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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2002
--------------------------------------------
Commission File Number: 0-9116
PANHANDLE ROYALTY COMPANY
-------------------------
(Exact name of registrant as specified 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., Oklahoma 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 Act: NONE
----
Securities registered under Section 12(g) of the 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
--------------------------------- ---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ss. 229.045 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. {X}
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by using the closing price of registrant's common stock, at
December 4, 2002, was $28,313,933. As of December 4, 2002, 2,079,100 shares of
Class A Common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the registrant's annual meeting of shareholders to be held
in 2003 (to be filed within 120 days of the close of registrant's fiscal year)
is incorporated by reference into Part III.
T A B L E O F C O N T E N T S
PART I PAGE
- ------ ----
Item 1. Business................................................................................. 2-5
Item 2. Properties............................................................................... 5-10
Item 3. Legal Proceedings........................................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders...................................... 11
PART II
- -------
Item 5. Market for Registrants Common Equity and Related Stockholder Matters..................... 11
Item 6. Selected Financial Data.................................................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 12-17
Item 7A. Quantitive and Qualitative Disclosure about Market Risk.................................. 17
Item 8. Financial Statements and Supplementary Data.............................................. 18-43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 44
PART III
- --------
Item 10.-13. Incorporated by Reference to Proxy Statement
PART IV
- -------
Item 14. Controls and Procedures.................................................................. 44
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8- K......................... 44
Signature Page.............................................................................................. 45
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.............................................................. 46-47
Exhibit 21.................................................................................................. 48
Exhibit 99.1................................................................................................ 49
Exhibit 99.2................................................................................................ 50
As used in this report, "SEC" means the United States Securities and Exchange
Commission, "Bbl" means barrel, "Mcf" means thousand cubic feet, "Mcf/D" means
thousand cubic feet per day, "Mcfe" means natural gas stated on an MCF basis and
crude oil converted to a thousand cubic feet of natural gas equivalent by using
the ratio of one Bbl of crude oil to six Mcf of natural gas, "PV-10" means
estimated pretax present value of future net revenues discounted at 10% using
SEC rules, "gross" wells or acres are the wells or acres in which the Company
has a working interest, and "net" wells or acres are determined by multiplying
gross wells or acres by the Company's net revenue interest in such wells or
acres.
PART I
ITEM 1. BUSINESS
GENERAL
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 stock of
the Company to 6,000,000 shares 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 twenty other states. The majority of the
Company's oil and gas production is from wells located in Oklahoma and New
Mexico. In 1988, the Company merged with New Mexico Osage Royalty Company, thus
acquiring most of its New Mexico mineral interests.
On October 1, 2001, Panhandle acquired privately held Wood Oil
Company (Wood) of Tulsa, Oklahoma. The acquisition was made pursuant to an
Agreement and Plan of Merger among Panhandle Royalty Company, PHC, Inc., and
Wood, dated August 9, 2001. Wood merged with Panhandle's wholly owned subsidiary
PHC, Inc., on October 1, 2001, with Wood being the surviving Company. Prior to
the acquisition, Wood was a privately held company engaged in oil and gas
exploration and production and fee mineral ownership and owned interests in
certain oil and gas and real estate partnerships and an office building in
Tulsa. Wood is operating as a subsidiary of Panhandle. Wood and its shareholders
were unrelated parties to Panhandle.
The Company's office is located at Grand Centre Suite 210, 5400
N. Grand Blvd., Oklahoma City, OK 73112 (405)948-1560, FAX (405)948-2038.
BUSINESS STRATEGY
The majority of Panhandle's revenues are derived from the
production and sale of oil and natural gas. See "Item 8 - 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 are 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. 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 acquired additional
mineral interest properties, both producing and non-producing and interests in
approximately 2000 wells in the Wood acquisition. Several of the mineral
properties and well interests were in areas where the Company had no mineral
holdings, thus expanding the Company's area of interest.
2
PRINCIPAL PRODUCTS AND MARKETS
The Company's principal products are crude oil and natural gas.
These products are sold to various purchasers, including pipeline and marketing
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.
In general, prices of oil and gas are dependent on numerous
factors beyond the control of the Company, such as competition, international
events and circumstances (including actions taken by the Organization of
Petroleum Exporting Countries (OPEC)), and economic, political and regulatory
developments. Since demand for natural gas is generally highest during winter
months, prices received for the Company's natural gas are subject to seasonal
variations.
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 the 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 evaluation 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.
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.
During fiscal 2002, sales to ONEOK, through well operators, accounted for
approximately 17% of the Company's total revenues. 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.
3
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. As previously discussed, the well
operators are relied upon by Panhandle to comply with governmental regulations.
Various aspects of the Company's oil and gas operations are
regulated by agencies of the federal government. The transportation of natural
gas in interstate commence is generally regulated by the Federal Energy
Regulatory Commission (FERC) pursuant to the Natural Gas Act of 1938 (the NGA)
and the Natural Gas Policy Act of 1978 (NGPA). The intrastate transportation and
gathering of natural gas (and operational and safety matters related thereto)
may be subject to regulation by state and local governments.
In the past, the federal government regulated the prices at
which the Company's produced oil and gas could be sold. Currently, "first sales"
of natural gas by producers and marketers, and all sales of crude oil,
condensate and natural gas liquids, can be made at uncontrolled market prices,
but Congress could reenact price controls at any time.
Within the past decade, the FERC has issued numerous orders and
policy statements designed to create a more competitive environment in the
national natural gas marketplace, including orders promoting "open access"
transportation on natural gas pipelines subject to the FERC's NGA and NGPA
jurisdiction. The FERC's "Order 636" was issued in April 1992 and was designed
to restructure the interstate natural gas transportation and marketing system
and to promote competition within all phases of the natural gas industry. Among
other things, Order 636 required interstate pipelines to separate the
transportation of gas from the sale of gas, to change the manner in which
pipeline rates were designed and to implement other changes intended to promote
the growth of market centers. Subsequent FERC initiatives have attempted to
standardize interstate pipeline business practices and to allow pipelines to
implement market-based, negotiated and incentive rates. The restructured
services implemented by Order 636 and successor orders have now been in effect
for a number of winter heating seasons and have significantly affected the
manner in which natural gas (both domestic and foreign) is transported and sold
to consumers.
FERC has indicated that it remains committed to Order 636's
"fundamental goal" of "improving the competitive structure of the natural gas
industry in order to maximize the benefits of wellhead decontrol," the future
regulatory goals and priorities of FERC may change, and it is not possible to
predict the effect, if any, of future restructuring orders or policies on the
Company's operations.
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.
4
While Order 636 and related orders do not directly regulate
either the production or sale of gas that may be produced from the Company's
properties, the increased competition and changes in business practices within
the natural gas industry resulting from such orders have affected the terms and
conditions under which the Company markets and transports its available gas
supplies. To date, the FERC's pro-competition policies have not materially
affected the Company's business or operations. On a prospective basis, however,
such orders may substantially increase the burden on producers and transporters
to accurately nominate and deliver on a daily basis specified volumes of natural
gas, or to bear penalties or increased costs in the event scheduled deliveries
are not made.
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 believe 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 the
availability and cost of insurance.
