 249,327 46,328 Deferred income taxes 46,000 93,000 ------------- ------------- Total current liabilities 1,062,513 739,273 Deferred income taxes 1,794,000 1,476,000 Stockholders' equity: Class A voting common stock, $.0333 par value; 6,000,000 shares authorized, 2,060,206 issued and outstanding (2,056,990 in 1999) 68,673 68,566 Capital in excess of par value 608,280 587,058 Retained earnings 12,676,861 10,392,980 ------------- ------------- Total stockholders' equity 13,353,814 11,048,604 ------------- ------------- $ 16,210,327 $ 13,263,877 ============= =============
See accompanying notes (16) 19 Panhandle Royalty Company Consolidated Statements of Income
YEAR ENDED SEPTEMBER 30, 2000 1999 --------------- --------------- Revenues: Oil and gas sales $ 9,091,920 $ 5,077,240 Lease bonuses and rentals 82,030 10,773 Interest 17,689 10,253 Other 86,335 19,209 --------------- --------------- 9,277,974 5,117,475 Costs and expenses: Lease operating expenses and production taxes 1,458,935 963,804 Exploration costs 514,739 535,431 Depreciation, depletion, amortization and impairment 2,052,489 1,737,453 General and administrative 1,450,241 1,164,745 Interest expense 15,643 16,943 --------------- --------------- 5,492,047 4,418,376 --------------- --------------- Income before provision (benefit) for income taxes 3,785,927 699,099 Provision (benefit) for income taxes 925,000 (35,000) --------------- --------------- Net income $ 2,860,927 $ 734,099 =============== =============== Basic earnings per share $ 1.39 $ .36 =============== =============== Diluted earnings per share $ 1.38 $ .36 =============== ===============
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 TOTAL ------------ ------------ ------------ ------------ ------------ Balances at September 30, 1998 2,047,602 $ 68,254 $ 515,823 $ 10,220,166 $ 10,804,243 Purchase and cancellation of common shares (237) (9) (1,835) -- (1,844) Issuance of common shares to ESOP 9,625 321 73,070 -- 73,391 Dividends declared ($.27 per share) -- -- -- (561,285) (561,285) Net income -- -- -- 734,099 734,099 ------------ ------------ ------------ ------------ ------------ Balances at September 30, 1999 2,056,990 68,566 587,058 10,392,980 11,048,604 Purchase and cancellation of common shares (3,368) (112) (70,798) -- (70,910) Issuance of common shares to ESOP 6,584 219 92,020 -- 92,239 Dividends declared ($.28 per share) -- -- -- (577,046) (577,046) Net income -- -- -- 2,860,927 2,860,927 ------------ ------------ ------------ ------------ ------------ Balances at September 30, 2000 2,060,206 $ 68,673 $ 608,280 $ 12,676,861 $ 13,353,814 ============ ============ ============ ============ ============
See accompanying notes. (18) 21 Panhandle Royalty Company Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30, 2000 1999 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,860,927 $ 734,099 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, amortization, and impairment 2,052,489 1,737,454 Deferred income taxes, net of transfer in 1999 of $105,000 (none in 2000) 271,000 6,000 Exploration costs 514,739 535,431 Common stock issued to Employee Stock Ownership Plan 92,239 73,391 Cash provided (used) by changes in assets and liabilities: Oil and gas sales and other receivables (821,437) (417,505) Income taxes receivable -- 152,090 Prepaid expenses 315 23,259 Accounts payable and accrued liabilities 192,795 (53,764) Income taxes payable 202,999 46,328 --------------- --------------- Total adjustments 2,505,139 2,102,684 --------------- --------------- Net cash provided by operating activities 5,366,066 2,836,783 CASH FLOWS FROM INVESTING ACTIVITIES OF PROPERTY AND EQUIPMENT Capital expenditures, including dry hole costs (4,089,851) (2,382,296) --------------- --------------- Net cash used in investing activities (4,089,851) (2,382,296) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under line of credit 500,000 300,000 Payments of loan principal (500,000) (300,000) Purchase and cancellation of common shares (70,910) (1,844) Payments of dividends (602,600) (559,646) --------------- --------------- Net cash used in financing activities (673,510) (561,490) --------------- --------------- Increase (decrease) in cash and cash equivalents 602,705 (107,003) Cash and cash equivalents at beginning of year 213,207 320,210 --------------- --------------- Cash and cash equivalents at end of year $ 815,912 $ 213,207 =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 15,643 $ 16,943 Income taxes paid (received), net of refunds 451,167 (239,418)
