-----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, Wa8aUWmX2WgUKa21uBBtZU3ZgmoWDs+C7zpE0ejowzB8ozBYgEPL/Tasuu6GlrsT bpEeTuERWDPFSXLYGOv8zw== 0000950134-98-009825.txt : 19981222 0000950134-98-009825.hdr.sgml : 19981222 ACCESSION NUMBER: 0000950134-98-009825 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981221 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-09116 FILM NUMBER: 98772940 BUSINESS ADDRESS: STREET 1: 5400 NW GRAND BLVD STREET 2: GRAND CENTRE STE 210 CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 BUSINESS PHONE: 4059481560 10KSB40 1 FORM 10-KSB FOR FISCAL YEAR END SEPTEMBER 30, 1998 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, 1998 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) .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, 1998, were $5,440,182. 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 2, 1998, was $16,380,816. As of December 2, 1998, 682,534 class A common shares were outstanding. Documents Incorporated By Reference ..... NONE 2 TABLE OF CONTENTS
PAGE ---- PART I 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 21 .............................................................. 37 Signature Page .......................................................... 38
(i) 3 PART I ITEM 1. DESCRIPTION OF BUSINESS FORWARD-LOOKING STATEMENTS Forward-looking statements for 1999 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. 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. 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 properties. Drilling operations have been active the last five 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 (1) 4 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 in the last five 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 in the last five 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, 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 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. (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 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 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 Company's properties, especially in the Dagger Draw field of New Mexico. (3) 6 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 is currently aware of one potential environmental claim against the operator on a property where the Company owns a working interest of less than 5%. The operator believes the claim to be without merit. See Note 1. of Notes to Consolidated Financial Statements. 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 At September 30, 1998, Panhandle employed nine 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, 1998, Panhandle's principal properties consisted of perpetual ownership of 179,841 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 6,033 net acres of minerals in Louisiana, Oklahoma and Texas. At September 30, 1998, Panhandle held royalty and/or working interests in 1,462 producing oil or gas wells, 36 successfully completed but not yet producing wells, and 22 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, 1998, 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 64 220 40 80 5,786 31,716 CO 8,176 38,600 8,176 38,600 ID 30 880 30 880 IL 1,018 4,393 1,018 4,393 IN 27 262 27 262 KS 620 5,360 60 480 560 4,880 MT 422 7,960 422 7,960 NE 439 5,960 439 5,960 ND 292 5,036 37 320 255 4,716 NM 53,324 153,073 1,150 4,949 2,639 7,137 49,535 140,987 OK 85,280 645,843 16,207 84,884 2,038 23,173 67,035 537,786 TN 1,543 3,087 1,543 3,087 TX 22,775 213,021 1,094 34,072 233 3,329 21,448 175,620 ------- --------- ------ ------- ------ ------ ------- ------- TOT: 179,841 1,115,970 18,575 124,605 4,987 34,039 156,279 957,326 ------- --------- ------ ------- ------ ------ ------- -------
(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 1999 2000 2001 Production ----- ------- ---- ---- ----- ---------- LA 271 271 OK 5,623 891 2,542 420 1,770 TX 139 66 20 53 ----- --- ----- --- ----- TOT: 6,033 957 2,562 420 2,094 ------- ----- ------ ------- ------
(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 nonproducing 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. 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 has 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 five 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 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, 1995 454,577 7,618,673 September 30, 1996 641,213 8,200,957 September 30, 1997 625,370 9,707,242 September 30, 1998 497,263 10,103,355 Proved Undeveloped Reserves September 30, 1995 10,339 1,570,440 September 30, 1996 297,582 1,638,104 September 30, 1997 278,438 1,559,860 September 30, 1998 279,824 1,557,965 Total Proved Reserves September 30, 1995 464,916 9,189,113 September 30, 1996 938,795 9,839,061 September 30, 1997 903,808 11,267,102 September 30, 1998 777,087 11,661,320