EMPLOYEES
At September 30, 2002, Panhandle employed fourteen 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. PROPERTIES
As of September 30, 2002, Panhandle's principal properties
consisted of perpetual ownership of 260,035 net mineral acres, held principally
in tracts in New Mexico, Oklahoma and Texas and 19 other states. The Company
also held leases on 16,183 net acres of minerals in Louisiana, Oklahoma and
Texas. At September 30, 2002, Panhandle held small royalty and/or working
interests in 4,708 producing oil or gas wells, 96 successfully completed but not
yet producing wells, and 61 wells in the process of being drilled or completed.
5
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 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, 2002, 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 Net Gross
Acres Acres Acres Acres Acres Acres Acres Acres
Prod'g Prod'g Leased Leased Open Open
STATE (1) (1) (2) (2) (3) (3)
- ------------------------------------------------------------------------------------------------------------------------
Arkansas 10,050 44,320 1,065 2,519 157 880 8,828 40,921
Colorado 8,327 39,299 109 219 8,217 39,080
Florida 6,924 13,849 6,924 13,849
Illinois 1,068 4,979 33 260 1,035 4,719
Kansas 3,122 11,976 120 960 3,002 11,016
Montana 1,008 17,947 1,008 17,947
Nebraska 1,319 13,249 7 160 1,312 13,089
North Dakota 11,179 64,286 11,179 64,286
New Mexico 57,456 172,879 1,295 5,350 1,916 5,190 54,245 162,339
Oklahoma 112,842 875,717 27,838 195,491 3,221 28,331 81,783 651,895
South Dakota 1,825 9,300 1,825 9,300
Tennessee 1,584 3,587 1,584 3,587
Texas 42,467 352,348 6,737 73,445 290 2,815 35,440 276,088
Others 864 5,613 864 5,612
- ------------------------------------------------------------------------------------------------------------------------
TOTAL: 260,035 1,629,348 37,197 278,244 5,591 37,376 217,246 1,313,728
(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.
The following table reflects net mineral acres leased from
others, lease expiration dates, and net leased acres held by production.
LEASES
Net Acres
Net Net Lease Acres Held by
State Acres Expiring Production
- -------------------------------------------------------------------------------------------------------
2003 2004 2005
---------------- ----------------- ----------------
Kansas 973 -- -- -- 973
Oklahoma 14,188 2,542 1,993 154 9,429
Texas 350 40 -- -- 310
New Mexico 476 -- -- -- 476
Other 196 -- -- -- 196
- -------------------------------------------------------------------------------------------------------
TOTAL 16,183 2,582 1,993 154 11,384
6
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
Oklahoma and New Mexico in the scope of properties evaluated for the Company.
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, 2002 820,790 24,089,830
September 30, 2001 412,705 13,236,455
September 30, 2000 408,732 11,585,331
Proved Undeveloped Reserves
September 30, 2002 294,415 5,219,570
September 30, 2001 263,386 4,451,895
September 30, 2000 251,508 2,803,789
Total Proved Reserves
September 30, 2002 1,115,205 29,309,400
September 30, 2001 676,091 17,688,350
September 30, 2000 660,240 14,389,120
The major portion of the increase in total proved reserves at
September 30, 2002, as compared to September 30, 2001, is due to the addition of
Wood Oil Company's reserves. At September 30, 2002, Wood's total proved reserves
were 521,442 barrels of oil and 10,996,780 mcf of gas.
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.
ESTIMATED FUTURE NET REVENUES
Set forth below are estimated future net revenues 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 revenues, 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 revenues 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 operating costs and production taxes levied by respective
states. Prices used for determining
7
future revenues from oil and natural gas for the periods ended September 30,
2002, 2001, and 2000 were as follows: 2002 - $27.76, $3.12; 2001 - $24.03,
$1.81; 2000 - $32.84, $3.96. These future net revenues 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 Revenues
9-30-02 9-30-01 9-30-00
----------- ----------- -----------
Proved Developed $76,081,978 $25,797,780 $48,481,740
Proved Undeveloped $18,572,672 $10,141,828 $16,604,661
----------- ----------- -----------
Total Proved (1) $94,654,650 $35,939,608 $65,086,401
10% Discounted Present Value of Estimated Future Net Revenues
9-30-02 9-30-01 9-30-00
----------- ----------- -----------
Proved Developed $49,485,409 $17,533,672 $32,122,191
Proved Undeveloped $11,868,812 $ 6,589,021 $11,417,769
----------- ----------- -----------
Total Proved (1) $61,354,221 $24,122,693 $43,539,960
(1) The major portion of the decrease from September 30, 2000 to
September 30, 2001, is attributable to the decreased oil and gas
prices used in the 2001 reserve report as compared to the prices
used in the 2000 reserve report. The increase from September 30,
2001 to September 30, 2002 is attributable to the addition of
reserves from Wood Oil Company, the increased oil and gas prices
used in the 2002 reserve report (see above listed prices), and
new reserve additions from drilling.
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
9-30-02 9-30-01 9-30-00
--------- --------- ---------
Bbls - Oil 132,514 68,530 66,609
MCF - Gas 3,897,084 2,208,238 2,454,844
The increase in production volumes from September 30, 2001 to
September 30, 2002 was substantially due to the production of 1,582,277 mcf and
74,294 barrels from the Wood Oil properties.
8
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 9-30-02 9-30-01 9-30-00
------------------- ----------- ---------- -----------
Per Bbl. Oil $ 22.48 $ 28.16 $ 27.13
Per MCF Gas $ 2.59 $ 4.81 $ 3.03
Average Production (Lifting Cost)
(Per MCFE of Gas)
(1) $ .36 $ .27 $ .17
(2) $ .28 $ .41 $ .34
-------------- ------------ -------------
$ .64 $ .68 $ .51
(1) Includes actual well operating costs only.
(2) 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. A substantial
number 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, 2002. Panhandle owns fractional
royalty interests or fractional working interests in these wells. The Company
does not operate any wells.
Gross Wells Net Wells
----------- ---------
Oil 953 28.587649
Gas 3,755 73.834639
----- ----------
TOTAL 4,708 102.422288
Information on multiple completions is not available from
Panhandle's records, but the number of such is insignificant.
As of September 30, 2002, Panhandle owned 278,244 gross
developed mineral acres and 37,197 net developed mineral acres. Panhandle has
also leased from others 204,894 gross developed acres which contain 11,384 net
developed acres.
UNDEVELOPED ACREAGE
As of September 30, 2002, Panhandle owned 1,351,104 gross and
222,838 net undeveloped mineral acres, and leases on 55,524 gross and 4,779 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.
9
Net Productive Net Dry
Development Wells Wells Wells
- ----------------- ---------------- -------
Fiscal year ending
September 30, 2000 2.356519 .277873
Fiscal year ending
September 30, 2001 4.568279 .969404
Fiscal year ending
September 30, 2002 4.059870 1.146157
Exploratory Wells
Fiscal year ending
September 30, 2000 .810099 .400511
Fiscal year ending
September 30, 2001 1.806223 .676206
Fiscal year ending
September 30, 2002 1.416253 .550419
Purchased Wells
Fiscal year ending
September 30, 2000 .007321 0
Fiscal year ending
September 30, 2001 .040365 0
Fiscal year ending
September 30, 2002 53.246100 0
PRESENT ACTIVITIES
The following table sets forth the gross and net oil and gas
wells drilling or testing as of September 30, 2002, in which Panhandle owns a
royalty or working interest.
Gross Wells Net Wells
----------- ---------
Oil 6 .130980
Gas 55 1.546280
OTHER FACILITIES
The Company leases approximately 7,600 square feet of office
space in Oklahoma City, OK. The obligation under this lease will end in 2003.