See accompanying notes (19) 22 Panhandle Royalty Company Notes to Consolidated Financial Statements September 30, 2000 and 1999 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 at the date of purchase by the Company are considered to be cash equivalents. OIL AND GAS SALES The Company sells oil and natural gas to various customers, recognizing revenues as oil and gas is produced and sold. Substantially all of the Company's accounts receivable are due from purchasers of oil and natural gas or operators of the oil and gas properties. 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, 2000. 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. DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT Depreciation, depletion and amortization of the costs of producing oil and gas properties are generally computed using the units of production method primarily on a separate-property basis using proved reserves as estimated annually by an independent petroleum engineer. Depreciation of furniture and fixtures is computed using the straight-line method over estimated productive lives of five to eight years. 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 (20) 23 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $4,110,879 at September 30, 2000, 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 is expected to be made within this time frame. Impairment of nonproducing oil and gas properties is recognized based on experience and management judgment. In accordance with 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," the Company recognizes impairment losses 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. The Company's oil and gas properties were reviewed for indicators of impairment on a field-by-field basis, resulting in the recognition of impairment provisions of $262,998 and $357,891, respectively, for 2000 and 1999, which are included in depreciation, depletion, amortization and impairment expense. The majority of the impairment recognized in 2000 and 1999 relates to single well fields on which the Company does not expect sufficient future net cash flow to recover its carrying cost. ENVIRONMENTAL COSTS Environmental liabilities, which historically have not been material, are recognized when it is probable that a loss has been incurred and the amount of that loss is reasonably estimable. Environmental liabilities, when accrued, are based upon estimates of expected future costs. At September 30, 2000, there were no such costs accrued. 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. (21) 24 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, 2000 and 1999, the Company's net liability for natural gas production imbalances of approximately 31,671 mcf and 28,500 mcf amounted to $55,527 and $44,380, respectively. EARNINGS PER SHARE OF COMMON STOCK Basic earnings per share ("EPS") is calculated using net income divided by the weighted average of common shares outstanding during the year. Diluted EPS is similar to Basic EPS except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The treasury stock method is used to calculate dilutive shares, which reduces the gross number of dilutive shares (Note 6). FAIR VALUES OF FINANCIAL INSTRUMENTS The following information is provided regarding the estimated fair value of the Company's financial instruments at September 30, 2000 and 1999: 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. (22) 25 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 2. INCOME TAXES The Company's provision (benefit) for income taxes is detailed as follows:
2000 1999 ---------- ---------- Current: Federal $ 647,000 $ 59,000 State 7,000 5,000 ---------- ---------- 654,000 64,000 Deferred: Federal 244,000 (87,000) State 27,000 (12,000) ---------- ---------- 271,000 (99,000) ---------- ---------- $ 925,000 $ (35,000) ========== ==========
The difference between the provision (benefit) for income taxes and the amount which would result from the application of the federal statutory rate to income before provision (benefit) for income taxes is analyzed below:
2000 1999 ---------- ---------- Provision for income taxes at statutory rate $1,325,074 $ 244,685 Percentage depletion (368,687) (196,401) Tight-sands gas credits (59,359) (69,959) State income taxes, net of federal benefit 22,125 (4,550) Other 5,847 (8,775) ---------- ---------- $ 925,000 $ (35,000) ========== ==========
(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:
2000 1999 ---------- ---------- Deferred tax liabilities: Capitalized costs and related depreciation, depletion, amortization and impairment $1,794,000 $1,505,000 Cash basis of accounting for income tax purposes 46,000 93,000 ---------- ---------- 1,840,000 1,598,000 Deferred tax assets: Percentage depletion carryforward -- 17,000 Alternative minimum tax credit carryforwards -- 12,000 ---------- ---------- -- 29,000 ---------- ---------- Net deferred tax liabilities $1,840,000 $1,569,000 ========== ==========