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 (6) 9 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. 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, 1998, 1997 and 1996 were as follows: 1998 - $14.45, $1.63; 1997 - $19.12, $2.48; 1996 - $23.88, $1.84. 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
9-30-98 9-30-97 9-30-96 ----------- ----------- ----------- Proved Developed $18,256,510 $29,186,367 $25,166,810 Proved Undeveloped $ 4,868,946 $ 7,188,163 $ 8,363,380 ----------- ----------- ----------- Total Proved (1) $23,125,456 $36,374,530 $33,530,190
10% Discounted Present Value of Estimated Future Net Cash Flows
9-30-98 9-30-97 9-30-96 ----------- ----------- ----------- Proved Developed $12,469,019 $19,890,600 $17,827,160 Proved Undeveloped $ 2,929,190 $ 4,430,870 $ 5,328,364 ----------- ----------- ----------- Total Proved (1) $15,398,209 $24,321,470 $23,155,524
(1) The decrease in value from September 30, 1997 to September 30, 1998 is principally attributable to the lower oil and gas prices used in the 1998 reserve report verses the prices used in the 1997 reserve report. (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 9-30-98 9-30-97 9-30-96 --------- --------- --------- Bbls - Oil 103,989 147,734 145,301 MCF - Gas 1,710,264 1,600,247 1,551,147
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 9-30-98 9-30-97 9-30-96 --------- --------- --------- Per Bbl. Oil $ 15.16 $ 21.21 $ 19.93 Per MCF Gas $ 2.20 $ 2.39 $ 1.95 Average Production (Lifting Cost) Per Equivalent Bbl. Oil (1)(2) $ 2.47 $ 2.54 $ 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, 1998. Panhandle owns fractional royalty interests or fractional working interests in these wells. The Company does not operate any wells.
Gross Wells Net Wells ----------- --------- Oil 426 13.990492 Gas 1,036 18.564742 ----- --------- TOTAL 1,462 32.555234
Information on multiple completions is not available from Panhandle's records, but the number of such is insignificant. (8) 11 As of September 30, 1998, Panhandle owned 124,605 gross developed mineral acres and 18,575 net developed mineral acres. Panhandle has also leased from others 44,103 gross developed acres which contain 2,094 net developed acres. UNDEVELOPED ACREAGE As of September 30, 1998, Panhandle owned 991,365 gross and 161,266 net undeveloped mineral acres, and leases on 30,025 gross and 3,939 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, 1996 1.614002 .485562 Fiscal year ending September 30, 1997 2.630851 .659734 Fiscal year ending September 30, 1998 1.548498 .608732 Exploratory Wells Fiscal year ending September 30, 1996 .456455 .231341 Fiscal year ending September 30, 1997 .627670 .477731 Fiscal year ending September 30, 1998 .953696 .566764 Purchased Wells Fiscal year ending September 30, 1996 1.542173 0 Fiscal year ending September 30, 1997 .798765 0 Fiscal year ending September 30, 1998 .174667 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, 1998, in which Panhandle owns a royalty or working interest.
Gross Wells Net Wells ----------- --------- Oil 3 .252061 Gas 19 .615659
The Company has very small interests in three waterflood operations in Oklahoma and Texas which have negligible 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, 1998. 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:
Quarter Ended HIGH LOW ------------- ---- --- December 31, 1996 37-3/4 20-3/4 March 31, 1997 33 24 June 30, 1997 36 24 September 30, 1997 33 25 December 31, 1997 42-1/2 28 March 31, 1998 33-1/2 26 June 30, 1998 34-1/16 28 September 30, 1998 29-1/8 25-3/4
As of November 30, 1998, the approximate number of holders of shares of Panhandle stock were:
Title of Class Number of Holders -------------- ----------------- Class A Common (Voting)................... 2,300
(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 1996 $ .20 March 1997 $ .20 June 1997 $ .20 September 1997 $ .20 December 1997 $ .20 March 1998 $ .30 June 1998 $ .20 September 1998 $ .20
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, 1998, the Company had positive working capital of $452,270, a decrease of $501,258, compared to year end September 30, 1997. Cash flow from operating activities also decreased to $3,458,521, as compared to $4,675,180, for fiscal 1997. These decreases were a result of a decline in oil and gas sales revenues during fiscal 1998. The revenue decreases are discussed in detail in "Results of Operations." Capital expenditures on oil and gas activities in fiscal 1998 amounted to $3,395,945, an increase of $496,529, over the 1997 amount. Leases, drilling and equipping wells accounted for $2,656,781 while $739,164 was spent acquiring new mineral properties. This increased spending on oil and gas property development is a continuation of the Company's business strategy which is to actively pursue the development of the Company's oil and gas properties by participating in additional drilling of wells on these properties. The Company has historically funded the majority of its capital expenditures and working capital requirements with cash flow from operations. The bank line of credit was utilized in