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings involving Panhandle or
its subsidiary, as of the date of this report.
10
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, 2002.
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, 2000 $ 14.000 $ 12.250
March 31, 2001 $ 19.563 $ 13.250
June 30, 2001 $ 23.000 $ 18.050
September 30, 2001 $ 19.010 $ 15.160
December 31, 2001 $ 18.000 $ 14.700
March 31, 2002 $ 15.15 $ 14.350
June 30, 2002 $ 15.900 $ 14.000
September 30, 2002 $ 14.950 $ 12.750
As of December 4, 2002, the approximate number of holders of shares of Panhandle
stock were:
Title of Class Number of Holders
-------------- -----------------
Class A Common (Voting) .................. 2,700
During the past two years, cash dividends have been paid as follows on the class
A common stock:
DATE RATE PER SHARE
---- --------------
December 2000 $ .07
March 2001 $ .14
June 2001 $ .07
September 2001 $ .07
December 2001 $ .07
March 2002 $ .07
June 2002 $ .07
September 2002 $ .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 4 to the
consolidated financial statements contained herein at "Item 8 - Financial
Statements", for a further discussion of the loan agreement.
11
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes consolidated financial data of
the Company and should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company, including the Notes thereto,
included elsewhere in this report.
Year Ended September 30,
2002 (A) 2001 2000 1999 1998
REVENUES
Oil & Gas Sales $ 13,080,754 $ 12,546,055 $ 9,091,920 $ 5,077,240 $ 5,337,832
Lease Bonuses 41,497 17,991 82,030 10,773 44,269
Interest & Other 469,146 231,876 104,024 29,462 58,081
$ 13,591,397 $ 12,795,922 $ 9,277,974 $ 5,117,475 $ 5,440,182
COSTS & EXPENSES
Lease Oper. Exp.
& Prod. Taxes $ 3,001,449 $ 1,771,789 $ 1,458,935 $ 963,804 $ 961,929
Exploration Costs (B) 417,971 947,046 514,739 535,431 481,244
Depr. Depl. Amortization 5,845,779 1,670,961 1,789,491 1,379,562 1,287,562
Provision for Impairment 1,116,234 848,535 262,998 357,891 149,851
Gen. & Administrative 2,263,908 1,689,426 1,450,241 1,164,745 1,099,636
Interest Expense 895,997 779 15,643 16,943 3,125
$ 13,541,338 $ 6,928,536 $ 5,492,047 $ 4,418,376 $ 3,983,347
Income Before Provision
(Benefit) for Income Taxes $ 50,059 $ 5,867,386 $ 3,785,927 $ 699,099 1,456,835
Provision (Benefit)
for Income Taxes (293,000) 1,600,000 925,000 (35,000) 142,000
Net Income $ 343,059 $ 4,267,386 $ 2,860,927 $ 734,099 $ 1,314,835
Diluted Earnings per Share $ .16 $ 2.05 $ 1.38 $ .36 $ .64
Dividends Declared per share $ .28 $ .35 $ .28 $ .27 $ .30
Weighted Average
Shares Outstanding
Basic 2,067,872 2,060,109 2,055,470 2,047,507 2,039,292
Diluted 2,089,972 2,085,044 2,077,430 2,063,906 2,052,366
Net Cash Provided
By Operating
Activities $ 7,481,195 $ 9,302,965 $ 5,366,066 $ 2,836,783 $ 3,458,521
Total Assets $ 44,837,068 $25,279,684 $16,210,327 $ 13,263,877 $13,019,312
Long-Term Debt $ 14,024,000 $ 4,050,000 $ 0 $ 0 $ 0
Shareholders Equity $ 16,953,294 $16,995,050 $13,353,814 $ 11,048,604 $10,804,243
All share per share amounts, are adjusted for the effect of the 3-for-1 stock
split which was effective May 7, 1999.
(A) 2002 results included are consolidated amounts of Panhandle Royalty
Company and wholly owned subsidiary Wood Oil Company, acquired October 1, 2001.
(B) The Company uses the successful efforts method of accounting for its
oil and gas activities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements for 2002 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
12
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.
GENERAL
The Company's principal line of business is the production and
sale of its oil and natural gas reserves. Results of operations are dependent
upon the quantity of production and the price obtained for such production.
Prices received by the Company for the sale of its oil and natural gas have
fluctuated significantly from period to period. Such fluctuations affect the
Company's ability to maintain or increase its production from existing oil and
gas properties and to explore, develop or acquire new properties.
The following table reflects certain operating data for the
periods presented:
For the Year Ended
September 30,
2002 2001 2000
Production:
Oil (bbls) 132,514 68,530 66,609
Gas (mcf) 3,897,084 2,208,238 2,454,844
Average Sales Price:
Oil (per bbl) $ 22.48 $ 28.16 $ 27.13
Gas (per mcf) $ 2.59 $ 4.81 $ 3.03
RESULTS OF OPERATIONS
2002 Compared To 2001
REVENUES
Total revenues increased 6% to $13,591,397 in 2002, compared to
$12,795,922 in 2001. The increase was a direct result of increased sales volumes
for both oil and natural gas offset by dramatically reduced sales prices for
both oil and natural gas, as outlined in the above table. The increased sales
volume of both oil and natural gas is almost exclusively due to the addition of
production from the Wood Oil acquisition properties. Wood Oil's production
volumes were 1,582,277 mcf (94% of the gas volume increase) and 74,294 barrels
(100% of the oil volume increase). The reduction in average sales price was
simply the result of world market conditions for crude oil and natural gas
prices returning to more sustainable price levels from the ultra high prices of
certain months in fiscal 2001.
LEASE OPERATING EXPENSES AND PRODUCTION TAXES (LOE)
LOE increased $1,251,482 to $2,173,667 in 2002. 95% of the
increase was due to LOE on the Wood acquisition properties. Gross production
taxes are paid as a percentage of oil and gas sales revenues and thus fluctuate
by increases in oil and gas sales revenues.
EXPLORATION COSTS
Exploration costs declined 56% in 2002 as fewer exploratory
wells were drilled in 2002, thus, reducing the chance of an exploratory well
being a dry hole, which under the successful effects accounting method are
expensed as exploration costs.
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A)
DD&A increased 250% in 2002 or $4,174,818. The majority of the
increase, $3,099,085, was DD&A on the Wood acquisition properties. The DD&A on
these properties was calculated using the fair value of the properties which was
assigned in the purchase accounting done at the acquisition date. In addition, a
full year of DD&A on many wells completed late in 2001 was recognized in 2002.
Drilling and completion costs in fiscal 2001 were extremely high as drilling
rigs and completion equipment enjoyed high utilization rates during the year.
These high costs were thus being amortized in 2002.
13
PROVISION FOR IMPAIRMENT
The provision for impairment increased 32% or $267,699 in 2002.
The increase is due again to the high costs of drilling and equipping wells in
2001 coupled with disappointing production volumes on several wells, resulting
in impairment on those fields and several individual wells.
GENERAL AND ADMINISTRATIVE COSTS (G&A)
G&A increased $574,482 in 2002 or 34%. The majority of the
increase was due to G&A associated with Wood Oil and the three employees
retained from Wood. Additionally one other employee was hired during 2002 year
and personnel related expenses (including salaries, payroll taxes, insurance
expense and ESOP expense) increased in during the year.