3. LONG-TERM DEBT The Company has a revolving line of credit agreement with a bank, which extends through December 31, 2002, for borrowings up to $5,000,000, which bear interest at the bank's base rate minus .25% (9.25% at September 30, 2000). Any 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, December 31, 2002. The Company is required to pay an annual fee of .06% for the unused portion of the line of credit. There was no balance outstanding at September 30, 2000 and 1999. 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 $250,000, acquiring treasury stock in any one year in excess of $250,000 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 questions concerning estates of deceased stockholders, unlocatable shareholders or questions of ownership of the underlying shares. 5. STOCKHOLDERS' EQUITY On February 26, 1999, the Company's Board of Directors approved a proposal to (1) amend the Company's duration from fifty years to perpetuity; (2) amend the Company's Articles of Incorporation to increase the number of authorized shares of Class A Common Stock from 1,000,000 shares to 6,000,000 shares; (3) effect a 3-for-1 stock split of the outstanding Class A Common Stock and a corresponding reduction of the par value per share from $.10 to $.0333; (4) adopt amendments to the Articles of Incorporation to change voting rights from one vote per stockholder to one vote per share; and (5) amend the Articles of Incorporation to provide that generally any merger, consolidation, liquidation or dissolution of the Company or sale of substantially all of the assets of the Company requires the affirmative vote of the holders of 66-2/3% or more of the Company's outstanding Class A Common Stock. On May 7, 1999, these proposals were put forth to a vote of the stockholders, for which a majority of the stockholders voted in favor of each proposal, causing these proposals to become effective on such date. The Class A Common Stock split was effected in the form of a stock dividend, distributed on June 1, 1999, to stockholders of record on May 7, 1999. All agreements concerning Common Stock of the Company, including the Company's Employee Stock Ownership Plan and the Company's commitment under the Deferred Compensation Plan for Non-Employee Directors, provide for the issuance or commitment, respectively, of additional shares of the Company's stock due to the declaration of the stock split. All references to number of shares, per share, and authorized share information in the accompanying consolidated financial statements have been adjusted to reflect the stock split and increase in authorized shares approved on May 7, 1999, at the special meeting of the stockholders of the Company. 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share. The Company's diluted earnings per share calculation takes into account certain shares that may be issued under the Non-Employee Directors' Deferred Compensation Plan (Note 8). (25) 28 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 6. EARNINGS PER SHARE (CONTINUED)
YEAR ENDED SEPTEMBER 30, 2000 1999 ---------- ---------- Numerator for primary and diluted earnings per share: Net income $2,860,927 $ 734,099 ========== ========== Denominator: For basic earnings per share--weighted average shares 2,055,470 2,047,507 Effect of potential diluted shares: Directors' deferred compensation shares 21,960 16,399 ---------- ---------- Denominator for diluted earnings per share--adjusted weighted average shares and potential shares 2,077,430 2,063,906 ========== ========== Basic earnings per share $ 1.39 $ .36 ========== ========== Diluted earnings per share $ 1.38 $ .36 ========== ==========
7. 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 2000 or 1999) 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 108,209 shares of the Company's common stock held by the plan as of September 30, 2000, 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 ---- ------ ------- 2000 6,584 $92,239 1999 9,625 $73,391
(26) 29 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 8. 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 and are adjusted for changes in market value subsequent thereto. 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, 2000, 21,960 shares (16,399 shares at September 30, 1999) are included in the Plan. The Company has accrued $307,444 at September 30, 2000 ($132,727 at September 30, 1999) in connection with the Plan which is included in accrued liabilities in the accompanying consolidated balance sheet ($174,717 and $9,072 was charged to the results of operations for the years ended September 30, 2000 and 1999, respectively, and is included in general and administrative expense in the accompanying income statement). 9. 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. The Company has interests in a field of properties, the production on which was sold to one purchaser, which accounted for approximately 26% of the Company's gas revenues in fiscal 2000. The operator of the wells in this field has entered into contracts to sell and deliver a substantial quantity of the gas volumes produced from this field at a weighted average minimum price of $4.47 and a weighted average maximum price of $5.41 per MMbtu. The contracts relate to volumes produced from November 1, 2000 through March 31, 2001. (27) 30 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 9. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) 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, 2000 1999 ------------ ------------ Producing properties $ 27,282,697 $ 24,074,385 Nonproducing properties 6,154,159 5,804,543 ------------ ------------ 33,436,856 29,878,928 Accumulated depreciation, depletion and amortization (20,164,045) (18,133,674) ------------ ------------ Net capitalized costs $ 13,272,811 $ 11,745,254 ============ ============