fiscal 1996 to make a large mineral property purchase, with all borrowings repaid in fiscal 1997. As of September 30, 1998, the Company had no debt outstanding. The Company expects to continue its business strategy of aggressive drilling participation through fiscal 1999, and for several additional years. At September 30, 1998, the Company had remaining projected costs of $1,288,247, for its share of drilling and equipment costs on working interest wells which have been proposed or were in the process of being drilled or completed. Management currently expects to spend a total of approximately $2,500,000, for exploration and development well costs in fiscal 1999. The above capital costs, overhead expenses and dividend payments are to be funded by cash flow and from borrowings under the Company's bank line of credit. (11) 14 The current low oil sales prices and resulting lower oil production, experienced in fiscal 1998 is expected to continue into fiscal 1999, see "Results of Operations." This means the Company's expected cash flow in fiscal 1999 may be less than the amount needed to fully fund all drilling obligations, overhead and dividend payments. Thus, the bank line of credit will be utilized, on an as needed basis, to allow the Company to continue its aggressive approach of developing its oil and gas properties. The line of credit and expected cash flow are more than sufficient to meet all expected capital obligations. The above-mentioned capital expenditure amounts may vary due to many factors, including drilling results, oil and gas prices, industry conditions and acquisition opportunities, among others. A significant acquisition of producing properties could increase capital expenditures greatly and would be financed by additional debt or possibly debt and equity. RESULTS OF OPERATIONS Revenues decreased $1,576,296 or 22% in fiscal 1998 as compared to fiscal 1997. The reduction in revenues was attributable to a $1,621,357 reduction in oil and gas sales revenues offset somewhat by small increases in other revenues. The oil and gas sales revenue decease was a result of decreased sales prices for both oil and natural gas, decreased oil sales volumes, slightly offset by increased natural gas sales volumes. The chart below summarizes the Company's production and average sales prices for oil and natural gas in fiscal 1998 and 1997. PRODUCTION
OIL GAS ----------------------- ----------------------- Total Average Total Average BBLS Price/BBL MCF Price/MCF ------- --------- --------- --------- Year Ended 9/30/98 103,989 $ 15.16 1,710,264 $ 2.20 Year Ended 9/30/97 147,734 $ 21.21 1,600,247 $ 2.39
As can readily be seen from the above chart, the decrease in oil sales volumes along with the decreased average oil sales price were the primary reasons for the oil and gas revenue decrease. Oil sales prices decreased steadily through fiscal 1998 and the posted price per barrel has decreased to $8.50 in early December 1998. An oversupply of crude oil worldwide and a declining demand for oil in many developing countries apparently caused the price drop. The average natural gas sales prices in 1998 was 8% lower than fiscal 1997. This price reduction was basically offset by a 6.9% increase in natural gas production volume. In addition to the above, oil sales volumes were adversely affected by a production allowable limitations in the Dagger Draw Field of New Mexico (the Company's major oil producing field) during the first half of the year. In May 1998, the majority operator of the same field elected to shut in those wells during the last half of the year due to low crude oil prices. In October 1998, certain of these wells were put back on production. Management is uncertain as to when full production will resume. (12) 15 Shut-in oil wells along with current low oil sales prices could reduce the Company's oil and gas sales revenues well into fiscal 1999. However, several new gas wells should come on line in fiscal 1999, thus, increasing gas sales volumes, and if gas sales prices remain steady, should reduce the impact of lost oil sales revenues, in fiscal 1999. COSTS AND EXPENSES decreased slightly (1%), during fiscal 1998 as compared to fiscal 1997. Lease operating expenses and production taxes decreased $92,107, principally due to decreased severance taxes paid on reduced oil and gas sales. Severance taxes are a percentage of oil and gas sales revenues. Depreciation, depletion, amortization and impairment costs (DD&A) decreased slightly, $36,790, in fiscal 1998 as compared to fiscal 1997. The Company's units of production DD&A was decreased by lower production volumes in fiscal 1998, however, decreases in well reserves (caused by lower prices for oil and gas in the 1998 reserve report compared to the 1997 reserve report) caused many well DD&A percentages in 1998 to be higher than those in 1997. In addition, the Company recognized a SFAS No. 121 impairment provision (see Note 1, Summary of Significant Accounting Policies, to the