INTEREST EXPENSE
Interest expense increased by $895,218 in 2002. The increase is
due to interest paid on the loan used to acquire Wood Oil. The acquisition was
funded by a new $20,000,000 five-year term loan which requires monthly principal
and interest payments. At September 30, 2002 the interest rate on the term loan
was 4.5%.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased in 2002 due to a much
lower income before taxes. The Company continues to be able to utilize tax
credits from production of "tight gas sands" natural gas and excess percentage
depletion on its oil and gas properties. The effective tax rate was
approximately 27% in 2001. The aggregate income tax benefit of $293,000 in 2002,
was primarily a result of percentage depletion and "tight gas sands" credits
reducing the expected federal income tax expense by approximately $279,000.
OVERVIEW
The Company recorded net income of $343,059 in 2002, compared to
net income of $4,267,386 in 2001. This decrease was the result of lower oil and
gas natural sales prices and increased LOE, DD&A, impairment, G&A and interest
expense. The increased expenses, for the most part, were a result of the Wood
Oil acquisition.
2001 COMPARED TO 2000.
REVENUES
Total revenues increased 38% to $12,795,922 in 2001 compared to
$9,277,974 in 2000. The increase was due to a large increase in the average
sales price for natural gas in 2001, offset some what by a 10% decrease in gas
production volumes in 2001. The decreased sales volumes were principally due to
decreased sales from the Potato Hills Field in southeast Oklahoma, as normal
production decline takes place. Additionally, nationwide gas storage facilities
filled quickly as summer approached, limiting demand for natural gas in the
summer months.
LEASE OPERATING EXPENSES AND PRODUCTION TAXES (LOE)
LOE continues to increase each year as the Company increases the
number of working interest wells in which it has an interest. The Company
participated in a record number of working interest wells in 2001. Gross
production taxes are paid as a percentage of oil and gas sales revenues and thus
fluctuate by increases in oil and gas sales revenues.
EXPLORATION COSTS
Exploration costs increased $432,307 or 84% in 2001 as compared
to 2000. The increased costs were primarily dry hole costs. As previously
mentioned, the Company participated in a record number of wells in 2001, many of
which were exploratory. As the Company utilizes the successful efforts method of
accounting for oil and gas operations, dry holes resulted in the expensing of
all costs associated with those wells.
14
DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A)
DD&A declined $118,530 or 7% in 2001. The decline was
principally due to decreased gas production volume in 2001, reducing the units
of production DD&A on the Company's oil and gas properties.
GENERAL AND ADMINISTRATIVE COSTS (G&A)
G&A costs increased $239,185 in 2001. The increase was the
result of the Company paying an investment banking firm $200,000 to provide a
valuation of the Company, strategic planning and other advice. In addition,
personnel related expenses (including salaries, payroll taxes, insurance
expenses and ESOP expenses) increased approximately $98,000 in 2001. These
increases were offset by a reduction in 2001 G&A expense related to the
Non-Employee Directors Deferred Compensation Plan ("the Plan"). This decease was
a result of the Company recognizing a charge to general and administrative
expense of approximately $175,000 to adjust the potential shares in the Plan to
market price at September 30, 2000, verses a comparable charge to expense of
approximately $31,000 for 2001. The Non-Employee directors have taken these
potential shares, rather than a cash payment for their directors fees.
PROVISION FOR INCOME TAXES
The provision for income taxes increased in 2001, due to a much
larger income before taxes (as discussed above). The Company continued to be
able to utilize tax credits from production of "tight gas sands" natural gas and
excess percentage depletion on its oil and gas properties to reduce its tax
liability, and an effective tax rate from the federal and state statutory rates.
The effective tax rate was approximately 27% in 2001 and 24% in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had a working capital deficit
of $2,399,457 as compared to $1,044,334 at September 30, 2001. The decrease is
the result of the $3,996,000 current portion of the $20,000,000 term loan used
to fund the acquisition of Wood Oil Company on October 1, 2001. Monthly payments
on the term loan of $333,000, plus, accrued interest began on December 1, 2001.
Cash provided by operating activities was $7,481,195 for 2002, $9,302,965 for
2001 and $5,366,066 for 2000.
The Company's expenditures for oil and gas activities for 2002
amounted to $6,937,687, exclusive of $15,229,466 used to acquire Wood Oil
Company. In 2001, these expenditures amounted to $9,481,077 and in 2000 were
$4,070,865. These expenditures are discretionary and increased in 2001 as prices
for both oil and gas increased causing a substantial increase in the number of
wells being drilled, thus, increasing the actual costs of drilling and
completing wells. The decrease in 2002, resulted from dramatically decreased oil
and gas prices, thus, causing an industry wide reduction in the number of wells
being drilled which reduced the costs of drilling and equiping wells.
Historically, the Company has funded its capital expenditures,
overhead expenditures and dividend payments from operating cash flow. With the
addition of the monthly payments required on the term loan, the Company has
utilized (as of December 4, 2002), $2,000,000 of the $5,000,000 line-of-credit
to help fund these expenditures. Management expects to borrow additional funds
under the line-of-credit during the coming fiscal year, as needs arise, to help
fund drilling costs. Currently, cash provided from operating activities is
expected to increase in 2003, as prices received for natural gas sales are
projected to exceed the 2002 prices. However, capital expenditures are also
projected to be increased over 2002 levels.
The Company has the potential availability of equity, which
could be offered in a public or private placement, if additional capital were
needed for capital expenditures or for debt reduction.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates, judgements and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and the
disclosure of contingent assets and liabilities. However, the accounting
principles used by the Company generally do not change the Company's reported
cash
15
flows or liquidity. Generally, accounting rules do not involve a selection
among alternatives, but involve a selection of the appropriate policies for
applying the basic principles. Interpretation of the existing rules must be done
and judgements made on how the specifics of a given rule apply to the Company.
The more significant reporting areas impacted by management's
judgements and estimates are crude oil and natural gas reserve estimation,
impairment of assets and tax accruals. Management's judgements and estimates in
these areas are based on information available from both internal and external
sources, including engineers, geologists and historical experience in similar
matters. Actual results could differ from the estimates as additional
information becomes known.
OIL AND GAS RESERVES
Of these judgements and estimates, management considers the
estimation of crude oil and natural gas reserves to be the most significant.
Changes in crude oil and natural gas reserve estimates affect the Company's
calculation of depreciation and depletion, provision for abandonment and
assessment of the need for asset impairments. The Company's consulting engineer
with assistance from Company geologists prepares estimates of crude oil and
natural gas reserves based on available geologic and seismic data, reservoir
pressure data, core analysis reports, well logs, analogous reservoir performance
history, production data and other available sources of engineering, geological
and geophysical information. As required by the guidelines and definitions
established by the Securities and Exchange Commission, these estimates are based
on current crude oil and natural gas pricing. As previously discussed, crude oil
and natural gas prices are volatile and largely affected by worldwide
consumption and are outside the control of management. Projected future crude
oil and natural gas pricing assumptions are used by management to prepare
estimates of crude oil and natural gas reserves used in formulating managements
overall operating decisions in the exploration and production segment.
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
The Company has elected to utilize the successful efforts method
of accounting for its oil and gas exploration and development activities.
Exploration expenses, including geological and geophysical costs, rentals and
exploratory dry holes, are charged against income as incurred. Costs of
successful wells and related production equipment and developmental dry holes
are capitalized and amortized by field using the unit-of-production method as
oil and gas is produced. The accounting method may yield significantly different
operating results than the full cost method.