COSTS INCURRED During the reporting period, the Company incurred the following costs in oil and gas producing activities:
2000 1999 ---------- ---------- Property acquisition costs $ 528,691 $ 445,827 Exploration costs 1,776,773 514,546 Development costs 1,765,401 1,399,795 ---------- ---------- $4,070,865 $2,360,168 ========== ==========
10. 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 (28) 31 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED) 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, and Texas, it is not economically feasible for the Company to provide estimates of all proved undeveloped reserves. The Company directs its independent petroleum engineering firm to include proved undeveloped reserves in certain areas of western and eastern Oklahoma and New Mexico in the scope of properties which are evaluated for the Company. 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. The Company's net proved (including certain undeveloped reserves described above) oil and gas reserves as of September 30, 2000 and 1999, 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, 2000 and 1999. 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. (29) 32 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED) ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES The following table presents the Company's net proved (including certain undeveloped reserves described above) oil and gas reserve quantities as estimated by Campbell & Associates, Inc., an independent petroleum engineering firm, as of September 30, 2000 and 1999, and the changes in reserves for the years then ended:
PROVED RESERVES ---------------------- OIL GAS (Mbarrels) (Mmcf) ---------- -------- September 30, 1998 777 11,661 Revisions of previous estimates (1)(2) (32) 709 Purchases of reserves in place 11 181 Extensions and discoveries 41 2,453 Production (76) (1,889) ---------- -------- September 30, 1999 721 13,115 Revisions of previous estimates (2) (81) 396 Purchases of reserves in place 6 147 Extensions and discoveries 81 3,186 Production (67) (2,455) ---------- -------- September 30, 2000 660 14,389 ========== ========
(1) Oil and gas revisions are primarily related to those reserves which were economically recoverable at the higher prices which existed at September 30, 1998, which are not economically recoverable at prices existing at September 30, 1999. (2) Gas revisions are primarily related to those reserves which were economically recoverable at the higher prices which existed at September 30, 2000, which were not economically recoverable at prices existing at September 30, 1999. In 2000 and 1999, oil reserves were also revised downward from 1998 due to a decline in production of certain New Mexico properties after being shut-in for several months in 1999 due to depressed oil prices. (30) 33 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)
PROVED DEVELOPED RESERVES PROVED UNDEVELOPED RESERVES -------------------------- ---------------------------- OIL GAS OIL GAS (Mbarrels) (Mmcf) (Mbarrels) (Mmcf) ---------- ---------- ---------- ---------- September 30, 1998 498 10,103 279 1,558 ========== ========== ========== ========== September 30, 1999 433 11,519 288 1,596 ========== ========== ========== ========== September 30, 2000 409 11,585 251 2,804 ========== ========== ========== ==========
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, 2000 1999 ------------ ------------ Future cash inflows $ 78,668,350 $ 52,222,440 Future production costs 12,308,320 9,047,782 Future development costs 1,273,629 1,183,278 ------------ ------------ Future net cash inflows before future income tax expenses 65,086,401 41,991,380 Future income tax expense 18,332,743 11,570,726 ------------ ------------ Future net cash flows 46,753,658 30,420,654 10% annual discount 15,892,344 10,348,756 ------------ ------------ Standardized measure of discounted future net cash flows $ 30,861,314 $ 20,071,898 ============ ============
(31) 34 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 10. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED) Changes in the standardized measure of discounted future net cash flows are as follows:
2000 1999 ------------ ------------ Beginning of year $ 20,071,898 $ 11,333,512 Changes resulting from: Sales of oil and gas, net of production costs (7,632,985) (4,113,436) Net change in sales prices and production costs 11,642,854 9,872,435 Net change in future development costs (60,124) (2,287) Extensions and discoveries 8,886,844 4,447,477 Revisions of quantity estimates (221,761) 797,470 Purchases of minerals-in-place 438,663 406,875 Accretion of discount 2,007,190 1,133,351 Net change in income taxes (4,807,558) (3,806,471) Change in timing and other, net 536,293 2,972 ------------ ------------ End of year $ 30,861,314 $ 20,071,898 ============ ============