Financial Statements contained herein at Item 7.) of $149,851 in fiscal 1998 as compared to an impairment provision of $115,734 on 1997. Exploration costs increased 4.6% in fiscal 1998 as compared to fiscal 1997. These costs are dry hole costs and seismic costs and vary from year to year. The Company utilizes the successful effort's method of accounting for oil and gas operations, thus, dry holes are a result of drilling unsuccessful exploratory wells. There is no way to accurately estimate exploration costs from year to year. The Company will continue exploratory well participations, thus, future exploration costs can be expected. General and administrative costs increased $93,060 or 9.2% in fiscal 1998. The increase was due to the addition of one employee during the year; increased salaries for existing personnel and increased office space leased during fiscal 1998. Interest expense was down due to the line of credit being paid off in fiscal 1997. The interest paid in fiscal 1998 was a commitment fee charged on the line of credit. The provision for income taxes is lower in fiscal 1998 due to lower pretax income in fiscal 1998 and the continuing utilization of excess percentage depletion and "tight gas sands" production tax credits. As discussed above, the decline in net income is attributable to decreased oil and gas sales revenues, caused by lower oil production and lower average oil and gas sales prices in fiscal 1998 as compared to fiscal 1997. Management has no control over the market prices of oil or gas and currently expects the depressed oil price to continue further into fiscal 1999. Fiscal 1999 earnings will be impacted by continued low oil prices. Continued investments in exploratory drilling also carry certain risks, principally dry hole costs as discussed above, the results of which can adversely affect earnings. (13) 16 YEAR 2000 ISSUES Much of the computer software in use today may not be able to accurately process data beyond the year 1999. The majority of computer systems process data using two digits for the year of transaction, rather than the full four digits. This may cause many systems to be unable to accurately process year 2000 transactions. The Company has completed its assessment of both its computer ("IT systems") and operational equipment ("non-IT systems") as of June 30, 1998. The Company has replaced its computer system hardware with new hardware which has operating systems which are represented as being year 2000 compliant. The Company's software supplier is in the process of revising software licenced by the Company which is represented to be year 2000 compliant. The system software reprogramming is expected to be complete in early 1999 with installation and testing by the Company by June 1999. The Company has no non-IT systems which are expected to be impacted in any material manner by Year 2000. The cost of replacement of the Company's IT systems noted above was less than $25,000. Cost of the year 2000 compliant system software will be included in the Company's standard annual license fee. Other costs to assess the Year 2000 matter or become compliant therewith are not expected to be significant. Should any of the operators of the properties in which the Company has an interest, purchasers who buy oil and gas from the Company's properties or financial institutions ("External Agents") used by the Company not properly address the Year 2000 matter, there could be some delay in the Company receiving payment for the sale of oil and gas. Should this occur, the Company may be required to borrow additional amounts on its available line of credit, thus incurring additional interest expense over that otherwise anticipated. However, the Company does not expect the Year 2000 will have a material impact on its financial position of results of operations. The Company has no systems which directly interface with External Agents. ITEM 7. FINANCIAL STATEMENTS Report of Independent Auditors............................ 15 Consolidated Balance Sheets As of September 30, 1998 and 1997 ............... 16 Consolidated Statements of Income For The Years Ended September 30, 1998 and 1997 ......... 17 Consolidated Statements of Stockholders' Equity For The Years Ended September 30, 1998 and 1997 ..... 18 Consolidated Statements of Cash Flows For The Years Ended September 30, 1998 and 1997 ..... 19 Notes To Consolidated Financial Statements ............... 20-31
(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, 1998 and 1997, 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Oklahoma City, Oklahoma December 2, 1998 (15) 18 Panhandle Royalty Company Consolidated Balance Sheets