IMPAIRMENT OF ASSETS
All long-lived assets are monitored for potential impairment
when circumstances indicate that the carrying value of the asset may be greater
than its future net cash flows. The evaluations involve a significant amount of
judgement since the results are based on estimated future events, such as
inflation rates, future sales prices for oil and gas, future costs to produce
these products, estimates of future oil and gas reserves to be recovered and the
timing thereof, the economic and regulatory climates and other factors. The need
to test a property for impairment may result from significant declines in sales
prices or unfavorable adjustments to oil and gas reserves. Any assets held for
sale are reviewed for impairment when the Company approves the plan to sell.
Estimates of anticipated sales prices are highly judgmental and subject to
material revision in future periods. Because of the uncertainty inherent in
these factors, the Company cannot predict when or if future impairment charges
will be recorded.
TAX ACCRUALS
The estimation of the amounts of income tax to be recorded by
the Company involves interpretation of complex tax laws and regulations.
Although the Company's management believes its tax accruals are adequate,
differences may occur in the future depending on the resolution of pending and
new tax matters.
16
The above description of the Company's critical accounting
policies is not intended to be an all-inclusive discussion of the uncertainties
considered and estimates made by management in applying accounting principles
and policies. Results may vary significantly if different policies were used or
required and if new or different information becomes known to management.
ITEM 7. A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's results of operations and operating cash flows are
impacted by changes in market prices for oil and gas. Operations and cash flows
are also impacted by changes in the market interest rates related to the
revolving credit facility and the $20 million five-year term loan, both bearing
interest at an annual variable interest rate equal to the national prime rate
minus ?%. A one percent change in the prime interest rate would result in
approximately a $180,000 change in annual interest expense.
17
ITEM 8. FINANCIAL STATEMENTS
Report of Independent Auditors ................................... 19
Consolidated Balance Sheets
As of September 30, 2002 and 2001 ....................... 20-21
Consolidated Statements of Income for the
Years Ended September 30, 2002, 2001 and 2000 ........... 22
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 2002, 2001 and 2000 ................. 23
Consolidated Statements of Cash Flows for
the Years Ended September 30, 2002, 2001 and 2000 ....... 24-25
Notes to Consolidated Financial Statements ....................... 26-43
18
Report of Independent Auditors
Board of Directors and Stockholders
Panhandle Royalty Company
We have audited the accompanying consolidated balance sheets of Panhandle
Royalty Company (the Company) as of September 30, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 2002. 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, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
December 10, 2002
19
Panhandle Royalty Company
Consolidated Balance Sheets
SEPTEMBER 30
2002 2001
---------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 242,836 $ 98,970
Oil and gas sales receivable 2,533,249 1,566,538
Income tax receivable - 294,137
Prepaid expenses 5,709 4,552
---------------------------------------
Total current assets 2,781,794 1,964,197
Property and equipment at cost, based on successful efforts
accounting:
Producing oil and gas properties 58,697,095 34,737,546
Nonproducing oil and gas properties 9,754,336 6,384,332
Furniture and fixtures 360,784 287,268
---------------------------------------
68,812,215 41,409,146
Less accumulated depreciation, depletion, and
amortization 27,860,713 22,061,402
---------------------------------------
Net properties and equipment 40,951,502 19,347,744
Investment in partnerships 856,607 -
Escrow deposit and deferred costs related to Wood Oil
acquisition - 3,860,027
Other assets 247,157 107,716
---------------------------------------
Total assets $ 44,837,060 $ 25,279,684
=======================================
(Continued on next page.)
20
SEPTEMBER 30
2002 2001
---------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 653,758 $ 478,580
Accrued liabilities:
Deferred compensation 321,555 378,014
Interest 66,567 -
Other 133,308 63,269
Income taxes payable 10,063 -
Long-term debt due within one year 3,996,000 -
---------------------------------------
Total current liabilities 5,181,251 919,863
Long-term debt 14,024,000 4,050,000
Deferred income taxes 8,639,000 3,284,000
Other noncurrent liabilities 39,515 30,771
Stockholders' equity:
Class A voting common stock, $.0333 par value; 6,000,000 shares authorized,
2,079,423 issued and outstanding (2,066,441 in 2001) 69,314 68,881
Capital in excess of par value 896,643 702,948
Retained earnings 15,987,337 16,223,221
---------------------------------------
Total stockholders' equity 16,953,294 16,995,050
---------------------------------------
Total liabilities and stockholders' equity $ 44,837,060 $ 25,279,684
=======================================
See accompanying notes.
21
Panhandle Royalty Company
Consolidated Statements of Income
YEAR ENDED SEPTEMBER 30
2002 2001 2000
-----------------------------------------------------------
Revenues:
Oil and gas sales $ 13,080,754 $ 12,546,055 $9,091,920
Lease bonuses and rentals 41,497 17,991 82,030
Interest 36,743 47,141 17,689
Income from partnerships and other (Note 2) 432,403 184,735 86,335
-----------------------------------------------------------
13,591,397 12,795,922 9,277,974
Costs and expenses:
Lease operating expenses and production taxes 3,001,449 1,771,789 1,458,935
Exploration costs 417,971 947,046 514,739
Depreciation, depletion, and amortization 5,845,779 1,670,961 1,789,491
Provision for impairment 1,116,234 848,535 262,998
General and administrative 2,263,908 1,689,426 1,450,241
Interest expense 895,997 779 15,643
-----------------------------------------------------------
13,541,338 6,928,536 5,492,047
-----------------------------------------------------------
Income before provision for income taxes 50,059 5,867,386 3,785,927
Provision (benefit) for income taxes (293,000) 1,600,000 925,000
-----------------------------------------------------------
Net income $ 343,059 $ 4,267,386 $2,860,927
===========================================================
Basic earnings per share $ .17 $ 2.07 $ 1.39
===========================================================
Diluted earnings per share $ .16 $ 2.05 $ 1.38
===========================================================
See accompanying notes.
22
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, 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 ($.28 per share) - - - (577,046) (577,046)
Net income - - - 2,860,927 2,860,927
-----------------------------------------------------------------------
Balances at September 30, 2000 2,060,206 68,673 608,280 12,676,861 13,353,814
Purchase and cancellation of common
shares (146) (5) (1,855) - (1,860)
Issuance of common shares to ESOP 6,381 213 96,523 - 96,736
Dividends declared ($.35 per share) - - - (721,026) (721,026)
Net income - - - 4,267,386 4,267,386
-----------------------------------------------------------------------
Balances at September 30, 2001 2,066,441 68,881 702,948 16,223,221 16,995,050
Purchases and cancellation of common
shares (291) (10) (4,100) (4,110)
Issuance of common shares to ESOP 8,157 272 118,412 - 118,684
Issuance of common shares to
directors for services 5,116 171 79,383 - 79,554
Dividends declared ($.28 per share) - - - (578,943) (578,943)
Net income - - - 343,059 343,059
-----------------------------------------------------------------------
Balances at September 30, 2002 2,079,423 $ 69,314 $ 896,643 $ 15,987,337 $ 16,953,294
=======================================================================
See accompanying notes.