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the Company's unaudited quarterly results of operations. FISCAL 2000 ---------------------------------------------------- QUARTER ENDED ---------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- ---------- ---------- ------------ Revenues $ 1,650,961 $2,240,986 $2,410,493 $ 2,975,534 Income before provision for income taxes (A) 406,258 1,002,720 1,253,740 1,123,209 Net income (B) 364,258 722,720 943,740 830,209 Basic earnings per share $ .18 $ .35 $ .46 $ .40 Diluted earnings per share $ .18 $ .35 $ .46 $ .39
(32) 35 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED) FISCAL 1999 ---------------------------------------------------- QUARTER ENDED ---------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- ---------- ---------- ------------ Revenues $ 1,042,473 $ 941,670 $1,542,780 $ 1,590,552 Income (loss) before provision for income taxes (A) 6,097 (119,745) 489,624 323,123 Net income (B) 6,097 (75,745) 408,624 395,123 Basic earnings per share $ -- $ (.04) $ .20 $ .20 Diluted earnings per share $ -- $ (.04) $ .20 $ .20
(A) Fourth quarter income before provision for income taxes includes an SFAS 121 charge of $112,998 and $267,891 for 2000 and 1999, respectively. (B) Year-end adjustments to the Company's provision for income taxes caused the effective rate for 2000 and 1999 to be less than that estimated during the previous three quarters. The effect of this difference is reflected in the fourth quarter net income above. (33) 36 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 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 November 30, 2000, 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
Served As Term Director Name Age Position & Offices Expires Since ---- --- ------------------ ------- -------- Michael A. Cawley (b) 53 Director 2001 1991 Sam J. Cerny (a)(d) 68 Director 2003 1993 E. Chris Kauffman (b)(c) 60 Director 2003 1991 H W Peace II (b) 65 Director, Chief 2002 1991 Executive Officer, President Ray H. Potts ( c) 68 Director 2001 1997 Robert A. Reece (a)(c) 56 Director 2002 1986 Jerry L. Smith (a) 60 Director, Chairman 2002 1987 of the Board
---------- (a) Member of Audit Committee (b) Member of Compensation Committee (c) Member of Retirement Committee (d) The sale of 500 shares on June 27, 2000 and 4,300 shares on June 29, 2000 of Panhandle Royalty Company class A common stock, were not reported by Mr. Cerny on FORM 4, until August 8, 2000. (34) 37 EXECUTIVE OFFICERS
Held Office Name Age Position & Offices Since ---- --- ------------------ ----------- Jerry L. Smith 60 Chairman of the 1997 Board, Director H W Peace II 65 Director, Chief 1991 Executive Officer, President Michael C. Coffman 47 Vice President, 1990 Chief Financial Officer, Secretary/Treasurer Wanda C. Tucker 63 Vice President of 1990 Land
BUSINESS EXPERIENCE 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 seven 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 Chairman of the Central Oklahoma Transportation & Parking Authority Trust. Robert A. Reece is an attorney, and for the last five years has been of counsel with the firm of Crowe & Dunlevy. He is active in the management of his family's investments. He is also a director of National Bank of Commerce. H W Peace II holds bachelors and masters degrees in geology. For thirty-six 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. Ray H. Potts holds a master's degree in geology from the University of Missouri. He was employed for six years as an exploration geologist for the Pure Oil Company and in (35) 38 1967 formed Potts-Stephenson Exploration Company, later changed to PSEC, Inc. In 1997 PSEC, Inc. was sold to ONEOK Resources Company. Mr. Potts is currently active in the oil and gas industry and has been involved in several national and state trade associations, geological societies and numerous civic activities. Jerry L. Smith for the last ten 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 is a past Treasurer and 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 since 1990. 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
Annual Compensation Name and --------------------------------------- Principal Position Year Salary Bonus All Other -------- ---- -------- ------- ----------- H W Peace II 2000 $128,000 $18,100 $21,915 (1) President & 1999 $125,000 $13,100 $20,715 (1) Chief Exec. 1998 $122,500 $25,600 $22,215 (1) Officer
---------- (1) Represents the value of 1,565 shares for 2000, and 2,538 shares for 1998, and 2,106 shares for 1997, 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 year's of service. (36) 39 DIRECTORS FEES Outside directors of the Company are paid $1,000 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. All outside directors are participating in this Plan. In addition to the above, Jerry Smith, 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 2000 and 1999, no payments were made to Mr. Smith under this arrangement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS As of November 30, 2000, the following 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 only beneficial owner of more than five percent of the outstanding shares of Panhandle's class A common stock.