SEPTEMBER 30, 1998 1997 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 320,210 $ 872,797 Oil and gas sales and other receivables 716,648 893,779 Income taxes receivable 152,090 -- Prepaid expenses 27,391 4,929 ----------- ----------- Total current assets 1,216,339 1,771,505 Property and equipment, at cost, based on successful efforts accounting: Producing oil and gas properties 22,360,790 20,063,953 Nonproducing oil and gas properties 5,693,399 5,068,467 Furniture and fixtures 241,567 213,474 ----------- ----------- 28,295,756 25,345,894 Less accumulated depreciation, depletion and amortization 16,600,499 15,127,925 ----------- ----------- Net properties and equipment 11,695,257 10,217,969 Other assets 107,716 107,716 ----------- ----------- $13,019,312 $12,097,190 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 576,033 $ 351,405 Gas imbalance liability 44,380 44,380 Dividends payable 31,656 29,856 Income taxes payable -- 112,336 Deferred income taxes 112,000 280,000 ----------- ----------- Total current liabilities 764,069 817,977 Deferred income taxes 1,451,000 1,247,000 Stockholders' equity: Class A voting common stock (one vote per stockholder), $.10 par value; 1,000,000 shares authorized, 682,534 issued and outstanding (679,820 in 1997) 68,254 67,982 Capital in excess of par value 515,823 445,306 Retained earnings 10,220,166 9,518,925 ----------- ----------- Total stockholders' equity 10,804,243 10,032,213 ----------- ----------- $13,019,312 $12,097,190 =========== ===========
See accompanying notes. (16) 19 Panhandle Royalty Company Consolidated Statements of Income
YEAR ENDED SEPTEMBER 30, 1998 1997 ---------- ---------- Revenues: Oil and gas sales $5,337,832 $6,959,189 Lease bonuses and rentals 44,269 14,469 Interest 45,929 17,372 Other 12,152 25,448 ---------- ---------- 5,440,182 7,016,478 Costs and expenses: Lease operating expenses and production taxes 961,929 1,054,036 Exploration costs 481,244 459,861 Depreciation, depletion, amortization and impairment 1,437,413 1,474,203 General and administrative 1,099,636 1,006,576 Interest expense 3,125 29,960 ---------- ---------- 3,983,347 4,024,636 ---------- ---------- Income before provision for income taxes 1,456,835 2,991,842 Provision for income taxes 142,000 693,000 ---------- ---------- Net income $1,314,835 $2,298,842 ========== ========== Basic earnings per share $ 1.93 $ 3.39 ========== ========== Diluted earnings per share $ 1.92 $ 3.38 ========== ==========
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, 1996 677,846 $ 67,785 $ 383,790 $ 7,763,391 $ 8,214,966 Purchase and cancellation of common shares (446) (45) (10,237) -- (10,282) Issuance of common shares to ESOP 2,420 242 71,753 -- 71,995 Dividends declared ($.80 per share) -- -- -- (543,308) (543,308) Net income -- -- -- 2,298,842 2,298,842 ------- ------------ ------------ ------------ ------------ Balances at September 30, 1997 679,820 67,982 445,306 9,518,925 10,032,213 Purchase and cancellation of common shares (111) (11) (3,358) -- (3,369) Issuance of common shares to ESOP 2,825 283 73,875 -- 74,158 Dividends declared ($.90 per share) -- -- -- (613,594) (613,594) Net income -- -- -- 1,314,835 1,314,835 ------- ------------ ------------ ------------ ------------ Balances at September 30, 1998 682,534 $ 68,254 $ 515,823 $ 10,220,166 $ 10,804,243 ======= ============ ============ ============ ============
See accompanying notes. (18) 21 Panhandle Royalty Company Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30, 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,314,835 $ 2,298,842 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, amortization, and impairment 1,437,413 1,474,203 Deferred income taxes 36,000 369,000 Exploration costs, exclusive of seismic 481,244 405,072 Common stock issued to Employee Stock Ownership Plan 74,158 71,995 Cash provided (used) by changes in assets and liabilities: Oil and gas sales and other receivables 177,131 (76,521) Income taxes receivable (152,090) -- Prepaid expenses (22,462) (409) Accounts payable and accrued liabilities 224,628 185,505 Income taxes payable (112,336) (52,507) ----------- ----------- Total adjustments 2,143,686 2,376,338 ----------- ----------- Net cash provided by operating activities 3,458,521 4,675,180 CASH FLOWS FROM INVESTING ACTIVITIES OF PROPERTY AND EQUIPMENT Capital expenditures, including dry hole costs (3,395,945) (2,899,416) ----------- ----------- Net cash used in investing activities (3,395,945) (2,899,416) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on line of credit -- (750,000) Purchase and cancellation of common shares (3,369) (10,282) Payments of dividends (611,794) (542,108) ----------- ----------- Net cash used in financing activities (615,163) (1,302,390) ----------- ----------- Increase (decrease) in cash and cash equivalents (552,587) 473,374 Cash and cash equivalents at beginning of year 872,797 399,423 ----------- ----------- Cash and cash equivalents at end of year $ 320,210 $ 872,797 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 3,125 $ 29,960 Income taxes paid 370,426 376,507