23
Panhandle Royalty Company
Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30
2002 2001 2000
----------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 343,059 $ 4,267,386 $ 2,860,927
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, amortization, and
impairment 6,962,013 2,519,496 2,052,489
Deferred income taxes (453,000) 1,444,000 271,000
Deferred lease bonus 8,744 30,771 -
Exploration costs 417,971 947,046 514,739
Gain on sale of assets (179,037) - -
Equity in earnings of partnerships (77,015) - -
Common stock issued to Employee Stock
Ownership Plan 118,684 96,736 92,239
Cash provided (used) by changes in assets and
liabilities, net of amounts acquired in Wood
Oil acquisition:
Oil and gas sales receivables 191,908 389,052 (821,437)
Income taxes receivable 415,810 (294,137) -
Prepaid expenses 239,691 (735) 315
Accounts payable and accrued liabilities (517,696) 152,677 192,795
Income taxes payable 10,063 (249,327) 202,999
----------------------------------------------------------
Total adjustments 7,138,136 5,035,579 2,505,139
----------------------------------------------------------
Net cash provided by operating activities 7,481,195 9,302,965 5,366,066
INVESTING ACTIVITIES
Capital expenditures, including dry hole costs (6,967,767) (9,486,994) (4,089,851)
Acquisition of Wood, net of cash acquired (15,229,466) - -
Distributions from partnerships 191,685 - -
Investment in partnerships (90,000) - -
Proceeds from sale of assets 1,371,272 - -
Escrow deposit and payments related to Wood Oil
acquisition - (3,860,027) -
----------------------------------------------------------
Net cash used in investing activities (20,724,276) (13,347,021) (4,089,851)
Continued on next page.
24
Panhandle Royalty Company
Consolidated Statements of Cash Flows (continued)
YEAR ENDED SEPTEMBER 30
2002 2001 2000
---------------------------------------------
FINANCING ACTIVITIES
Borrowings under debt agreement 18,100,000 4,050,000 500,000
Payments of loan principal (4,130,000) - (500,000)
Purchase and cancellation of common shares (4,110) (1,860) (70,910)
Payments of dividends (578,943) (721,026) (602,600)
---------------------------------------------
Net cash provided by (used in) financing activities 13,386,947 3,327,114 (673,510)
---------------------------------------------
Increase (decrease) in cash and cash equivalents 143,866 (716,942) 602,705
Cash and cash equivalents at beginning of year 98,970 815,912 213,207
---------------------------------------------
Cash and cash equivalents at end of year $ 242,836 $ 98,970 $ 815,912
=============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 829,430 $ 36,798 $ 15,643
Income taxes paid, net of refunds received (215,687) 699,464 451,167
See accompanying notes.
25
Panhandle Royalty Company
Notes to Consolidated Financial Statements
September 30, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Panhandle Royalty
Company and its wholly owned subsidiaries after elimination of all material
intercompany transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all demand deposits and funds invested in
short-term investments with original maturities of three months or less.
OIL AND GAS SALES AND GAS IMBALANCES
The Company sells oil and natural gas to various customers, recognizing revenues
as oil and gas is produced and sold. The Company uses the sales method of
accounting for gas imbalances in those circumstances where it has underproduced
or overproduced its ownership percentage in a property. Under this method, a
receivable or liability is recorded to the extent that an underproduced or
overproduced position in a reservoir cannot be recouped through the production
of remaining reserves. At September 30, 2002 and 2001, the Company had no
material gas imbalances. Charges for gathering and transportation are included
in lease operating expenses and production taxes.
CONCENTRATION OF CREDIT RISK
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, 2002.
26
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. See
Recently Issued Accounting Pronouncements.
Nonproducing oil and gas properties include nonproducing minerals, which have a
net book value of $7,253,206 at September 30, 2002, 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.
27
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
$1,116,234, $848,535 and $262,998, respectively, for 2002, 2001 and 2000. The
majority of the impairment recognized in these years relates to fields comprised
of a small number of properties 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, 2002, there were
no such costs accrued.
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 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 (see Note 5).
28
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, receivables, prepaid expenses, accounts payable, and accrued
liabilities approximate their fair values due to the short maturity of these
instruments. The fair value of Company's long-term debt approximates its
carrying amount due to the variable interest rate on these borrowings.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. Subsequently, the asset retirement cost should be
allocated to expense using a systematic and rational method and the liability
should be accreted to its face amount. The Company adopted SFAS No. 143 on
October 1, 2002. The primary impact of this standard relates to oil and gas
wells on which the Company has a legal obligation to plug and abandon the wells.
Prior to SFAS No. 143, Company had not recorded an obligation for these plugging
and abandonment costs due to its assumption that the salvage value of the
surface equipment would offset the cost of dismantling the facilities and
carrying out the necessary clean-up and reclamation activities. The adoption of
SFAS No. 143 on October 1, 2002 resulted in a net increase to Property and
Equipment and Retirement Obligations of approximately $325,000 and $250,000,
respectively, as a result of the Company separately accounting for salvage
values and recording the estimated fair value of its plugging and abandonment
obligations on the balance sheet. The increase in expense resulting from the
accretion of the asset retirement obligation and the depreciation of the
additional capitalized well costs is expected to be substantially offset by the
decrease in depreciation from the Company's consideration of the estimated
salvage values in the calculation.
29
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. It supercedes, with exceptions, SFAS No.
121. SFAS No. 144 was adopted by the Company on October 1, 2002. The adoption of
SFAS No. 144 had no material impact on the Company's financial position or
results of operations.
In June 2002, FASB issued SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The pronouncement is
effective for exit or disposal activities initiated after December 31, 2002.
Management does not believe that the adoption of SFAS 146 will have any material
impact on its financial position or results of operations in the near term.
2. ACQUISITION OF WOOD OIL COMPANY
On October 1, 2001, the Company acquired 100% of the outstanding common stock of
Wood Oil Company (Wood). The acquisition was made pursuant to an Agreement and
Plan of Merger among the Company, PHC, Inc. and Wood Oil Company, dated August
9, 2001. Wood merged with Panhandle's wholly owned subsidiary PHC, Inc., on
October 1, 2001, with Wood being the surviving Company. Prior to the
acquisition, Wood was a privately held company engaged in oil and gas
exploration and production and fee mineral ownership and owned interests in
certain oil and gas and real estate partnerships and owned an office building in
Tulsa, Oklahoma. Subsequent to the acquisition, Wood has continued to operate as
a subsidiary of Panhandle and personnel were moved to Oklahoma City in early
2002. Wood and its shareholders were unrelated parties to Panhandle.
30
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
2. ACQUISITION OF WOOD OIL COMPANY (CONTINUED)
The Company's decision to acquire Wood was the result of desired growth in the
Company's asset base of producing oil and gas reserves and fee mineral acreage.
Wood's oil and gas activity, fee minerals and operating philosophy, in general,
had been very similar to the Company's.
Wood's mineral acreage ownership and leasehold position as well as its producing
oil and gas properties are located in the same general areas as the Company's.
In several cases, both companies owned interests in existing producing wells and
several developing fields. The Company intends to actively pursue drilling
opportunities on Wood's properties.
Funding for the acquisition was obtained from Banc First of Oklahoma City,
Oklahoma in the form of a $20 million five-year term loan. Three million of
Wood's cash was used to reduce Panhandle's debt on the date of closing.
The operations of Wood, since October 1, 2001, are included in the accompanying
financial statements.