Amount And Nature Of Percent Of Name Beneficial Ownership Class ------------------ --------------------- ---------- Robert Robotti 103,104 shares, shared voting 5.0% c/o Robotti & Company and investment powers Incorporated, 52 Vanderbilt Avenue, New York, NY 10017
SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of September 30, 2000, all shares of class A common stock held beneficially, directly or indirectly by each director and by all directors and officers as a group (excluding certain shares that may be issued under the Non-Employee Directors' Deferred Compensation Plan (see Item 10. EXECUTIVE COMPENSATION and Item 7. FINANCIAL STATEMENTS, Note B)). (37) 40
Amount And Nature Of Percent Of Name Beneficial Ownership Class ------------------ --------------------- ---------- Michael A. Cawley (A) 300 shares, sole voting * and investment powers Sam J. Cerny (B) 300 shares, sole voting * and investment powers E. Chris Kauffman (C) 9,300 shares, shared voting * and investment powers H W Peace II (D) 29,267 shares, shared voting 1.3% and investment powers Ray H. Potts (E) 1,480 shares, sole voting * and investment powers Robert A. Reece (F) 16,044 shares, sole voting * and investment powers Jerry L. Smith (G) 21,072 shares, sole voting 1.0% and investment powers All directors and 38,567 shares, shared 1.9% officers as a voting and investment group (9 persons) powers 78,286 shares, sole voting 3.8% and investment powers 116,853 shares total 5.7%
---------- * less than 1.0% (A) P.O. Box 2180, Ardmore, OK 73402 (B) 3330 Liberty Twr, 100 N. Broadway, Okla. City, OK 73102 (C) 9705 North Broadway Ext. - Suite #200, Okla. City, OK 73114 (D) 5400 N.W. Grand Blvd - Suite #210, Okla. City, OK 73112 (E) 100 N. Broadway - Suite #3200, Okla. City, OK 73102 (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 (38) 41 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) (10) Agreement indemnifying directors and officers (Incorporated by reference to Form 10-K dated September 30, 1989) (21) 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, 2000. (39) 42 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 19, 2000 ------------------ 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/ JERRY L. SMITH /s/ E. CHRIS KAUFFMAN -------------------------- ----------------------------- Jerry L. Smith, Chairman of Board E. Chris Kauffman, Director Date December 19, 2000 Date December 19, 2000 --------------------- -------------------- /s/ ROBERT A. REECE /s/ RAY H. POTTS -------------------------- ----------------------------- Robert A. Reece, Director Ray H. Potts, Director Date December 19, 2000 Date December 19, 2000 --------------------- -------------------- /s/ SAM J. CERNY /s/ MICHAEL A. CAWLEY -------------------------- ----------------------------- Sam J. Cerny, Director Michael A. Cawley, Director Date December 19, 2000 Date December 19, 2000 --------------------- -------------------- /s/ MICHAEL C. COFFMAN -------------------------- Michael C. Coffman, Vice President Treasurer and Secretary (Principal Financial and Accounting Officer) Date December 19, 2000 ---------------------- (40) 43 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 21 SUBSIDIARIES OF PANHANDLE ROYALTY COMPANY AT SEPTEMBER 30, 2000 27 Financial Data Schedule