See accompanying notes. (19) 22 Panhandle Royalty Company Notes to Consolidated Financial Statements September 30, 1998 and 1997 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. Cash equivalents at September 30, 1997 included certificates of deposit of $200,000 (none at September 30, 1998) 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, 1998. 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. DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT 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. Depreciation of furniture and fixtures is computed using the straight-line method over estimated productive lives of five to eight years. (20) 23 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $4,207,114 at September 30, 1998, 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. 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 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 impairment provisions of $149,851 and $115,734, respectively, for 1998 and 1997, which are included in depreciation, depletion, amortization and impairment expense. 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 without discounting. At September 30, 1998, there were no such costs accrued. In December 1998, the Company was notified by an operator of a claim on a producing property in which the Company owns a 4.7% working interest. The operator has indicated the claim to be without merit. While the Company believes this claim will not have a material impact on the Company's financial position or results of operations, the ultimate outcome cannot presently be determined. (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, 1998 and 1997, 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 In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the Statement 128 requirements. FAIR VALUES OF FINANCIAL INSTRUMENTS The following information is provided regarding the estimated fair value of the Company's financial instruments at September 30, 1998 and 1997: 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:
1998 1997 --------- -------- Current: Federal $ 91,000 $279,000 State 15,000 45,000 --------- -------- 106,000 324,000 Deferred: Federal 46,000 316,000 State (10,000) 53,000 --------- -------- 36,000 369,000 --------- -------- $142,000 $693,000 ======== ========
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:
1998 1997 -------- ---------- Provision for income taxes at statutory rate $509,892 $1,017,226 Percentage depletion (298,167) (316,586) Tight-sands gas credits (63,838) (73,822) State income taxes, net of federal benefit 2,948 64,680 Other (8,835) 1,502 -------- ---------- $142,000 $ 693,000 ======== ==========
(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:
1998 1997 ---------- ---------- Deferred tax liabilities: Capitalized costs and related depreciation, depletion, amortization and impairment $1,509,000 $1,351,000 Cash basis of accounting for income tax purposes 112,000 280,000 ---------- ---------- 1,621,000 1,631,000 Deferred tax assets: Percentage depletion carryforward 58,000 - Alternative minimum tax credit carryforwards - 104,000 ---------- ---------- Net deferred tax liabilities $1,563,000 $1,527,000 ========== ==========
3. LONG-TERM DEBT The Company has a revolving line of credit agreement with a bank, which extends through January 3, 2001, for borrowings, which bear interest at the bank's base rate plus .2% (8.70% at September 30, 1998), of up to $2,500,000. 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, January 3, 2001. The Company is required to pay an annual fee of .125% for the unused portion of the line of credit. There was no balance outstanding at September 30, 1998 and 1997. 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. 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. (24) 27 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 5. 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 7).
YEAR ENDED SEPTEMBER 30, 1998 1997 ---------- ---------- Numerator for primary and diluted earnings per share: Net income $1,314,835 $2,298,842 ========== ========== Denominator: For basic earnings per share--weighted average shares 679,764 677,627 Effect of potential diluted shares: Directors' deferred compensation shares 4,358 2,970 ---------- ---------- Denominator for diluted earnings per share--adjusted weighted average shares and potential shares 684,122 680,597 ========== ========== Basic earnings per share $ 1.93 $ 3.39 ========== ========== Diluted earnings per share $ 1.92 $ 3.38 ========== ==========
6. 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 1998 or 1997) 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 30,934 shares of the Company's common stock held by the plan as of September 30, 1998, 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 ---- ------ ------- 1998 2,825 $74,158 1997 2,420 $71,995