The following table sets forth the allocation of the purchase price to the
assets and liabilities acquired:
Cash $ 3,759,000
Other current assets 1,260,000
Land and buildings held for sale 750,000
Oil and gas properties - proved 17,550,000
Minerals:
Producing 925,000
Nonproducing 3,491,000
Other property and equipment 43,000
Investments in partnerships and other assets 1,731,000
--------------
Total assets acquired 29,509,000
Current liabilities (853,000)
Deferred income taxes (5,808,000)
--------------
Total liabilities assumed (6,661,000)
--------------
Net assets acquired $22,848,000
==============
31
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
In April 2002, the Company sold the land and building and its interest in two
partnerships resulting in net proceeds of approximately $1.4 million of which
$800,000 were used to pay down long term debt. Other revenues in the
accompanying income statement include a gain of $56,487 on the sale of the
building and a gain of $122,550 on the sale of the two partnerships.
The following unaudited proforma results of operations give effect to the
acquisition as if consummated on October 1, 2000. The data reflects adjustments
of the historical Wood results for depreciation and amortization of the property
and equipment acquired, adjustments of expenses resulting from contractual
requirements of the acquisition agreement, incremental interest expense relating
to bank borrowing used to finance the purchase and income taxes. Total revenues
for 2001 include non-recurring gains on asset sales of $2.1 million. The pro
forma adjustments are based upon available information and assumptions that
management of the Company believes are reasonable. The pro forma results of
operations data does not purport to represent the results of operations that
would have occurred had such transaction been consummated on October 1, 2000 or
the Company's results of operation for any future date or period.
YEAR ENDED
SEPTEMBER 30,
2001
-----------------
Total revenues $25,234,054
Net income $ 8,927,780
Diluted earnings per share $ 4.27
32
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
3. INCOME TAXES
The Company's provision for income taxes is detailed as follows:
2002 2001 2000
-----------------------------------------
Current:
Federal $ 150,000 $ 160,000 $647,000
State 10,000 (4,000) 7,000
------------------------------------------
160,000 156,000 654,000
Deferred:
Federal (390,000) 1,232,000 244,000
State (63,000) 212,000 27,000
------------------------------------------
(453,000) 1,444,000 271,000
------------------------------------------
$(293,000) $1,600,000 $925,000
==========================================
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:
2002 2001 2000
-----------------------------------------
Provision for income taxes at statutory rate $ 17,521 $2,053,587 $1,325,074
Percentage depletion (201,600) (559,668) (368,687)
Tight-sands gas credits (77,404) (47,114) (59,359)
State income taxes, net of federal benefit (34,419) 141,099 22,125
Other 2,902 12,096 5,847
-----------------------------------------
$(293,000) $1,600,000 $ 925,000
=========================================
33
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
3. 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:
2002 2001
-------------------------------
Deferred tax liabilities:
Financial bases in excess of tax bases, including
intangible drilling costs capitalized for financial
purposes and expensed for tax purposes $11,210,000 $4,029,000
Deferred tax assets:
Percentage depletion and alternative minimum
tax credit carryforwards 1,950,000 308,000
Financial charges which are deferred for tax purposes 621,000 437,000
-------------------------------
2,571,000 745,000
-------------------------------
Net deferred tax liabilities $ 8,639,000 $3,284,000
===============================
4. LONG-TERM DEBT
Long-term debt consisted of the following at September 30:
2002 2001
-------------------------------
Revolving line of credit $ 1,350,000 $4,050,000
Term loan 16,670,000 -
-------------------------------
18,020,000 4,050,000
Current maturities of long-term debt 3,996,000 -
-------------------------------
$14,024,000 $4,050,000
===============================
34
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
In October 2001, the Company entered into an amended and restated loan agreement
with BancFirst of Oklahoma City, Oklahoma that provided a $20 million five-year
term loan and extended the maturity date of the Company's existing $5 million
revolving line of credit. Monthly principal payments on the term loan, which
began in December 2001, are $333,000. Outstanding borrowings under the revolving
line of credit are payable in full on December 31, 2003, unless extended.
Interest is payable monthly under both instruments and is based on the national
prime rate minus .25% (aggregate of 4.5% at September 30, 2002). Borrowings
under these agreements are secured by certain of the Company's oil and gas
properties.
The total outstanding borrowings under both the term loan and the revolving line
of credit may not exceed the borrowing base which is $25 million as of September
30, 2002. Subsequent determinations of the borrowing base are made semi-annually
or whenever the bank, in its sole discretion, believes that there has been a
material change in the value of the oil and gas properties. The loan agreement
contains customary covenants which, among other things, require periodic
financial and reserve reporting and limit the Company's incurrence of
indebtedness, liens, dividends and acquisitions of treasury stock, and require
the Company to maintain certain financial ratios.
The amount of required principal payments for the next five years as of
September 30, 2002, are as follows: 2003-$3,996,000, 2004-$5,346,000,
2005-$3,996,000, 2006-$3,996,000, and 2007-$686,000.
35
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 (see Note 7).
YEAR ENDED SEPTEMBER 30,
2002 2001 2000
-------------------------------------
Numerator for primary and diluted
earnings per share:
Net income $ 343,059 $4,267,386 $2,860,927
=====================================
Denominator:
For basic earnings per share--
weighted average shares 2,067,872 2,060,109 2,055,470
Effect of potential diluted shares:
Directors' deferred compensation
shares 22,100 24,935 21,960
-------------------------------------
Denominator for diluted earnings per
share--adjusted weighted average
shares and potential shares 2,089,972 2,085,044 2,077,430
=====================================
Basic earnings per share $.17 $2.07 $1.39
=====================================
Diluted earnings per share $.16 $2.05 $1.38
=====================================
36
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
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 2002, 2001 or 2000) 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 122,747 shares of the
Company's common stock held by the plan as of September 30, 2002, 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
--------------------------------------------------------
2002 8,157 $ 118,684
2001 6,381 $ 96,736
2000 6,584 $ 92,239
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, 2002, 22,100 shares (24,935 shares at
September 30, 2001) are included in the Plan. The Company has accrued $321,555
at September 30, 2002 ($378,014 at September 30, 2001) in connection with the
Plan ($23,095, $70,570 and $174,717 was charged to the results of operations for
the years ended September 30, 2002, 2001 and 2000, respectively, and is included
in general and administrative expense in the accompanying income statement).
37
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
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.
During 2002, 2001 and 2000 approximately 17%, 23% and 21%, respectively, of the
Company's total revenues were derived from gas sales to ONEOK, Inc. The Company
also has interests in a field of properties, the production on which accounted
for approximately 12%, 15% and 15% of the Company's revenues in 2002, 2001 and
2000, respectively.
AGGREGATE CAPITALIZED COSTS
The aggregate amount of capitalized costs of oil and gas properties and related
accumulated depreciation, depletion, and amortization as of September 30 is as
follows:
2002 2001
----------------------------
Producing properties $ 58,697,095 $ 34,737,546
Nonproducing properties 9,754,336 6,384,332
----------------------------
68,451,431 41,121,878
Accumulated depreciation, depletion and amortization (27,583,242) (21,813,974)
----------------------------
Net capitalized costs $ 40,868,189 $ 19,307,904
============================
COSTS INCURRED
During the reporting period, the Company incurred the following costs in oil and
gas producing activities:
2002 2001 2000
-----------------------------------------
Property acquisition costs (A) $ 219,306 $ 194,645 $ 528,691
Exploration costs 1,080,951 3,839,009 1,776,773
Development costs 5,637,430 5,447,423 1,765,401
-----------------------------------------
$6,937,687 $9,481,077 $4,070,865
=========================================
(A) Excludes Wood Oil acquisition in 2002 as set forth in Note 2, the cost of
which, net of cash acquired, was $15,229,466.