(25) 28 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 7. 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, 1998, 4,358 shares (2,968 shares at September 30, 1997) are included in the Plan. The Company has accrued $123,655 at September 30, 1998 ($86,455 at September 30, 1997) in connection with the Plan which is included in accrued liabilities in the accompanying consolidated balance sheet. 8. 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, 1998 1997 ------------ ------------ Producing properties $ 22,360,790 $ 20,063,953 Nonproducing properties 5,693,399 5,068,467 ------------ ------------ 28,054,189 25,132,420 Accumulated depreciation, depletion and amortization (16,416,872) (14,960,593) ------------ ------------ Net capitalized costs $ 11,637,317 $ 10,171,827 ============ ============
(26) 29 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 8. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) COSTS INCURRED During the reporting period, the Company incurred the following costs in oil and gas producing activities:
1998 1997 ---------- ---------- Property acquisition costs (principally nonproducing minerals) $ 739,164 $ 224,224 Exploration costs 1,181,110 967,456 Development costs 1,475,671 1,676,841 ---------- ---------- $3,395,945 $2,868,521 ========== ==========
9. 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 is not economically feasible for the Company to provide estimates of all proved undeveloped reserves. However, 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 and, 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. The Company's net proved (including certain undeveloped reserves described above) oil and gas reserves as of September 30, 1998 and 1997 have been estimated by Campbell & Associates, Inc., an independent petroleum engineering firm. All studies have been prepared in accordance (27) 30 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 9. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED) with regulations prescribed by the Securities and Exchange Commission. The reserve estimates were based on economic and operating conditions existing at September 30, 1998 and 1997. 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 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, 1998 and 1997, and the changes in reserves for the years then ended:
PROVED RESERVES ------------------------ OIL GAS (Mbarrels) (Mmcf) ---------- ------- September 30, 1996 939 9,839 Revisions of previous estimates (1) (243) 956 Purchases of reserves in place 8 64 Extensions and discoveries 348 2,008 Production (148) (1,600) ------- ------- September 30, 1997 904 11,267 Revisions of previous estimates (2) (102) (746) Purchases of reserves in place 13 33 Extensions and discoveries 66 2,817 Production (104) (1,710) ------- ------- September 30, 1998 777 11,661 ======= =======
(1) Oil and gas revisions are primarily related to those reserves which were economically recoverable at the higher prices which existed at September 30, 1996 which are not economically recoverable at prices existing at September 30, 1997. (2) Oil and gas revisions are primarily related to those reserves which were economically recoverable at the higher prices which existed at September 30, 1997 which are not economically recoverable at prices existing at September 30, 1998. (28) 31 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 9. 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, 1996 641 8,201 298 1,638 === ===== === ===== September 30, 1997 625 9,707 279 1,560 === ===== === ===== September 30, 1998 498 10,103 279 1,558 === ===== === =====
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, 1998 1997 ----------- ----------- Future cash inflows $30,120,490 $45,015,420 Future production costs 5,815,190 7,481,181 Future development costs 1,179,844 1,159,709 ----------- ----------- Future net cash inflows before future income tax expenses 23,125,456 36,374,530 Future income tax expense 5,945,839 8,971,733 ----------- ----------- Future net cash flows 17,179,617 27,402,797 10% annual discount 5,846,105 8,660,434 ----------- ----------- Standardized measure of discounted future net cash flows $11,333,512 $18,742,363 =========== ===========
(29) 32 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 9. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED) Changes in the standardized measure of discounted future net cash flows are as follows:
1998 1997 ------------ ------------ Beginning of year $ 18,742,363 $ 16,287,311 Changes resulting from: Sales of oil and gas, net of production costs (4,375,903) (5,850,364) Net change in sales prices and production costs (8,305,058) 387,598 Future development costs (13,875) (49,806) Extensions and discoveries 3,186,652 6,163,526 Revisions of quantity estimates (1,451,226) (780,082) Purchases of minerals-in-place 111,795 157,667 Accretion of discount 1,874,236 2,315,552 Net change in income taxes 2,281,936 521,575 Change in timing and other, net (717,408) (410,614) ------------ ------------ End of year $ 11,333,512 $ 18,742,363 ============ ============
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the Company's unaudited quarterly results of operations. The fiscal 1997 earnings per share amounts have been restated to comply with Financial Accounting Standards Board No. 128, "Earnings Per Share."