38
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
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, 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 Oklahoma and New Mexico in the scope of
properties which are evaluated for the Company.
The Company's net proved (including certain undeveloped reserves described
above) oil and gas reserves, all of which are located in the United States, as
of September 30, 2002, 2001, and 2000, 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, 2002, 2001, and 2000. 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.
39
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Net quantities of proved, developed, and undeveloped oil and gas reserves are
summarized as follows:
PROVED RESERVES
------------------------
OIL GAS
(MBARRELS) (MMCF)
------------------------
September 30, 1999 721 13,115
Revisions of previous estimates (1) (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
Revisions of previous estimates (1) (47) (2,178)
Extensions and discoveries 132 7,685
Production (69) (2,208)
------------------------
September 30, 2001 676 17,688
Revisions of previous estimates (38) 745
Purchases of reserves in place 487 9,712
Extensions and discoveries 123 5,061
Production (133) (3,897)
------------------------
September 30, 2002 1,115 29,309
========================
(1) Oil and gas revisions in 2001 are primarily related to those reserves
that were uneconomical at the lower prices that existed at September
30, 2001. Gas revisions in 2000 are primarily related to those reserves
that were economically recoverable at the higher prices that 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 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.
40
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, 1999 433 11,519 288 1,596
===========================================================
September 30, 2000 409 11,585 251 2,804
===========================================================
September 30, 2001 413 13,236 263 4,452
===========================================================
September 30, 2002 821 24,090 294 5,220
===========================================================
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, as of September 30 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."
2002 2001 2000
--------------------------------------------
Future cash inflows $123,668,010 $48,294,240 $78,668,350
Future production costs 25,022,170 9,355,230 12,308,320
Future development costs 3,991,185 2,999,402 1,273,629
--------------------------------------------
Future net cash inflows before future 94,654,655 35,939,608 65,086,401
income tax expenses
Future income tax expense 25,831,291 9,381,868 18,332,743
--------------------------------------------
Future net cash flows 68,823,364 26,557,740 46,753,658
10% annual discount 24,878,417 8,927,795 15,892,344
--------------------------------------------
Standardized measure of discounted
future net cash flows $ 43,944,947 $17,629,945 $30,861,314
============================================
41
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:
2002 2001 2000
------------------------------------------------
Beginning of year $ 17,629,945 $ 30,861,314 $ 20,071,898
Changes resulting from:
Sales of oil and gas, net of production costs (10,079,305) (10,774,266) (7,632,985)
Net change in sales prices and production costs 15,794,503 (17,851,098) 11,642,854
Net change in future development costs (665,685) (1,154,469) (60,124)
Extensions and discoveries 10,313,163 10,190,264 8,886,844
Revisions of quantity estimates 885,028 (2,981,154) (221,761)
Purchases of reserves-in-place 19,370,609 - 438,663
Accretion of discount 2,412,266 4,295,702 2,770,591
Net change in income taxes (10,933,161) 6,185,986 (4,807,558)
Change in timing and other, net (782,416) (1,142,334) (227,108)
------------------------------------------------
Net change 26,315,002 (13,231,369) 10,789,416
------------------------------------------------
End of year $ 43,944,947 $ 17,629,945 $ 30,861,314
================================================
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the Company's unaudited quarterly results of
operations.
FISCAL 2002
---------------------------------------------------------------
QUARTER ENDED
---------------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
---------------------------------------------------------------
Revenues $ 3,330,561 $ 2,745,824 $3,792,994 $ 3,722,018
Income (loss) before provision for
income taxes (102,237) (397,025) 623,684 (74,363)
Net income (loss) (A) (76,856) (287,123) 453,684 253,354
Basic earnings (loss) per share $ (.04) (.14) $ .22 $ .13
Diluted earnings (loss) per share $ (.04) $ (.14) $ .22 $ .12
42
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
FISCAL 2001
-----------------------------------------------------------
QUARTER ENDED
-----------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
-----------------------------------------------------------
Revenues $3,474,221 $3,940,975 $2,918,603 $2,462,123
Income before provision for income
taxes 1,561,911 2,374,071 1,367,935 563,469
Net income (A) 1,386,310 1,690,071 1,027,935 163,070
Basic earnings per share $ .67 $ .82 $ .50 $ .08
Diluted earnings per share $ .67 $ .82 $ .49 $ .08
(A) The quarters ended September 30, 2002 and 2001, reflect a change in
estimate associated with the Company's income tax provision resulting from
the determination of actual percentage depletion and tight sands gas
credits available to reduce the Company's taxable income.
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
N O N E
PART III
In accordance with paragraph (3) of general Instruction G to
Form 10-K, Part III, Items 10.-13. Of this Report are omitted because the
Company will file with the Securities and Exchange Commission not later than 120
days after the end of the fiscal year ended September 30, 2002, a definitive
proxy statement pursuant to Regulation 14A involving the election of directors,
which proxy statement is incorporated herein by reference.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiary) required to be
included in the Company's periodic SEC filings. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(3) Amended Certificate of Incorporation (Incorporated by
reference to Exhibit attached to Form 10 filed January
27, 1980, and to Forms 8-K dated June 1, 1982, December
3, 1982 and to Form 10-QSB dated March 31, 1999).
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 Certificate 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
(99.1) Certification of Chief Executive Officer
(99.2) Certification of Chief Financial Officer
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2002.
44
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 18, 2002
-------------------
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 18, 2002 Date December 18, 2002
---------------------------- ----------------------------
/s/ Robert A. Reece /s/ Michael A. Cawley
- --------------------------------- ----------------------------------
Robert A. Reece, Director Michael A. Cawley, Director
Date December 18, 2002 Date December 18, 2002
---------------------------- ----------------------------
/s/ H. Grant Swartzwelder /s/ Michael C. Coffman
- --------------------------------- ----------------------------------
H. Grant Swartzwelder, Director Michael C. Coffman, Vice President
Treasurer and Secretary
Date December 18, 2002 (Principal Financial
---------------------------- and Accounting Officer)
Date December 18, 2002
45
CERTIFICATION
I, HW Peace II, certify that:
1. I have reviewed this annual report on Form 10-K;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a). designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b). evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c). presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a). all significant deficiencies in the design
or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b). any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regards to significant deficiencies and material
weaknesses.
Date: December 18, 2002
/s/ HW Peace II
---------------
HW Peace II
Chief Executive Officer
46
CERTIFICATION
I, Michael C. Coffman, certify that:
1. I have reviewed this annual report on Form 10-K;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a). designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
b). evaluated the effectiveness of the
registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c). presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a). all significant deficiencies in the design
or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b). any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regards to significant deficiencies and material
weaknesses.
Date: December 18, 2002
/s/ Michael C. Coffman
----------------------
Michael C. Coffman
Chief Financial Officer
47
Part III
Index to Exhibits
Exhibit No. Description
(3) Amended Certificate of Incorporation (Incorporated by
reference to Exhibit attached to Form 10 filed January
27, 1980, and to Forms 8-K dated June 1, 1982, December
3, 1982 and to Form 10-QSB dated March 31, 1999).
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 Certificate 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
(99.1) Certification of Chief Executive Officer
(99.2) Certification of Chief Financial Officer
48