FISCAL 1998 ------------------------------------------------------------ QUARTER ENDED ------------------------------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- ----------- ----------- ------------ Revenues $ 1,826,939 $ 1,335,664 $ 1,199,739 $ 1,077,840 Income (loss) before provision for income taxes (A) 751,541 369,716 341,193 (5,615) Net income (B) 586,541 299,716 296,193 132,385 Basic earnings per share $ .86 $ .44 $ .44 $ .19 Diluted earnings per share $ .86 $ .44 $ .43 $ .19
(30) 33 Panhandle Royalty Company Notes to Consolidated Financial Statements (continued) 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
FISCAL 1997 -------------------------------------------------------- QUARTER ENDED -------------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- ---------- ---------- ------------ Revenues $1,557,539 $2,511,315 $1,475,773 $1,471,851 Income before provision for income taxes (A) 582,102 1,407,716 648,708 353,316 Net income (B) 476,102 1,082,716 513,708 226,316 Basic earnings per share $ .70 $ 1.60 $ .76 $ .33 Diluted earnings per share $ .70 $ 1.59 $ .76 $ .33
(A) Fourth quarter income before provision for income taxes includes an SFAS 121 charge of $59,851 and $115,734 for 1998 and 1997, respectively. (B) Year-end adjustments to the Company's provision for income taxes caused the effective rate for 1998 to be less than (more than in 1997) 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, 1998, 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 - ---- - ------------------ ------- --------- Michael A. Cawley (b) 51 Director 2001 1991 Sam J. Cerny (a) 66 Director 2000 1993 E. Chris Kauffman (b)(c) 58 Director 2000 1991 H W Peace II (b) 63 Director, Chief 1999 1991 Executive Officer, President Ray H. Potts (c) 66 Director 2001 1997 Robert A. Reece (a)(c) 54 Director 1999 1986 Jerry L. Smith (a) 58 Director, Chairman 1999 1987 of the Board
(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 - ---- --- ------------------ ----------- Jerry L. Smith 58 Chairman of the 1997 Board, Director H W Peace II 63 Director, Chief 1991 Executive Officer, President Michael C. Coffman 45 Vice President, 1990 Chief Financial Officer, Secretary/Treasurer Wanda C. Tucker 61 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 six 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. In addition, he is the chief financial officer and treasurer of The Insurance Center Agency, Inc. He is also a director of First State Bank in Oklahoma City and a 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-four 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 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 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 eight 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 eight 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 1998 $122,500 $25,600 $22,215(1) President & 1997 $113,750 $25,600 $20,903(1) Chief Exec. 1996 $108,750 $15,600 $18,653(1) Officer
(1) Represents the value of 846 shares for 1998, 702 shares for 1997, and 888 shares for 1996, 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 $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 1998 and 1997, 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 December 4, 1998, 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, 1998, all shares of class A common stock held beneficially, directly or indirectly by each director and by all directors and officers as a group. (35) 38
Amount And Nature Of Percent Of Name Beneficial Ownership Class ---- -------------------- ---------- Michael A. Cawley (A) 100 shares, sole voting * and investment powers Sam J. Cerny (B) 1,200 shares, sole voting * and investment powers E. Chris Kauffman (C) 3,100 shares, shared voting * and investment powers H W Peace II (D) 8,371 shares, shared voting 1.2% and investment powers Ray H. Potts (E) 160 shares, sole 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 10,392 shares, shared 1.5% officers as a voting and investment group (9 persons) powers 27,103 shares, sole voting 4.0% and investment powers 37,495 shares total 5.5% * 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 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) (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, 1998. EXHIBIT 21 SUBSIDIARIES OF PANHANDLE ROYALTY COMPANY AT SEPTEMBER 30, 1998 The following table sets forth certain information with respect to Panhandle's subsidiary: 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. (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 15, 1998 ----------------------------------- 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 15, 1998 Date December 15, 1998 ----------------------------- ------------------------- /s/ Robert A. Reece /s/ Ray H. Potts - ----------------------------------- ------------------------------- Robert A. Reece, Director Ray H. Potts, Director Date December 15, 1998 Date December 15, 1998 ----------------------------- ------------------------- /s/ Sam J. Cerny /s/ Michael A. Cawley - ----------------------------------- ------------------------------- Sam J. Cerny, Director Michael A. Cawley, Director Date December 15, 1998 Date December 15, 1998 ----------------------------- ------------------------- /s/ Michael C. Coffman - ----------------------------------- Michael C. Coffman, Vice President Treasurer and Secretary (Principal Financial and Accounting Officer) Date December 15, 1998 ----------------------------- (38) 41 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- (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
EX-27 2 FINANCIAL DATA SCHEDULE
5 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 320,210 0 868,738 0 0 1,216,339 28,295,756 16,600,499 13,019,312 764,069 0 0 0 68,254 10,735,989 13,019,312 5,337,832 5,440,182 961,929 3,980,222 0 0 3,125 1,456,835 142,000 1,314,835 0 0 0 1,314,835 1.93 1.92
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